PART I

(a)      Other expenses from ordinary activities comprise consulting and advisory costs, scientific advisory board costs, accounting and auditing costs, travel expenses and outsourced employee costs.

(b)     Basic loss per share is determined by dividing the loss after income tax by the weighted average number of ordinary shares, outstanding during the period. The computation of diluted loss per share is similar to basic loss per share, except that it assumes the potentially dilutive securities, such as options, were converted to shares at the beginning of the period. For all periods presented, diluted loss per share is equivalent to basic loss per share as the potentially dilutive securities are excluded from the computation of diluted loss per share because the effect is anti-dilutive.

Dividends

No dividend has been paid by the Company in the five fiscal years up to and including fiscal 2007.

Exchange rates

The consolidated financial statements of the Company which form part of this Annual Report are presented in Australian dollars (A$).

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The following table sets forth, for the periods and dates indicated, certain information concerning the noon buying rate in New York City for Australian dollars expressed in U.S. dollars per A$1.00 as certified for customs purposes by the Federal Reserve Bank of New York.

As at November 2, 2007 the Australian dollar closed at US$0.9180

B .            Capitalization and indebtedness

Not applicable.

C.            Reasons for the offer and use of proceeds

Not applicable.

D.            Risk factors

Prospective investors and shareholders should be aware that any investment in the Company involves a degree of risk and should be made only by those with the necessary expertise to appraise the investment. In addition to the other information in this document, the following risk factors should be considered in evaluating whether to make or hold an investment in the Company. Any or all of these factors could have a material and adverse effect on the Company’s operational results, financial condition and prospects. Furthermore, the trading price of ChemGenex shares could decline resulting in the loss of all or part of any investment therein.

The Company has a history of operating losses and negative cash flow and may never become profitable

ChemGenex is a company that has a history of operating losses. These losses have arisen mainly from the costs incurred in research and development of its products and general administrative costs. For the year ended June 30, 2007, the Company’s net loss was A$11,700,919 and its accumulated deficit as of June 30, 2007 was A$92,723,921.

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The Company expects to continue to incur operating losses over the next two years and may never be profitable. To date, the Company has generated revenues through research and development funding from its partners, milestone payments and contract research. In order to support the research and development of the Company’s business, the Company plans to incur expenses in excess of revenue. The Company’s strategy is to utilize its understanding of the genetics of complex diseases and its expertise in medicinal chemistry to identify novel targets for therapeutic intervention and to develop personalized medicines particularly in the field of cancer. The discovery of novel gene and protein targets and the subsequent development of therapeutic products based on these targets is an expensive process and the Company has in the past partnered its discovery programs in diabetes and obesity and in depression with international pharmaceutical companies. The Company’s cancer program has led to the development of two therapeutic agents that are currently in clinical trial in the U.S. The Company may not develop any products and any other products it may develop may not generate revenues.

Additional funding is likely to be required to give the Company time to reach profitability. Raising such additional funding could entail restrictions on the rights of holders of ordinary shares. If the Company is unable to raise additional funds it may have to curtail its operations.

The Company’s need for capital at any given time depends on a number of factors, including:

•                   the ability to enter collaborations to support its research and development programs;

•                   the rate of progress and cost of the Company’s research activities;

•                   the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights;

•                   the costs and timing of obtaining regulatory approvals for the Company’s products;

•                   the emergence of competing products and other adverse market development; and

•                   changes in, or termination of, the Company’s existing collaboration and licensing arrangements.

The Company may not receive further revenues from collaboration and licensing agreements or changes in the development of the Company’s drug candidates may cause available capital resources to be used more quickly than expected.

The Company is likely in the future to require additional funds, in addition to funds received from licensing and collaboration agreements, to continue research and development. It is likely that the Company will seek funds through further licensing and collaboration agreements and through additional sale of the Company’s securities. The Company may not be able to secure licensing and collaboration agreements on satisfactory terms, if at all. Also, the public markets for issues of biotechnology company securities are volatile and competitive. The Company may not be able to attract additional funds on acceptable terms, if at all. The Company also may decide to access the public equity markets whenever conditions are favorable, even if the Company does not have an immediate need for additional capital at that time. If the Company raises additional funds by issuing equity securities, dilution to shareholders may result. This might be the case, for example, because U.S. investors may not be able to participate in certain fund raising, such as rights offerings, under applicable securities laws and may therefore be diluted. Other shareholders may not have the means to exercise their rights in such an offering, and will see their interests diluted, and the price at which any further capital raising is made also may be below the price at which other investors acquired their shares.

If adequate funds are not available, the Company may have to significantly reduce its research and development programs or obtain funds through licensing and collaboration agreements at an earlier stage in the drugs’ development than the Company envisaged. If adequate funds are not available on acceptable terms, its ability to invest in the progress of its development programs and product portfolio will be materially and adversely affected, with the result that its prospects are less favorable. Following the issue of 33,948,293 shares at A$0.62 cents each on Feb/April of 2007 ChemGenex had working capital of approximately A$23 million as at June 30, 2007. Based on the anticipated cash flow requirements of the Company’s existing research and development activities, the Board has concluded that these funds should be sufficient to support operations into the second half of calendar 2008. The Board remains confident that adequate funds to continue the Company’s operations will be raised from partnership agreements and/or equity placements as required in the future.

The Company anticipates a net loss in fiscal 2008.

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If the Company is unable to retain and attract key employees, its scientific and management capabilities could be reduced.

The loss of key employees could weaken the Company’s scientific and management capabilities, resulting in delays in the development of its cancer clinical trials and broader research programs thus impacting negatively on the Company’s business. ChemGenex is significantly dependent on certain scientific and management personnel, including Dr. Gregory R. Collier, Dr. Dennis M. Brown, Dr. James A. Campbell, Eric P. Merrigan, Tina Herbert, and Eric Humphriss. Although the Company has entered into employment or consultancy arrangements with each of the Company’s key personnel with the aim of securing their services, the retention of such services cannot be guaranteed. Companies such as ChemGenex are highly dependent on employees who have an in-depth and long-term understanding of their companies’ technologies, products, programs, collaborative relationships and strategic goals. The loss of these key employees and the Company’s inability to recruit new employees to replace them could have a negative impact on the business and prospects of the Company because the Company’s scientific and management capabilities would be reduced.

The Company is dependent on its academic collaborators, consultants and scientific advisors and their confidentiality.

The Company has relationships with collaborators and consultants at academic and other scientific institutions who conduct trials under contractually defined terms at the Company’s request. It is the Company’s policy that all of its employees, academic collaborators, consultants and scientific advisors enter into confidentiality agreements that control the dissemination of all intellectual property produced that results from their work for the Company. It is possible; however, that unauthorized dissemination of such confidential information could materially adversely affect the Company’s business, financial condition and results of operations. Such collaborators also could enter into employment agreements or consulting arrangements with competitors.

The Company may not be successful in its clinical trials programs. These programs are costly, time consuming and of uncertain outcome. If such programs are not successful, the Company may invest substantial amounts of time and money without developing revenue-producing products.

Clinical trials of promising products can take years, the duration depending among other factors on type, complexity, novelty and intended use of the product candidate. The Company may fail to successfully complete clinical trials and bring products to market for a number of reasons, including:

•                   as the Company enters a more extensive clinical program in several different diseases, the data generated in these studies may not be as compelling as the earlier results;

•                   unforeseen safety issues or side effects;

•                   variability in the number and types of patients available for each study, and difficulty in maintaining contact with patients after treatment, resulting in incomplete data;

•                   delays resulting from review board action at institutions assisting the Company with its clinical trials; and

•                   the failure to obtain required regulatory approvals.

If the products that the Company brings to market are not commercially successful, the Company’s liquidity may be adversely affected.

The Company’s success depends on acceptance of the Company’s products by the market, including physicians and third-party payers, and consequently the Company’s liquidity and viability as a going concern may be adversely affected if it is unable to achieve market acceptance of its products. Factors that may affect the rate and level of market acceptance of any of the Company’s products include:

•                   the existence or entry onto the market of superior competing products or therapies;

•                   the price of the Company’s products compared to competing products;

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•                   public perception regarding the safety, efficacy and benefits of the Company’s products compared to competing products or therapies;

•                   the effectiveness of the Company’s sales and marketing efforts and those of the Company’s marketing partners;

•                   regulatory developments related to manufacturing or use of the Company’s products;

•                   the willingness of physicians to adopt a new treatment regimen; and

•                   publicity concerning the product type in general.

Even if the Company’s products are approved, they may still face later regulatory difficulties, which could impair its ability to market its products or force it to incur substantial additional expenses.

Even if the Company receives regulatory approval to sell any of its products, the U.S. Food and Drug Administration (“FDA”), the Australian Therapeutics Goods Administration or comparable foreign regulatory agencies could require the Company to conduct post-marketing trials to further evaluate safety and efficacy or could prevent the Company from using the labeling claims which the Company would like to use to promote its products. Regulators will undertake periodic reviews and inspections. If they discover previously unknown problems with a product or its manufacturing facility or if the Company fails to comply with regulatory requirements, regulators could:

•                   impose fines against the Company;

•                   impose restrictions on the product, its manufacturer, or the Company;

•                   require the Company to recall or remove a product from the market;

•                   suspend or withdraw its regulatory approvals;

•                   require the Company to conduct additional clinical trials;

•                   require the Company to change its product labeling; or

•                   require the Company to submit additional marketing applications.

If any of these events occur, the Company’s ability to sell its products will be impaired and the Company may incur substantial additional expense to comply with the regulatory requirements. In addition, in certain countries, even after regulatory approval, the Company is still required to obtain price reimbursement approval. This may delay the marketing of the Company’s products or, when approval cannot be obtained, mean that the product cannot be sold at all.

If the Company is unable to keep pace with technological change or with the advances of its competitors, its technology and products may become obsolete or non-competitive.

The biotechnology and pharmaceutical industries are subject to rapid technological change which could affect the success of the Company’s drugs or make them obsolete. The field of biotechnology is characterized by significant and rapid technological change. Research and discoveries by others may result in medical insights or breakthroughs which render the Company’s drug candidates less competitive or even obsolete before they generate revenue.

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The Company’s business faces intense competition from major pharmaceutical companies and specialized biotechnology companies engaged in the development of drugs directed at the conditions and disorders that are the focus of the Company’s therapeutics programs. As a result its competitors may be able to establish superior proprietary positions.

