As filed with the Securities and Exchange Commission on September 26, 2006.

Registration No. 333-135428

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 2
to

FORM F-3

pSivida Limited

(Exact name of Registrant as specified in its charter)

Western Australia, Commonwealth of Australia		2834		Not Applicable
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

Level 12 BGC Centre

28 The Esplanade

Perth WA 6000

Australia

61 (8) 9226 5099

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Lori H. Freedman, Esq.
Vice President, Corporate Affairs, General Counsel and Secretary
pSivida Limited
400 Pleasant Street
Watertown, MA 02472
(617) 926-5000
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:
Lawrence Goodman, Esq.
Peter F. Stewart, Esq.
Curtis, Mallet-Prevost, Colt & Mosle LLP
101 Park Avenue
New York, NY 10178
Tel: (212) 696-6000
Fax: (212) 697-1559

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  þ

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a registration statement pursuant to General Instruction I.C. or a post-effective amendment thereto that shall become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act, check the following box.  o

If this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction I.C. filed to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act, check the following box.  o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  o

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.

 

 

Preliminary Prospectus, subject to completion, dated September 26, 2006.

PSIVIDA LIMITED

15,834,207 American Depositary Shares

representing 158,342,070 Ordinary Shares

     The selling shareholders of pSivida Limited identified in this prospectus beginning on page 35 may offer and sell from time to time an aggregate of up to 15,834,207 of our American Depositary Shares (“ADSs”), each of which is evidenced by an American Depository Receipt and represents ten of our ordinary shares. These ADSs were acquired by the selling shareholders pursuant to a private placement transaction between us and the selling shareholders. All of the ADSs listed in this prospectus are being sold by the selling shareholders named in this prospectus or their respective transferees, pledgees, donees or successors-in-interest. The selling shareholders will receive all proceeds from the sale of the ADSs being offered in this prospectus. We will not receive any proceeds from