The Company’s competitors in the biotechnology and pharmaceutical industries may have superior research and development capabilities, drugs, manufacturing capability or marketing expertise. Many of the Company’s competitors have significantly greater financial and human resources and may have more experience in research and development. As a result, the Company’s competitors may develop safer or more effective drugs, or implement more effective sales and marketing programs or be able to establish superior proprietary positions. In addition, the Company anticipates that it will face increased competition in the future as new companies enter the Company’s markets and alternative drugs become available.

The Company’s products under development are expected to address a broad range of markets including, but not limited to anti-cancer drugs for the treatment of chronic myelogenous leukemia (“CML”) and other forms of leukemia, prostate cancer and other solid tumors. The Company’s competitive position will be determined in part by the potential indications for which the Company’s products are developed and ultimately approved by regulatory authorities. The relative speed with which the Company or its collaborative partners can develop products, complete the clinical trials and approval processes and supply commercial quantities of the products to the market, are expected to be important competitive factors.

The Company’s competitors may be developing products that could compete with the products the Company is developing. The Company and its collaborators will need to persuade patients and physicians to adopt its products over its competitors’ products.

In the field of cancer therapeutics the Company faces intense competition from major pharmaceutical companies and specialized biotechnology companies engaged in the development of product candidates and other therapeutic products. Several of these companies have products in the same indications or utilize similar technologies and/or personalized medicine techniques. The FDA has approved two drugs for Gleevec ^® -resistant CML; Sprycel ^® (dasatinib), a drug developed and commercialized by Bristol-Myers Squibb was approved in June 2006, and Nilotinib ^® (nilotinib) a drug developed and commercialized by Novartis was approved in October 2007. Significantly, neither Sprycel ^® nor Nilotinib ^® have demonstrated efficacy against the T315I bcr-abl mutation, and it is this sub-set of resistant CML patients that are being targeted by the Company for initial approval. Several biotechnology and pharmaceutical companies are seeking to develop effective therapeutics specifically for CML patients with the T315I mutation. Vertex Pharmaceuticals and its partner Merck are developing an aurora kinase inhibitor referred to as MK-0457 or VX-680. This agent is currently in phase 2 clinical trials. Astex Therapeutics is developing AT9283, an inhibitor of several targets including bcr-abl. This agent is currently in phase 1/2 clinical trials. Several companies have agents in phase 1 clinical trials, including Exelixis (XL228), Kyowa Hakko (KW2449) and Medimmune/Infinity Pharmaceuticals (IPI504). Xanthus Pharmaceuticals is currently conducting a phase 3 study with amonafide malate (listed as an example product candidate — Refer Item 4B. Business Overview — ChemGenex’s development pipeline) in acute myeloid leukemia. The previous list is indicative only, and there may be other competitive trials or technologies elsewhere in the world. Additionally, many of the Company’s competitors, including large pharmaceutical companies, have greater financial and human resources and more experience than the Company does.

If the healthcare industry limits coverage or reimbursement levels, the acceptance of the Company’s products could suffer. It may not be able to sell its drug profitably.

The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare facilities. During the past several years, the healthcare industry has been subject to increased government regulation of reimbursement rates and capital expenditures. Among other things, third party payers are increasingly attempting to contain or reduce healthcare costs by limiting both coverage and levels of reimbursement for healthcare products and procedures. Cost control policies of third party payers, including government agencies, may adversely affect acceptance and use of the Company’s product line.

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If the Company is unable to successfully establish and protect its intellectual property, which is significant to the Company’s competitive position, its competitors may be able to take advantage of its research and development efforts.

The Company’s success depends in part on its ability to obtain and maintain protection for its inventions and proprietary information, so that it can stop others from making, using or selling its inventions or proprietary rights. The Company owns a portfolio of patents and patent applications. There is a significant delay between the time of filing of a patent application and the time its contents are made public, and others may have filed patent applications for subject matter covered by the Company’s pending patent applications without the Company being aware of those applications. The Company’s patent applications may not have priority over patent applications of others and its pending patent applications may not result in issued patents. Even if the Company obtains patents, they may not be valid or enforceable against others. Moreover, even if the Company receives patent protection for some or all of its products, those patents may not give the Company an advantage over competitors with similar products.

To develop and maintain its competitive position, the Company also relies on unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation, which it protects with security measures it considers to be reasonable, including confidentiality agreements with its collaborators, consultants and employees. The Company may not have adequate remedies if these agreements are breached and the Company’s competitors may independently develop any of this proprietary information.

If the Company fails to obtain adequate protection for its intellectual property, the Company’s competitors may be able to take advantage of the Company’s research and development efforts. The Company’s success will depend, in large part, on its ability to obtain and maintain patent or other proprietary protection for its technologies in general and, in particular, drugs and processes. The Company may not be able to obtain patent protection for the use of certain drug compounds, processes developed by its employees or medical uses of compounds discovered through its technology. Legal standards relating to patents covering pharmaceutical or biotechnological inventions and the scope of claims made under these patents are still developing. There is no consistent policy regarding the breadth of claims allowed in biotechnology patents. The Company’s patent position is therefore uncertain and involves complex legal and factual issues. This risk factor is one that faces many companies in the biotechnology industry and the Company is not aware of any Company-specific risks.

The Company may incur substantial costs as a result of disputes relating to intellectual property.

The Company may have to initiate litigation to enforce its patent and license rights. If the Company’s competitors file patent applications that claim technology also claimed by the Company, the Company may have to participate in interference or opposition proceedings to determine the priority of invention. An adverse outcome could subject the Company to significant liabilities and require the Company either to cease using a technology or to pay license fees.

The Company could incur substantial costs in any litigation or other proceeding relating to patent rights, even if it is resolved in the Company’s favor. Some of the Company’s competitors may be able to sustain the costs of complex litigation more effectively or for a longer time than the Company can because of their substantially greater resources. In addition, uncertainties relating to any patent, pending patent or intellectual property litigation could have a material adverse effect on the Company’s ability to bring a technology to market, enter into collaborations in respect of the disputed or other technologies, or raise additional funds.

The Company may not be able to bring any of the drug candidates it is developing to market.

Development of drug candidates involves a lengthy and complex process. Any drug candidate that the Company seeks to offer commercially to the public must be put through extensive research, development and pre-clinical and clinical testing which will be costly to the Company. This development process takes several years. In addition, the Company or its partners will need to obtain regulatory approvals to conduct clinical trials and manufacture drugs before they can be marketed. Results of pre-clinical studies are not necessarily indicative of results that may be obtained in clinical trials and results in early clinical trials may be different from those obtained in long-term testing or in general use. Adverse or inconclusive results from pre-clinical testing or clinical trials may substantially delay, or halt entirely, the development of products.

The Company may fail to successfully develop a drug candidate for many reasons, including:

•                   the failure to establish any collaborative third party agreements to support drug development;

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•                   the failure to produce a promising compound in sufficient quantities to conduct clinical trials or to manufacture the compound at commercially acceptable quantities and prices;

•                   the failure of the drug in pre-clinical studies;

•                   the inability of clinical trials to demonstrate that the drug is safe and effective in humans; or

•                   the failure to obtain required regulatory approvals.

ChemGenex Pharmaceuticals Limited shares may fluctuate in value.

The market price for ChemGenex Pharmaceuticals Limited shares and the securities of other similar companies have been volatile. Factors that could significantly impact the market price of ChemGenex Pharmaceuticals Limited shares in the future other than those described elsewhere in this Annual Report include:

•                   announcements concerning research activities, technological innovations, clinical trials or financial results by the Company or its competitors;

•                   termination of collaborations by the Company or its partners;

•                   governmental regulatory initiatives;

•                   the FDA, the Australian Therapeutic Goods Administration or European Medicines Evaluation Agency approving or denying new applications;

•                   patent or proprietary rights developments;

•                   public concern as to the safety or ethical implications of biotechnology products;

•                   sales of substantial amounts of the Company’s shares by existing shareholders;

•                   price and volume fluctuations in the stock market at large that do not relate to the Company’s operating performance;

•                   changes in financial estimates by securities analysts, comments by securities analysts, or the Company’s failure to meet analysts’ expectation;

•                   actual or anticipated variations in periodic operating results;

•                   new products or services introduced or announced by the Company or its competitors;

•                   changes in the market valuations of other similar companies;

•                   announcements by the Company of significant acquisitions, strategic partnerships, joint ventures or capital commitments; and

•                   additions or departures of key personnel.

The Company’s products may not receive and maintain regulatory approval. The complexity and multi-jurisdictional nature of the applicable regulatory processes could result in delays in achieving such regulatory approval, which would have an adverse effect on the Company’s financial conditions, its programs and projected revenues.

The international pharmaceutical industry is highly regulated by numerous governmental authorities in the U.S., Australia and Europe and by regulatory agencies in other countries where the Company intends to market products it may develop. National regulatory authorities administer a wide range of laws and regulations governing the testing, approval, manufacturing, labeling and marketing of drugs and also review the quality, safety and effectiveness of such products. These regulatory requirements are a major factor in determining whether a technology can be developed into a marketable clinical application or a specific product and the amount of time and expense associated with such development.

Government regulation imposes significant costs and restrictions on the development of pharmaceutical products for human use, including those the Company is developing. The development, clinical evaluation, manufacture and

15

marketing of the Company’s products and ongoing research and development activities are subject to regulation by governments and regulatory agencies in all territories within which the Company intends to manufacture and market its products (whether themselves or through a partner). The Company’s products may not successfully complete the clinical trial process. Similarly, regulatory approvals to manufacture and market the Company’s products may not ultimately be obtained.

The time taken to obtain regulatory approval varies between countries. The Company’s products may not be approved in any country within the timescale envisaged, or at all. This may result in a delay, or make impossible, the commercialization of its products. Furthermore, each regulatory authority may impose its own requirements (for instance, by restricting the product’s indicated uses) and may refuse to grant, or may require additional data before granting, an approval, even though the relevant product candidate may have been approved by another country’s authority.

If regulatory approval is obtained, the product and its manufacture will be subject to continual review and this approval may be withdrawn or restricted. Changes in applicable legislation or regulatory policies, or discovery of problems with the product, or its production process, site or manufacturer, may result in the imposition of restrictions on the product, its sale, manufacture or use, including withdrawal of the product from the market, or may otherwise have an adverse effect on the Company’s liquidity and financial condition.

The Company has not had any of its product candidates receive approval for commercialization in Australia, the U.S. or elsewhere.

The Company may be unable to secure adequate insurance at an acceptable cost. Failure to secure such insurance may expose the Company to liability in the event of a claim.

The Company’s business exposes it to potential product liability, professional indemnity and other risks which are inherent in the research and development, pre-clinical studies, clinical trials, manufacturing, marketing and use of pharmaceutical products. The Company in carrying out its activities will potentially face contractual and statutory claims, or other types of claims. Consumers, healthcare producers or persons selling products based on the Company’s technology may be able to bring claims against the Company based on the use of such products in clinical trials and the sale of products based on the Company’s technology. The Company is insured for product liability with a policy covering US$5,000,000 that covers bodily injury or property damage arising out of the Company’s products used in the regular course of the clinical trials. The policy was recently renewed for the period from May 1, 2007 to April 30, 2008. The Company also carries directors’ and officers’ liability policies in the U.S. and Australia, with coverage of US$10,000,000, and customary employer’s liability, fiduciary liability and property insurance coverages in amounts that are considered usual for similarly situated companies. Product liability or any future necessary insurance cover may not be available to the Company at an acceptable cost, if at all, and if there is any claim, the level of the insurance the Company carries now or in the future may not be adequate. Similarly, a product liability, professional indemnity or other claim may materially and adversely affect the Company’s liquidity or its ability to continue to progress its product development. In addition, it may be necessary for the Company to secure certain levels of insurance as a condition to the conduct of clinical trials. In the event of any claim, the Company’s insurance coverage may not be adequate.

The Company may face product liability claims.

The testing, marketing and sale of human health care products entails an inherent risk of product liability. The Company in carrying out its activities will potentially face contractual and statutory claims, or other types of claim. In addition, the Company is exposed to potential product liability risks that are inherent in the research and development, pre-clinical study, clinical trials, manufacturing, marketing and use of medical devices and drug products. Consumers, healthcare producers or persons selling products based on the Company’s technology may be able to bring claims against the Company based on the use of such products in clinical trials and the sale of products based on the Company’s technology.

The Company may be subject to special interest groups and adverse public opinion.

Government bodies and regulatory agencies require that potential pharmaceutical products are subject to pre-clinical studies, including animal testing, prior to conducting human trials. ChemGenex arranges for such work either directly or through its collaborators. While the Company has not been subject to the attention of special interest

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groups, or any adverse public opinion of which it is aware, such work entails the risk of adverse public opinion and the attention of special interest groups, including those of animal rights activists. These groups may in the future focus on the Company’s activities or those of its licensees or collaborators, and this might adversely affect the Company’s operations, by requiring it to curtail its activities or to change its testing procedures.

The pharmaceutical and biotechnology industries are frequently subject to adverse publicity on many topics, including corporate governance or accounting issues, product recalls and research and discovery methods, as well as political controversy over the impact of novel techniques and therapies on humans, animals and the environment. While there has to date been no adverse publicity about the Company, its collaborators, or its products, such adverse publicity in the future, should it arise, may hurt the Company’s public image, which could harm its operations, cause its share price to decrease or impair its ability to gain market acceptance for its products. The Company has adopted an ethics policy for genetic research.

A twelve month, A$2,400,000 extension to a research agreement first signed on 2 June, 2005 with Deakin University (Geelong, Australia) to conduct gene discovery, small molecule screening and validation research according to instruction from the Company in the fields of obesity, diabetes and depression. This agreement is called “Research, License and Commercialisation Agreement (“Research Services Provision)”. The extension covers the period from January 1, 2007 to December 31, 2007.

A twelve month, A$150,000 extension to a research agreement first signed on January 14, 1998 with the International Diabetes Institute (Melbourne, Australia) to conduct gene discovery and validation research according to instruction from the Company in the fields of obesity and diabetes. This agreement is called “Research Agreement for Human Diabetes / Obesity Discovery”. The extension covers the period from January 1, 2007 to December 31, 2007.

An agreement signed in June 16, 2006 with Premier Research Group plc to provide clinical study services which ChemGenex may submit to the FDA in support of clinical studies being conducted with Ceflatonin®. The agreement is called “the Master Clinical Service Agreement”. The services to be provided by this agreement cover a period of approximately 24 months but may be terminated, by either party, during that time within the terms provided in the agreement.

The Company has no fixed asset commitments as at June 30, 2007, and has incurred no significant fixed asset expenditure since that date. Expenditure on plant and equipment is usually minimal due to the Company’s outsourcing arrangements. Recent capital expenditure on plant and equipment is as follows:

Important events since June 30, 2007

On October 26, 2007ChemGenex Pharmaceuticals Limited announced a strategic restructuring based upon the spinoff of its metabolic diseases assets by early December, pending shareholder approval. ChemGenex’s metabolic diseases assets currently reside within the company’s wholly-owned subsidiary Autogen Research, which is to be renamed Verva Pharmaceuticals. Pending shareholder approval at the Annual General Meeting, scheduled to take place in Melbourne on November 28, Verva Pharmaceuticals will be demerged from ChemGenex. Verva Pharmaceuticals then intends to merge with Adipogen Pharmaceuticals, pursuant to a merger implementation agreement signed on October 29, 2007. Upon shareholder approval, ChemGenex shareholders will receive one share in Verva Pharmaceuticals for every five ChemGenex Pharmaceuticals shares held at the record date. In accordance with ASX listing rules and the option agreements, existing ChemGenex option holders will not be allocated shares in Verva Pharmaceuticals unless options are exercised prior to the record date. The Verva Pharmaceuticals shares will not be registered under the U.S. Securities Act for distribution to holders of the Company’s ADRs. After the record date the exercise price for each remaining ChemGenex option will be reduced by approximately 7 cents.

B.            Business overview

The Company focuses on the development of novel therapeutic agents in two diseases: cancer and metabolic syndrome (which includes diabetes and obesity). Product development in the two disease areas is supported by four product development platforms: Gene-Based Target Discovery, Target Validation, Drug Discovery and Drug Development. The combination of these platforms is collectively known as the eXpress Technology Platform. In the field of cancer, ChemGenex currently has two small molecule drug candidates in Phase 2 human trials (Ceflatonin® and Quinamed®) and a broad pipeline of compounds and validated targets, including four pre-clinical cancer compounds (CXS299, CXS2101, CXS6001 and CXS273) and two early-stage discoveries identified in the Target Discovery program. In the field of metabolic syndrome, the Company has previously partnered its Target Discovery and Target Validation capabilities with Merck Santé, has discovered and protected by patent more than 50 other gene and protein targets and has established two new unencumbered programs; (i) a small molecule discovery program, and (ii) a predictive biomarker program.

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ChemGenex’s competitive advantage

The Company’s competitive advantage can be considered in terms of protected intellectual property (IP), the research and development platforms that support the development of existing IP and the creation of new IP and the organizational ability to realize the commercial value of the Company’s IP and other assets.

The Company has approximately 50 patent families in various states of protection ranging from provisional applications through to granted patents in a number of jurisdictions. In addition to IP that is protected by patents there is significant know how and expertise within the senior research staff of the Company.

The research and development infrastructure of the Company is described below and consists of skills in medicinal chemistry and product development for cancer therapeutics, gene discovery using animal models and human samples from known populations, high-powered statistical analysis capabilities to determine linkages between gene variations and disease states and a suite of validation technologies to characterize the biological roles of given genes (and their protein products) by altering their expression levels in cell culture and in animals. Specific competitive advantage is realized through (a) ChemGenex’s product development pipeline (b) exclusive commercial access to Deakin University’s out-bred colony of Psammomys obesus , a species of gerbil also known as the sand rat, a well-defined model for dietary induced Type 2 diabetes, (c) exclusive access to the International Diabetes Institute’s substantial collection of phenotyped human tissue and DNA samples for the purpose of discovery of novel metabolic syndrome targets and (d) access to the experience of Dr. J. Blangero and supercomputing infrastructure at the Southwest Foundation for Biomedical Research.

Business strategy

The Company’s business strategy for growth and profitability is to discover, develop and commercialize novel therapeutics that address significant unmet needs in the pharmaceutical industry, based on the Company’s understanding of the genetic basis of disease. The Company keeps its core competencies in-house (such as laboratory research management, pre-clinical work, clinical strategy and management), outsourcing the majority of laboratory research and all clinical testing to specialists, to minimize its infrastructure and fixed overhead costs. In the fields of diabetes and obesity the Company seeks early partnering of discovery programs in order to share development costs and risks with partners and to ensure that programs are commercially and scientifically focused. In the field of cancer, the Company intends to seek out joint venture or licensing partners for further development and commercialization of its products following Phase 2 clinical evaluation. This will allow ChemGenex to license its products before full regulatory approval is required to place the product in the market. The goal in each case is to seek multinational partners with drug development milestones payable to the Company on completion of agreed targets and submission of regulatory documents and, eventually, payment or royalties on sales of commercialized products. The expectation is that the size of the payments to the Company will vary depending on the size of the eventual market, the stage of development of the product concerned and the strength of the data that is generated prior to partnering.

Components of ChemGenex’s discovery, validation and drug development platforms

Target discovery and Biomarkers

The target discovery, validation and drug development platforms utilize infrastructure located at Deakin University (Geelong, Australia), the International Diabetes Institute (Melbourne, Australia) and the Southwest Foundation for Biomedical Research (San Antonio, Texas). Key features of the Target Discovery platform include:

•                   Deakin University’s out-bred colony of Psammomys obesus , a well-characterized animal model of diabetes and obesity. The Company has exclusive access to this colony for both discovery and validation activities;

•                   a library of extensive family pedigrees of more than 44,000 human tissue and DNA samples and a dedicated human genotyping facility that is used for sequencing target genes to identify variations associated with disease states; and

•                   access to the computing facilities at the Southwest Foundation for Biomedical Research for statistical analysis of gene variations as relating to disease state.

The Company’s research scientists have found the animal model to be useful in studying metabolic disorders, such as diabetes and obesity. Psammomys obesus populations develop a range of body weight, blood glucose, and insulin

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levels with distributions similar to those found in human populations. This animal model is used to discover candidate genes (and the proteins they encode) with altered levels of expression that are associated with each disease. For example, specific genes are up- or down-regulated in diabetic animals compared to normal healthy animals. The candidate genes identified in this way are then analyzed and compared with human population data using the Company’s Human Gene Discovery facility at the International Diabetes Institute (Melbourne) and in the U.S., at the Center for Human Statistical Genetics at the Southwest Foundation for Biomedical Research. The Company has contractual agreements with both institutions. Candidate genes that are found to exist in the human genome and be associated with the diseases in question are then subject to further rigorous analysis. As an example the PSARL (Presenilin-Associated Rhomboid-like protein) gene was discovered by the Company in Psammomys obesus and subsequently identified in humans. This gene identified originally in the animal model was found to have a human analogue and detailed genetic analysis of samples from more than 1,000 humans confirmed that variation in the gene in humans was significantly associated with increased risk of diabetes.

Some of the genes that were discovered using the Target Discovery platform have potential utility as biomarkers. That is, gene variants or differences in levels of gene expression, and thus protein levels, may predict disease state or propensity to develop certain diseases. The Company has recently expanded its efforts in biomarker discovery and is screening for novel genes and proteins that might have commercial utility.

Target validation

The Target validation platform utilizes infrastructure located at Deakin University in Geelong, Australia. It encompasses a comprehensive set of proprietary and non-proprietary technologies from gene discovery, gene structure and function analysis to the validation of gene and protein products that may be potential therapeutic or diagnostic targets. The validation platform is used to characterize the biological role of targets that have been discovered and found to be related to disease state using the combined resources of the discovery platform.

Examples of the technologies employed in Target Validation include in vitro (cell culture) experiments to determine the effect of up- or down-regulation of genes on quantifiable end-points, in vivo experiments to manipulate the levels of target genes or expressed proteins in animals and tracking of physiological and behavioral responses, and clarification of the nature of any protein-protein interactions, which can reveal potential drug targets.

An example of the role of validation is the blocking of expression of the gene target SGIP1 (SH3-Domain GRB2-Like Interacting Protein 1) in Psammomys obesus and Rattus norvegicus . In the Company’s laboratory experiments SGIP1 was identified as having increased expression in the hypothalamus of obese compared to lean Psammomys obesus . The candidate gene was confirmed as being associated with disease using the Company’s human genetics group in the Southwest Foundation for Biomedical Research. To examine the role of SGIP1 in the development of obesity, antisense oligonucleotides of the genes were infused into a specific region of the brain (the lateral cerebral ventricle) in both Psammomys obesus and Rattus norvegicus . The procedure has the effect of blocking the expression of the SGIP1 genes in the brain and the Company believes this is a proxy of what could occur if therapeutic agents could be used to affect the level of the protein. When treated with antisense SGIP1, both species showed approximately 40% reduction in food intake and 5-8% loss of body weight compared with control animals.

Drug discovery

The Company’s diabetes and obesity program based at Deakin University has expanded its scope to include chemical screening and the discovery of small molecules that are potential insulin sensitizers. This new chemogenomics-based program integrates systems biology with drug discovery and development, and has already identified a range of lead compounds that are progressing into preclinical studies.

The Company’s diabetes screen is based on Gene Expression Signatures, which are accurate measurements of gene expression in model systems of diabetes reflecting changes in the complex control mechanisms and pathways that are involved in the treatment of the disease. By understanding the ‘signature’ of cells recovering from diabetes it is possible to quickly and accurately determine the effects of any given compound’s actions across multiple pathways within a cell, and ascertain if it has potential as a treatment. As lead molecules progress through preclinical development the signatures are used to accelerate medicinal chemistry programs, allowing rapid assessment of compounds based on the signatures of different molecular iterations.

The Company’s anti-cancer therapeutic development platform focuses on developing novel small molecule therapeutics for the treatment of cancer and related conditions. The major strategy has been to screen agents studied by the U.S. National Cancer Institute that have confirmed human clinical activity but were not fully developed. Among these agents the Company identifies compounds suitable for development based on its assessment of

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mechanism of action, molecular targets affected, potential formulation improvements and genetic differences between patients that can be exploited in clinical development. It utilizes chemical genomics and drug screening systems to identify agents affecting novel targets and evaluates a compound’s suitability as a drug and formulation technology to maximize delivery and bioavailability, meaning the extent to which a chemical is absorbed and distributed in the blood in an unchanged form following administration to a living organism.

Drug development

The Company’s pre-clinical and clinical development efforts are based in Menlo Park, California. In vitro and in vivo screening models are used to evaluate lead compounds. Data from these models is fed back into extensive in-house databases for iterative analysis. A parallel series of profiling assays is performed to determine the potential pharmaceutical attributes and vulnerabilities of a compound.

Compounds that merit further development proceed through pre-formulation and advanced pre-clinical in support of regulatory filings for human clinical evaluation. These include non- Good Laboratory Practice (GLP) and GLP pharmacology, efficacy and toxicology studies in laboratory animal models. Additionally, compound manufacturing, scale-up considerations and dosage form stability studies are also performed.

Those agents with acceptable pharmacological and toxicological profiles may become the subject of evaluation in humans. This requires submission to the U.S. FDA of an Investigational New Drug (IND) application for permission to begin Phase I dose escalation studies. After the Maximum Tolerated Dose is identified at the schedule contemplated for therapeutic use, Phase 2 studies evaluating potential disease indications are performed. If significant activity is identified, then larger Phase 3 studies are conducted in support of a New Drug Application (NDA). If approved the product can then be commercialized.

ChemGenex’s development pipeline

In the field of cancer the Company has two clinical stage product candidates, four pre-clinical stage product candidates and two discovery stage targets that have recently been identified.

Clinical stage product candidates

The Company has applied its genomic and clinical development expertise with its knowledge of cancer to identify small molecule therapeutic targets in oncology. By focusing on compounds with confirmed clinical activity and using genomic tools to optimize their development, the Company has been able to create a pipeline of product candidates described below:

Ceflatonin® (homoharringtonine)

Homoharringtonine (“HHT)” is a small molecule with established clinical activity as a single agent in hematological malignancies. The Company’s scientists have discovered that it affects a number of critical cellular pathways, including the regulation of genes associated with programmed cell death (apoptosis) and the inhibition of formation of new blood vessels in solid tumors (angiogenesis). The Company has received Orphan Drug Status protection for HHT in CML in both the U.S.A. and Europe, as well as Fast Track Status from the U.S. F.D.A. In previous published Phase 2 clinical trials, 70% of patients showed complete hematological remission (CHR) in chronic myeloid leukemia (“CML”) after interferon-α failure. In more recent pilot studies in CML patients who had failed Gleevec ^® , 100% of chronic-phase patients and 70% of accelerated-phase patients achieved a CHR. The Company is currently conducting Phase 2/3 trials in the U.S.A. and Europe for CML patients who have the T315I bcr-abl mutation that confers resistance to Gleevec ^® and other TKIs. Data published in 2007 indicated that Ceflatonin had positive clinical activity against Gleevec ^® -resistant, chronic myeloid leukemia (CML) associated with the T315I Bcr-Abl mutation. The Company is conducting a complementary phase 2 clinical trial in the U.S.A. for CML patients who have failed multiple TKIs regardless of mutation status. At the M.D. Anderson Cancer Center the Company is conducting a combination (with Gleevec ^® ) therapy Phase 2 trial in CML patients who had failed Gleevec ^® . Preliminary data presented at the American Society of Hematology (ASH) Annual Meeting in December 2006 reported that 42% of patients on the combination therapy regime achieved a hematologic response (reduction of leukemic cells in the blood).The Company is also conducting Phase 2 trials in patients with the bone marrow disease called myelodysplastic syndrome (“MDS”) in collaboration at the M.D. Anderson Cancer Center. The Company has one issued patent and has four active patent applications covering Ceflatonin ^® formulations,

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purification, synthesis and uses. The Company has licensed from Stragen Pharma S.A. three issued patents and has four active patent applications covering the preparation of homoharringtonine derivates, purification, and the use of homoharringtonine resistant to Gleevec ^® .

Quinamed® (amonafide dihydrochloride)

Amonafide dihydrochloride (amonafide) is a synthetic organic compound with established anti-cancer clinical activity. The Company has recently discovered that amonafide effects a number of targets in the epidermal growth factor receptor pathway, which controls the growth of a number of tumor types, in addition to affects on an enzyme that is critical for normal cell replication, topoisomerase II. In National Cancer Institute (“NCI”)-sponsored clinical studies with amonafide monohydrochloride, 25% of breast cancer patients and 15% of prostate cancer patients showed either partial (>50% reduction in tumor volume) or complete (no measurable disease) responses. However, researchers also noted some unpredictable side effects. It was later discovered that differences in how patients metabolize the drug has a significant impact on toxicities. These metabolic differences can now be determined by testing a patient’s NAT-2 genotype. The Company’s development strategy is to determine a patient’s NAT-2 genotype and then treat them with a more precise and personal dose needed to produce the optimal result. At the American Association of Clinical Oncologists (ASCO Annual Meeting in June 2007, data was presented from the phase 1/2a dose-escalation study of Quinamed. The key outcomes from this study were (i) demonstration that dose level could be optimised according to patient genotype, (ii) the drug was well tolerated, with predictable and manageable side effects, and (iii) there was evidence of anticancer activity in several solid tumor types. The Company has two issued patents and has three active patent applications covering amonafide salts, formulations, synthesis and uses.

Pre-clinical stage product candidates

In addition to Ceflatonin ^® and Quinamed ^® the Company is developing several other pre-clinical oncology compounds, including the following:

CXS299: This is a new platinum (IV) compound recently licensed from the M.D. Anderson Cancer Center in Houston, Texas. CXS299 is a first in class platinum IV agent that is active against cancer cells resistant to the effects of commercially available platinum-based therapies. Currently approved platinum II agents have generated sales of greater than US$1 billion. However, some patients develop resistance to platinum II therapy resulting in a need for additional therapies. CXS299 is currently in pre-clinical development and could enter Phase I in 2009.

CXS2101:  This compound inhibits NF-Kappa B and has been shown to increase the anti-cancer activity of other agents in animal models.

CXS6001:  This compound affects levels of the structural protein tubulin in cancer cells and has shown anti-tumor efficacy in mouse models.

CXS273:  This compound affects the integrity of DNA and has been shown to increase the anti-cancer activity of cisplatin in a mouse model.

Validated targets

The SEPS 1 gene (formerly called Tanis) was identified by the Company following the observation of increased hepatic gene expression in diabetes in Psammomys obesus . The Company has since determined the gene’s sequence and location on the human chromosome and the characteristics of the gene’s protein product. Evidence indicates that the SEPS 1 gene represents an important target not only in diabetes but potentially in other diseases, such as cancer and inflammatory diseases and the Company’s patent protection has been broadened accordingly.

It has been determined that the PSARL gene is linked to signaling pathways within a cell that are thought to be associated with insulin resistance, which is the cause of Type 2 diabetes. Evidence indicates that the PSARL gene represents an important target not only in diabetes but potentially in other diseases, such as cancer and age-related degenerative diseases and the Company’s patent protection has been  broadened accordingly.

Beacon was isolated in Psammomys obesus as a gene expressed in direct proportion to body fat content. The protein product of the Beacon gene is expressed as a small peptide in the hypothalamus, a part of the brain that regulates energy intake and expenditure, and is understood to play a role in energy balance. The Company’s research has

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demonstrated that the expression of the Beacon gene is proportional to the amount of body fat, and that giving the Beacon peptide to lean animals significantly increased their feeding rate and body weight in direct proportion to the quantity of Beacon peptide. This suggests that blocking the action of the Beacon peptide by biological or chemical means could provide a means of treating obesity.

SGIP1 is a protein involved in the regulation of satiation at the neurological level. The Company has determined that suppression of SGIP1 expression reduced the feeding rate of Psammomys obesus significantly over a period of four days. While the SGIP1 gene has been identified in humans, additional work on the expression and function of the gene in humans is still needed.

Discovery stage targets

The Company has more than 50 discovery stage candidates, in different stages of patent protection.

Additional opportunities

The Company has generated revenue through the use of the capacity in its technology platform for fee-for-service contract research. Many drug development companies do not have proprietary technology to validate genetic targets with demonstrable links to a disease state. These companies are the prospective clients for use of the Company’s technology. In 2002 the Company had a significant contract with Sequenom for this purpose and from 2003 to 2007 the service has been utilized by several Australian biotechnology companies. The Company continues to seek fee-for-service revenue although no further contracts have yet been arranged.

Research and product development programs

The Company currently contracts its target discovery research programs to three organizations; Deakin University in Geelong, Victoria, Australia, the International Diabetes Institute in Melbourne, Victoria, Australia and the Southwest Foundation for Biomedical Research in San Antonio, Texas. The discovery and validation programs are involved in the previously described collaborative programs with Merck Santé (diabetes and obesity targets) and Vernalis (depression targets). Cancer research is carried out at the Company’s laboratory in Menlo Park, California, and clinical trials conducted at leading US and European hospitals.

The Company has been accepted into the inaugural Pharmaceutical Partnership Program (P3) of the Australian Federal government, through which the Company has the ability to earn grant revenue based on the growth of the Company’s research in Australia over the next three years. Admission into the Australian government’s P3 scheme involved a peer review process and the Company was one of only seven Australian-owned biotechnology companies admitted into the first round of the scheme. The scheme will subsidize incremental increases in research and development activities by means of a 30% cash grant for every dollar spent on eligible research by the Company at the end of each fiscal year.

Commercial and research and development collaborations

The following section describes the Company’s existing commercial collaborators and the commercial agreements with respect to the Company’s principal research and development programs and commercialization agreement:

General Research Agreement:  Chemgenex Pharmaceuticals entered into a General Research Agreement on December 20, 2005 with Merck Santé (a subsidiary of Merck KGaA) pursuant to which Merck Santé agrees to fund a minimum of €210,000 per annum for the Company to undertake preclinical research on its behalf. The term of the agreement is to December 31, 2008. Additional fees are payable if additional staff resources are required to complete specific research programs.

Patent and Technology License Agreement: On February 7, 2005 ChemGenex Pharmaceuticals Limited entered into a technology licensing agreement with The University of Texas M. D. Anderson Cancer Center to develop information or discoveries relating to the anti-cancer activities of DACH-Ac-Pt [(1R,2R-diaminocyclohexane)-(trans-diacetato)-(dichloro)-platinum(IV)] a novel cisplatin analog now referred to by the Company as CXS299. The royalty-bearing, exclusive license is for certain IP rights defined in United States Patent No. 5,434,256, and foresees the pre-clinical and clinical development of CXS299. ChemGenex Pharmaceuticals Limited has incurred expenses of US$50,000 (paid by cash and issue of shares) in March 2005. Further fees payable under this agreement will be dependent upon the commencement of various stages of clinical trials required, the results of those trials and the

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licensing of product associated with the trials. Unless terminated by either party the agreement will remain in effect until patent rights or technology rights associated with the agreement expire.

Research, License and Commercialization Agreement (Research Services Provision):  A contract dated April 21, 2005 between ChemGenex Pharmaceuticals Limited and Deakin University consolidated the provision of research services by Deakin University previously defined in the agreements of June 26, 2000 (Research Services (Subcontracting), August 16, 2000 (Research, License and Commercialization Agreement (Gene Discovery in Depression) and February 28, 1997 (Research Agreement). Under the consolidated agreement ChemGenex undertakes to fund research and development programs with Deakin University in the fields of diabetes, obesity, cancer, respiratory diseases, inflammatory diseases, osteoporosis, allergy, asthma, depression and autoimmunity. All intellectual property developed under the terms of the agreement belongs to the Company. If ChemGenex commercializes or licenses products resulting from the research program conducted under the contract, it is obligated to pay Deakin University a royalty on net sales. The contract may be terminated if the University does not timely commence its work, if it fails to achieve milestones or use appropriate professional standards or if the program is not producing results in the opinion of the Company, among other conditions. It may also be terminated by Deakin University if ChemGenex fails to provide the agreed funding. Under certain circumstances the Company is obligated to pay the royalties to Deakin University even in the event of early termination. The original term of this agreement from January 1, 2005 to December 31, 2005 was twice extended by 12 months to December 31, 2006 and December 30, 2007 (on December 18, 2006). ChemGenex incurred expenses of A$2,420,000 in fiscal 2006, and A$2,410,000 in fiscal 2007 for services provided under the agreement. Further expenses of $1,200,000 will be incurred until expiry date.

Research, License and Commercialization Agreement:  Autogen Research Pty Ltd. entered into this agreement with the SFBR, based in San Antonio, Texas, on December 31, 2002. Under the terms of this agreement Autogen Research Pty Ltd undertakes to collaborate with SFBR and to provide funding for a project in return for the joint ownership and an exclusive license to use and commercialize the intellectual property resulting from the funded project on the terms set forth in the agreement. Among the conditions for termination are failure to timely commence and progress the agreed work plan, insolvency, change in control and other similar conditions. The agreement also is terminable if Autogen Research Pty Ltd does not provide the agreed funding. The term of this agreement was extended to December 31, 2007 on January 11, 2007. Autogen Research Pty Ltd incurred expenses of A$490,929 in fiscal 2005, A$895,138 in fiscal 2006 and A$711,824 in fiscal 2007 under this agreement. No further expenses will be incurred until expiry date.

Research Agreement:  On January 14, 1998 Autogen Pty Ltd. entered into a research agreement with the International Diabetes Institute (IDI) to conduct gene discovery and validation research according to instruction from the Company in the fields of obesity and diabetes pursuant to which Autogen Research Pty Ltd undertakes to collaborate with the IDI and to provide the funding for a project in return for joint ownership and a license to the intellectual property resulting from the project. If Autogen Research Pty Ltd commercializes or licenses products resulting from the research program conducted under the contract, it is obligated to pay the IDI a royalty on net sales. The contract may be terminated if the IDI does not timely commence its work, if it fails to achieve milestones or use appropriate professional standards or if the program is not producing results in the opinion of Autogen Research Pty Ltd, among other conditions. It may also be terminated by the IDI if Autogen Research Pty Ltd fails to provide the agreed funding. Under certain circumstances Autogen Research Pty Ltd is obligated to pay the royalties to the IDI even in the event of early termination. The term of this agreement was extended to December 31, 2007 on December 22, 2006. Autogen Research Pty Ltd incurred expenses of A$1,104,190 in fiscal 2005, A$501,838 in fiscal 2006 and A$221,662 in fiscal 2007 under this agreement. Further expenses of A$75,000 will be incurred until expiry date.

Sole License Agreement:  On March 1, 1999: Autogen Pty Ltd and Kyokuto Pharmaceutical Industrial Co. Ltd., licensed certain intellectual property for use in Kyokuto’s diagnostic products in Japan. The contract relates to the use of an engineered hybrid of certain forms of glutamic acid decarboxylase in the diagnostic and presymptomatic detection of insulin dependent (type 1) diabetes. Under the agreement Kyokuto is obligated to pay a net royalty on sales, at certain minimum levels. If less than the minimum net royalty is paid, the Company can terminate the license on three months’ notice or convert it to a non-exclusive license. The license agreement, which is for a term of 15 years or so long as there is patent coverage over the licensed property, whichever is longer, can be terminated by either party for an uncured breach upon 60 days’ notice; for a payment default; upon certain insolvency events and in the event of a change of control of either party, by the non-defaulting party.

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Patents, licenses and proprietary rights

The Company pursues a policy of seeking to obtain patent protection for its inventions in Australia, the U.S., Europe, Japan and in selected other countries. The Company also relies upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. To date, the Company has not threatened or instituted proceedings against any third party on patent or other proprietary rights nor has any third party threatened or instituted proceedings against the Company.

Certain products and processes currently being developed or considered for development by the Company are in the area of biotechnology. The number of patent filings by biotechnology firms in major jurisdictions is particularly high and the outcome of such applications is generally uncertain and involves complex legal and factual questions. To date, no consistent international policy has emerged regarding the breadth of claims allowed in biotechnology patents. Accordingly, there can be no assurance that the Company will develop products or processes that are patentable, that patent applications made by the Company, or made by parties who have agreed to license their inventions to the Company, will result in patents being issued or that, if issued, the claims allowed will be sufficiently broad to protect what the Company believes to be its proprietary rights or that such patents will prevent others from developing similar or functionally equivalent products or processes. In addition, products or processes covered by such patents, or any other products or processes developed by the Company or licensed to the Company, may infringe patents owned by third parties or be subject to claims of patent infringement by these parties. In such a situation, the Company may have to obtain a license, defend an infringement action in court or challenge the scope or validity of any infringed or allegedly infringed patents. Such required licenses may not be available to the Company at all, or if available, such licenses may not be on terms acceptable to the Company or that the Company will prevail in any patent litigation. Failure to obtain a license or prevail in any patent litigation relating to any technology that the Company may require to commercialize its products or processes may have a material adverse impact on the Company.

Litigation may also be necessary to enforce any patents granted to the Company or to determine the scope and validity of third party patents. Patent litigation is time consuming and expensive. The Company may not have, or be able to devote the necessary resources to conduct patent litigation. Patent applications made by or licensed to the Company may not result in patents being issued or, if issued, the patents may not provide the right to exclude competitors with similar technology.

The Company maintains an active policy of filing patent applications. It is possible that patents may not be granted on pending applications made by the Company or parties that have licensed their inventions to the Company. Similarly, issued patents may not provide significant proprietary protection or commercial advantage or may be infringed or designed around by others. Since publication of inventions or discoveries in scientific or patent literature often lags behind actual invention or discovery, it is possible that the inventions covered by each of the Company’s pending patent applications may not have dominant status in terms of date of invention. The Company’s patents or patent applications may become involved in opposition proceedings instituted by third parties. If such proceedings were initiated against the Company’s rights, the defense of such rights could involve substantial costs and the outcome cannot be anticipated. If patents are issued to other parties that contain valid claims that are interpreted to cover any of the Company’s products, it is possible that the Company may not be able to obtain licenses to such patents at a reasonable cost, if at all, or may not be able to develop or obtain alternative technology. Competitors or potential competitors may have filed applications for, may have received patents covering, or may obtain additional patents and proprietary rights that may relate to, compounds or processes competitive with those of the Company.

The Company also relies upon unpatented proprietary technology, and no assurance can be given that others will not independently develop substantially equivalent proprietary technology and techniques, or otherwise gain access to the Company’s proprietary technology or disclose such technology, or that the Company can meaningfully protect its rights to its unpatented proprietary technology, secrets and know-how.

It is the Company’s policy generally to require its consultants, outside scientific collaborators, sponsored researchers and other advisors to execute confidentiality agreements prior to the commencement of consulting or other relationships with the Company. Employees have a similar confidentiality provision in their employment contracts. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with the Company is to be kept confidential and not disclosed to third parties except in specific, limited circumstances. The Company also requires signed confidentiality or material transfer agreements from any person who is to receive confidential data or proprietary material from the Company. In the case of consultants, the agreements generally provide that all inventions conceived by the individual while rendering services to the Company shall be assigned to the Company as the exclusive property of the Company. Similar provisions are contained in the Company’s employment contracts, and provisions of many national laws, including

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Australia, provide that intellectual property rights created during the course of employment belong to the employer. There can be no assurance, however, that these agreements and provisions will provide meaningful protection or adequate remedies for the Company’s intellectual property rights, trade secrets or other confidential information in the event of unauthorized use or disclosure.

Patent protection is being sought in major markets through the filing of U.S. and International Patent Cooperation Treaty (“PCT”) applications. The portfolio includes 22 PCT applications and currently derived from these applications are over 96 national and regional patent applications in 12 different jurisdictions, including the U.S., Europe and Japan. The portfolio also includes 20 provisional patent applications not listed above that have been submitted in the past year.

Under the PCT, a single patent application is filed which designates various countries or regions. The application is r eferred to as an International application. All major countries and regions (e.g. Europe) can be designated and this effectively reserves the right to lodge patent applications in those countries and regions up to 18 months following the filing of the PCT application. During that period, an International Search Report and an International Preliminary Examination Report are issued by the relevant national patent office (e.g. the United States Patent and Trademark Office (“USPTO”), or Australian Patent Office) and there are opportunities to amend the claims and specification although new matters cannot be added. At the end of the 18 month period (i.e. generally 30 months after filing of the initial provisional application), the applicant decides in which countries to pursue national or regional applications.

Competition

The Company faces, and will continue to face, intense competition from one or more of the following entities:

•                   biotechnology companies;

•                   pharmaceutical companies;

•                   academic and research institutions; and

•                   government agencies.

The Company is also subject to significant competition from organizations that are pursuing approaches, technologies and products that are the same as, or similar to, its technology and products. Any products that are developed through the Company’s technologies will compete in highly competitive markets. Further, the Company’s competitors may be more effective at using their technologies to develop commercial products. Many of the organizations competing with the Company have greater capital resources, larger research and development staffs and facilities, more experience in obtaining regulatory approvals and more extensive product manufacturing and marketing capabilities. As a result, the Company’s competitors may be able to more easily develop technologies and products that would render the Company’s technologies and products, and those of its collaborators, obsolete and noncompetitive. In addition, there may be product candidates of which the Company is not aware at an earlier stage of development that may compete with the Company’s product candidates.

Specific competition risk according to disease class is summarized below.

Cancer

In the field of cancer therapeutics the Company faces intense competition from major pharmaceutical companies and specialized biotechnology companies engaged in the development of product candidates and other therapeutic products. Several of these companies have products in the same indications or utilize similar technologies and/or personalized medicine techniques. The FDA has approved two drugs for Gleevec ^® -resistant CML; Sprycel ^® (dasatinib), a drug developed and commercialized by Bristol-Myers Squibb was approved in June 2006, and Nilotinib ^® (nilotinib) a drug developed and commercialized by Novartis was approved in October 2007. Significantly, neither Sprycel ^® nor Nilotinib ^® have demonstrated efficacy against the T315I bcr-abl mutation, and it is this sub-set of resistant CML patients that are being targeted by the Company for initial approval. Several biotechnology and pharmaceutical companies are seeking to develop effective therapeutics specifically for CML patients with the T315I mutation. Vertex Pharmaceuticals and its partner Merck are developing an aurora kinase inhibitor referred to as MK-0457 or VX-680. This agent is currently in phase 2 clinical trials. Astex Therapeutics is developing AT9283, an inhibitor of several targets including bcr-abl. This agent is currently in phase 1/2 clinical trials. Several companies have agents in phase 1 clinical trials, including Exelixis (XL228), Kyowa Hakko (KW2449) and Medimmune/Infinity Pharmaceuticals (IPI504). Xanthus Pharmaceuticals is currently conducting a

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phase 3 study with amonafide malate in acute myeloid leukemia. There are also a number of other competitive trials or technologies elsewhere in the world.

Metabolic Syndrome and Depression

There are numerous internationally-regarded genomics and target discovery companies that are active in the search for new potent therapeutics against these diseases. Some of the Company’s competitors have entered into collaborations with leading companies within the Company’s target markets. Companies that are applying different proprietary technologies to the search for novel targets include:

•                   Amgen, Inc.

•                   Curagen Corporation, Inc.

•                   DeCode Genetics.

•                   Excelixis, Inc.

•                   Genentech, Inc.

•                   Human Genome Sciences, Inc.

•                   Incyte Pharmaceuticals, Inc.

•                   ZymoGenetics, Inc.

A number of organizations are attempting to rapidly identify and patent genes and gene fragments sequenced at random, typically without specific knowledge of the function of such genes or gene fragments. If the Company’s competitors discover or characterize important genes or gene fragments before it does, it could adversely affect the Company’s ability to commercialize its products. The Company expects that competition in genomics research will intensify as technical advances are made and become more widely known. In addition, a number of competitors are claiming patent protection without having cellular, animal, or human data to support their claims. In many cases generic claims are being issued by the USPTO, and these claims may make it difficult to commercialize products, or, if licenses are made available, may make the royalty burden on these products so high as to prevent commercial success.

Material effects of government regulation

The international pharmaceutical industry is highly regulated by numerous governmental authorities in Australia, the U.S., the U.K., Europe and by regulatory agencies in other countries where the Company intends to test or market products it may develop. National regulatory authorities administer a wide range of laws and regulations governing the testing, approval, manufacturing, labeling and marketing of drugs and devices and also review the quality, safety and effectiveness of pharmaceutical products and devices. These regulatory requirements are a major factor in determining whether a substance can be developed into a marketable product and the amount of time and expense associated with such development.

The national regulatory authorities have high standards of technical appraisal. Consequently, the introduction of new pharmaceutical products generally entails a lengthy development and approval process. Of particular importance is the requirement that products be authorized or registered prior to marketing and such authorization or registration be maintained. Of particular significance in the U.S. are the U.S. FDA requirements covering research and development, testing, manufacturing, quality control, labeling and marketing of drugs for human use. A pharmaceutical product cannot be marketed in the U.S. until it has been approved by the FDA, and then can only be marketed for the indications and claims approved by the FDA. As a result of these requirements, the length of time, the level of expenditure and the laboratory and clinical information required for approval of a New Drug Application (“NDA”) or a product license application are substantial and can require a number of years, although recently revised regulations are designed to reduce the time for approval of new products. In Europe, two systems for the registration of pharmaceutical products are in operation, the centralized procedure and the mutual recognition procedure. In the centralized system, review of the proposed new product is co-coordinated by the European Medicines Evaluation Agency (“EMEA”) located in London and, if the product is found to meet the criteria for marketing authorization, a European Marketing Authorization is granted which is valid throughout the EU. In the mutual recognition procedure, the initial review is undertaken by the national health authority of one of the EU member states and, if this country considers the product acceptable for marketing authorization, the other EU member states are asked to recognize this approval and issue their own authorization. The mutual recognition procedure thus results in a national authorization in each member state. However, irrespective of the procedure followed, the technical requirements for marketing authorization are the same. For European countries that are outside the EU, national marketing authorization procedures with similar technical standards exist. The Company

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anticipates that the introduction of new products will continue to require substantial effort, time and expense in order to comply with regulatory requirements.

No new drug is permitted to be sold in developed countries without extensive data on its quality, safety and efficacy first being obtained, organized and submitted to governmental regulatory authorities. The development stage of this process may be divided into two parts: (i) pre-clinical; and (ii) clinical development. Included in pre-clinical development are the development of processes for manufacturing the product candidate, toxicology studies and other activities such as pharmacology and drug metabolism studies. Clinical trials run until, and in some cases after, the product is marketed and covers several, sometimes overlapping, phases.

In Phase I trials, a small number of healthy human volunteers are exposed to a product candidate. Typically, the volunteers are administered single or multiple doses, following which the effects of the candidate drug are closely monitored. The way the body deals with the product candidate from administration to elimination (pharmacokinetics) is also studied. Phase 2 trials involve the first studies on patients and explore the doses required to produce the desired benefits. Safety and pharmacokinetic information is also collected. Phase 3 trials typically involve larger numbers of patients and geographically dispersed test sites. The trials in this Phase may compare the new agent with other available treatments. In Phase 3 trials, costs are significantly higher than in earlier Phases due to the larger number of patients and longer duration of trial.

In addition to the forms of regulation referred to above, the prices of pharmaceutical products in many countries are controlled by law. In some countries, such as France and Japan, the prices of individual products are regulated. By contrast, in the U.K., prices are controlled by reference to limits upon the overall profitability, measured by the rate of return on capital employed, of sales of products supplied under the U.K. National Health Service. The permitted rate of return on capital employed for each pharmaceutical company is determined through negotiations with the U.K. Department of Health under the 1999 Pharmaceutical Price Regulation Scheme. If a company’s actual rate of return exceeds the agreed rate, it is required to negotiate either a repayment of past profits which the Department of Health considers to be excessive or future price reductions. There is no assurance that the current arrangements will continue in the future.

Governments may also influence the price of pharmaceutical products through their control of national healthcare organizations which may bear a large part of the cost of supply of such products to consumers. In the U.S. and Germany, indirect pressure can be exerted on prices by government funded or private medical care plans. The Company is unable to predict whether, or to what extent, its business may be affected by legislative and regulatory developments relating to specific pharmaceutical products or the pricing of such products, or to its overall business. The uncertainties involved, or any adverse regulatory developments, could significantly affect the Company’s operational results and its ability to achieve profitability.

C.            Organizational structure

ChemGenex Pharmaceuticals Limited is a limited liability corporation listed on the ASX. Its subsidiaries are set forth below:

D.            Property, plant and equipment

The Company’s headquarters are in Geelong, Victoria, Australia. Its headquarters, comprising leased premises of approximately 80 square meters, contains office space and storage space. The property plant and equipment recorded includes leasehold improvements, furniture and fittings, computer equipment, and equipment used in research and development by external providers.

These properties are in good condition.

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The headquarters premises are leased from Deakin University under an annual lease agreement which expires on December 31, 2007. Designated research projects are subcontracted to third party laboratories including Deakin University.

ChemGenex Pharmaceuticals, Inc. leases approximately 2,400 square feet of corporate office space in Menlo Park, California, under a lease agreement that terminates on December 31, 2007. The U.S. subsidiary also subleases approximately 500 square feet of laboratory space to conduct in vitro experiments to support oncology discovery and development programs in Menlo Park, California under a sublease that terminates on December 31, 2007. On August 1, 2007 the Company moved into new premises of approximately 5,000 square feet in Menlo Park under a 38 month lease agreement which expires on October 31, 2010. This lease allows for an option for a further 2 years to October 31, 2012.

Environmental

The Company’s operations are not subject to any significant environmental regulations under either Australian Commonwealth or State legislation. The Company uses hazardous materials that could be dangerous to human health, safety or the environment. As appropriate, the Company stores these materials and various wastes resulting from their use at its facilities pending ultimate use and disposal. The Company is subject to a variety of federal, state and local laws in both Australia and the U.S. and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes resulting from the use of such materials. While the costs for compliance, including costs related to the disposal of hazardous materials, to date have been nominal, the Company may incur significant costs complying with both existing and future environmental laws and regulations. ChemGenex Pharmaceuticals, Inc. is subject to regulation by the Occupational Safety and Health Administration, or OSHA, the California and federal environmental protection agencies and to regulation under the Toxic Substances Control Act. OSHA or the California or federal EPA may adopt regulations that may affect the U.S. subsidiary’s research and development programs. The Company is unable to predict whether any agency will adopt any regulations that could have a material adverse effect on its operations.

U.S. pronouncements

Uncertainty in Income Taxes

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB No. 109, Accounting for Income Taxes (“FIN 48”). FIN 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold      a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition. In addition, FIN 48 clearly scopes out income taxes from SFAS No. 5, Accounting for Contingencies . FIN 48 applies to all    tax positions related to income taxes subject to SFAS No. 109. This includes tax positions considered to be “routine” as      well as those with a high degree of uncertainty. The guidance contained in FIN 48 is also applicable to pass-through entities,      non-taxable entities, and entities whose tax liability is subject to 100% credit for dividends paid. FIN 48 utilizes the following two-step approach for evaluating tax positions: recognition (step one) and measurement (step two). Step one occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained on examination. Step two is only addressed if step one has been satisfied. Under step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which is more-likely-than-not to be realized on ultimate settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being

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sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions. FIN 48 requires expanded disclosures, including a tabular roll forward of the beginning and ending aggregate unrecognized tax benefits as well as specific detail related to tax uncertainties for which it is reasonably possible the amount of unrecognized tax benefit will significantly increase or decrease within twelve months. These disclosures are required at each annual reporting period, unless a significant change occurs in an interim period. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company plans to adopt this pronouncement in fiscal year beginning July 1, 2007 and does not believe the adoption of FIN 48 will have a material effect on the consolidated financial statements.

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities and also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value and does not expand the use of fair value in any new circumstances. Under SFAS 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Under SFAS 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company plans to adopt this pronouncement in fiscal years beginning July 1, 2008 and does not believe the adoption of SFAS 157 will have a material effect on the consolidated financial statements.

Accounting for Research and Development Costs

In June 2007, the Financial Accounting Standards Board (“FASB”) considered the Emerging Issues Task Force (“EITF”) review of FASB Statement No. 2 Accounting for Research and development Costs. The Task Force reached a consensus that nonrefundable advance payments for future research and development activities should be deferred and capitalized.  Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed.  Entities should continue to evaluate whether they expect the goods to be delivered or services to be rendered.  If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. The consensus in this Issue should be effective for fiscal years beginning after December 15, 2007, including interim periods within those fiscal years.  Entities should report the effects of applying the [consensus] in this Issue as a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption.  An entity should disclose the cumulative effect of the change on retained earnings or on other components of equity or net assets in the statement of financial position.  Earlier application is not permitted. The Company plans to adopt this pronouncement in fiscal years beginning July 1, 2008 and does not believe the adoption of EITF 07-3 will have a material effect on the consolidated financial statements.

Fair Value Measurements

In February 2007, the FASB issued FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. FAS 159 is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. FAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. This Statement does not establish requirements for recognizing and measuring dividend income, interest income, or interest expense. This Statement does not eliminate disclosure

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requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statements No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair Value of Financial Instruments. FAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company plans to adopt this pronouncement in fiscal years beginning July 1, 2008 and does not believe the adoption of FAS 159 will have a material effect on the consolidated financial statements.

Differences between Australian accounting standards and U.S. accounting standards

The Company prepares its audited consolidated financial statements in accordance with AIFRS, which differ in certain significant respects from U.S. GAAP. The following table sets forth a comparison of the Company’s net loss and total equity in accordance with AIFRS and U.S. GAAP as of the dates and for the periods indicated:

See Note 26 to the audited consolidated financial statements included elsewhere herein for a description of the differences between AIFRS and U. S. GAAP as they relate to the Company, and a reconciliation to U.S. GAAP of net loss and total equity for the dates and periods indicated therein. Differences between AIFRS and U.S. GAAP that have a material effect on net loss and total equity relate to share-based compensation, purchase accounting and marketable securities.

Application of critical accounting policies

The Company prepares its financial statements in accordance with generally accepted accounting principles. As such, it is required to make estimates, judgments, and assumptions that management believes are reasonable based upon the information available. The estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies listed in Note 2 of the Company’s audited consolidated financial statements that management believes are the most critical to aid in fully understanding and evaluating its financial condition and results of operations are discussed below.

AIFRS  and U.S. GAAP

Revenue Recognition

Research revenue comprises amounts received for certain research and development activities under the Company’s collaborations with Merck Santé and Vernalis

For these contracts revenues are recognized as earned on a straight line basis over the lives of the respective agreements as this reflects the level of effort required over the performance period. Such agreements are performed on a “best efforts” basis with no guarantee of either technological or commercial success. Project funding received in advance of the period in which the associated research efforts are performed is included in deferred revenue.

Revenue from government grants is recognised when received and all attaching conditions have been complied with.

When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate.

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U.S. GAAP

In-Process Research and Development

In connection with the June 21, 2004 merger with ChemGenex Therapeutics, Inc. (accounted for under the purchase method of accounting), for U.S. GAAP purposes the Company allocated A$16.6 million of the purchase price to in-process research and development projects that had not yet reached technological feasibility and are reasonably believed to have no alternative future use. Under US GAAP this inprocess research and development expenditure was written off in the financial statements for that year. The value assigned to in-process research and development was determined by estimating the cost to develop the purchased in-process research and development into commercially feasible products, the percentage of completion at the acquisition date and the resulting net risk-adjusted cash flows from the projects, and discounting the net cash flows to their present value. The discount rate of 43.5% used in determining the in-process research and development expenditures reflects a higher risk of investment because of the higher level of  uncertainty due in part to the nature of the Company and the industry to constantly develop new technology for future product releases. The forecasts used by the Company in valuing in-process research and development were based on assumptions the Company believed at the time to be reasonable, but which are inherently uncertain and unpredictable. Given the uncertainties of the development process, no assurance can be given that deviations from the Company’s estimates will occur and no assurance can be given that the in-process research and development projects identified will ever reach either technological or commercial success.

Share-based Compensation

Under U.S. GAAP, the Company had elected, to June 30, 2005, to account for share-based compensation attributable to the issuance of share options to directors and employees using the intrinsic value method as prescribed by APB No. 25. Accordingly, share-based compensation expense is only recorded if the quoted market price of the Company’s stock, as at the measurement date, exceeds the amount that the director or employee must pay. The intrinsic value attributable to unvested options is amortized over the remaining vesting period of the options. For options that vest upon the achievement of a target stock price, compensation expense is recognized when the target is achieved.

Since July 1, 2005 the Company has accounted for share-based compensation attributable to share options granted to employees in accordance with FAS No. 123R (as for share-based compensation attributable to share options granted to non-employees as detailed below).

Under U.S. GAAP, the Company accounts for share-based compensation attributable to share options granted to non-employees in accordance with FAS No. 123, Accounting for Stock-Based Compensation , as amended by FAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (collectively, “FAS No. 123”), and Emerging Issues Task Force Issue No. 96-18 , Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (“EITF No. 96-18”). Share-based compensation for stock options granted to employees and non-employees is equal to the fair value of the share options as of the measurement date. The Company determines the fair value of options granted to employees and  non-employees using the Black-Scholes option valuation model, which requires the input of highly subjective assumptions, including the estimated fair value of the Company’s common stock and expected stock price volatility.

A .            Operating results

The Company’s principal activity since July 1996 has been research and development of novel targets and therapeutics for human diseases including obesity, diabetes, depression and cancer. The Company has made losses since commencing its current principal activities. As at June 30, 2007, the Company’s accumulated deficit was A$92,723,921 compared to A$81,023,002 as at June 30, 2006.

The Company’s losses fluctuate from year to year principally due to the commencement or termination of collaborative research and development agreements, the timing of milestone payments, government grants, the level of interest income and variations in the level of expenditures relating to research and clinical development programs. The Company expects to incur continued losses in coming years. The Company continues to incur the greater part of its costs on personnel and external contract costs needed to support the research and development of its platforms, including expenses related to the protection of patent and other intellectual property rights.

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Overview

The Company is a biopharmaceutical company committed to advancing patient care by discovering, developing and commercializing novel medicines for cancer, diabetes, obesity, depression and anxiety. ChemGenex Pharmaceuticals Limited was formed through the merger of AGT Biosciences Limited and ChemGenex Therapeutics, Inc. on June 21, 2004. AGT Biosciences Limited was a publicly-listed company that specialized in the use of genomics tools to identify and validate novel targets for therapeutic intervention in diabetes, obesity, depression and anxiety. AGT Biosciences Limited, which had previously been called Autogen Limited (from May 1999 to March 2003) and Australia Wide Industries Limited (from July 1986 to May 1999), commenced biotechnology activities on July 10, 1996. On June 28, 2002, a 20% shareholding in Autogen Limited held by the then Executive Chairman was sold to the publicly-listed Australian investment company, Charter Pacific Corporation Limited. This led to a significant restructure of the management team and significantly improved financial performance of the Company. ChemGenex Therapeutics, Inc. was a private company incorporated in the state of Delaware on September 14, 1999 to use genomic tools and medicinal chemistry to accelerate the development of anti-cancer therapeutics. The merged entity commenced trading on the ASX as ChemGenex Pharmaceuticals Limited on June 29, 2004. At June 30, 2007 the merged entity has an aggregate of 185,847,331 shares of ordinary stock outstanding.

To date, the Company has devoted substantially all of its resources to the development of its target discovery and validation technologies, research and development and preclinical and early stage clinical testing of Ceflatonin® (homoharringtonine) and Quinamed® (amonafide dichloride) and other product candidates. It has incurred net losses since the commencement of biotechnology operations and expects to incur substantial and increasing losses for the next several years as it expands its research and development activities and moves its product candidates into later stages of development. To date, the Company has no product revenue and has funded its operations primarily through the payments from pharmaceutical industry partners, issue of equity securities and interest income. It has established an ongoing partnership agreement in diabetes and obesity with Merck Santé. Planned core activities over the next several years are to:

•                   continue the development of Ceflatonin®, currently in Phase 2/3 clinical trial for the treatment of CML;

•                   continue the development of Quinamed®, currently in Phase 2 clinical trial for the treatment of solid tumors including prostate, breast and ovarian cancer;

•                   continue the development of its other cancer-treating product candidates;

•                   expand the Company’s research, discovery and development programs in the fields of diabetes and obesity;

•                   advance the Company’s preclinical cancer-treating candidates into clinical development;

•                   establish and maintain sales and marketing operations;

•                   commercialize any product candidates that receive regulatory approval; and

•                   in-license technology and acquire or invest in businesses, products or technologies that are synergistic with the Company’s own.

ChemGenex has a limited history of operations with its current management team and business focus.

The Company’s business is subject to significant risks, including but not limited to the risks inherent in its ongoing clinical trials and the regulatory approval process, the results of its research and development efforts, competition from other products and technologies and uncertainties associated with obtaining and enforcing patent rights.

Results of operations – fiscal years

The following tables are intended to illustrate a tabular analysis of the consolidated statements of income for the 2007, 2006 and 2005 fiscal years.

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The table below shows contribution of different revenue and other income types to total revenue and other income for fiscal 2007, 2006 and 2005. All revenue was earned in Australia and is expressed in A$.

The table below shows percentage revenue and other income changes for fiscal 2007, 2006 and 2005:

The table below shows the proportion of individual expenses items to total operating costs for fiscal 2007, 2006 and 2005.

While the level of research and development expenditure has remained relatively constant for the past two fiscal years, the relativity to other expenses altered significantly in 2005 reflecting the increase in the Company’s operating base following the merger with ChemGenex Therapeutics Inc. in June 2004.

Comparison of fiscal year 2007 with fiscal year 2006

Revenue

The Company’s total revenue decreased by A$9 thousand or 0.3% from A$2.3 million in fiscal 2006 to A$2.3 million in fiscal 2007. The decrease reflects a reduction in research revenue following the completion a Research Agreement with Merck Sante and an increase in interest and government grants during the year.

Costs and expenses

The Company’s costs and expenses are detailed in the consolidated statements of income.

Research expenditure

Research expenditure increased by 8% from A$7.2 million in fiscal 2006 to A$7.7 million in fiscal 2007. This reflects continued  increased expenses associated with clinical trials for Ceflatonin incurred during the year.

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Employee costs

Employee expenses decreased by A$0.2 million or 7% to A$2.5 million in fiscal 2007,

Patent costs

Patent costs include regulatory charges involved in applying for, and maintaining, patent protection together with charges from patent attorneys for specialist advice on these matters. Patent costs are expensed as incurred. Patent costs decreased by 2% to A$0.5million in fiscal 2007.

Legal costs

Legal costs reduced by 42% to A$66 thousand in fiscal 2007.

Depreciation

No substantive change from previous year.

Other expenses from ordinary activities

Other expenses from ordinary activities increased by 57% from A$1.8 million in fiscal 2006 to A$2.8 million in fiscal 2007. The major increases incurred in travel and consulting costs associated with increased clinical trials and capital raising activities.

Net loss

The Company’s net loss increased by A$1.3 million or 13% from A$10.4 million in fiscal 2005 to A$11.7 million in fiscal 2007 for the reasons described above.

Comparison of fiscal year 2006 with fiscal year 2005

Revenue

The Company’s total revenue decreased by A$1.8 million or 43.9% from A$4.1 million in fiscal 2005 to A$2.3 million in fiscal 2006. The decrease primarily reflects the completion Research Agreements with Merck Sante Vernalis (R&D) Limited during the year which have not been replaced at the same agreements with similar revenue values.

Costs and expenses

The Company’s costs and expenses are detailed in the consolidated statements of income.

Research expenditure

Research expenditure increased by 55% from A$4.6 million in fiscal 2005 to A$7.2 million in fiscal 2006. This reflects increased expenses associated with clinical trials for Ceflatonin incurred during the year.

Employee costs

Employee expenses increased by A$0.07 million or 3% to A$2.7 million in fiscal 2006,

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Patent costs

Patent costs include regulatory charges involved in applying for, and maintaining, patent protection together with charges from patent attorneys for specialist advice on these matters. Patent costs are expensed as incurred. Patent costs increased by 29% in fiscal 2006 due to different timing of various patent activities.

Legal costs

Legal costs did not alter significantly from fiscal year 2005 to 2006.

Depreciation

No substantive change from previous year.

Amortization

With the introduction of AIFRS Accounting Standards from July 1, 2004 there were no Amortization costs recognised in fiscal 2006 or 2005.

Other expenses from ordinary activities

Other expenses from ordinary activities decreased by 20% from A$2.3 million in fiscal 2005 to A$1.8 million in fiscal 2006. This decrease primarily reflects the “one off” costs associated with the initial SEC registration and NASDAQ listing incurred fiscal June 2005.

Net loss

The Company’s net loss increased by A$4.1 million or 66% from A$6.2 million in fiscal 2005 to A$10.4 million in fiscal 2006 for the reasons described above.

B .            Liquidity and capital resources

The Company’s future revenues, liquidity and capital requirements are dependent upon several factors, including, but not limited to, its success in generating significant revenues from partnerships and/or sales; the time and cost required to manufacture and find partners for its products; the time and cost required for clinically developed products to obtain regulatory approvals; competitive technological developments; additional government-imposed regulation and control; and changes in healthcare systems which affect reimbursement, pricing or availability of drugs and market acceptance of drugs and drug technologies.

To date, the Company has funded its operations primarily through the payments from pharmaceutical industry partners and the issue of equity securities. From July 1, 1996, when the Company’s biotechnology activities commenced, it has received approximately A$80.9 million (including A$50.5 million since 1 July 2004) from the issue of equity securities. In addition, during this period, the Company has received A$26.5 million from its pharmaceutical partners for depression, diabetes and obesity research.

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Over the past five years the Company has been able to obtain approximately 66% of the funding required for the combined diabetes, obesity, depression and anxiety contracts research spending via collaborative research agreements -

Net cash used in operating activities of A$11,905,605 in fiscal 2007, A$8,485,618 in fiscal 2006 and $6,944,186 in fiscal 2005 was primarily a result of the cash shortfall associated with our research activities (detailed in Item 4B – Business Overview - commercial and research and development collaborations) and expenses incurred for administration infrastructure.

As of June 30, 2007, the Company had A$25.4 million in available cash and cash equivalents. The Company’s existing cash reserves and revenues received from existing pharmaceutical partners will be utilized to support company administration costs, research costs and the ongoing cancer development and clinical trial programs. Based on existing cash and cash equivalents, the Company anticipates that it has adequate funds to operate at current levels and meet its contractual obligations, described further in Item 5F. “Tabular Disclosure of Contractual Obligations,” until the second half of calendar 2008 without obtaining further partnership agreements for the cancer clinical trial programs. The Company continues to monitor this situation and is constantly reviewing its relationships to ensure adequate funding will be available to support current projects.

Minimal cash (apart from interest on cash assets) has been provided by, or used for, investing activities during each of the three years in the period ended June 30, 2007.

While the Company’s cash resources are currently held in Australian dollars (A$), a significant part of its cash flow burden over the next year is committed to funding clinical trial programs in the U.S. The Company monitors the potential foreign currency exposure from this situation and utilizes forward exchange contracts when appropriate to manage this risk.

C.            Research and product development programs

Included within research and development expenditure is the following external expenditure on research and development projects.

Over the last three years total expenditure on research and development has resulted in the consumption of significant cash resources, totaling A$19,538,372. The principal expenditures have been as follows: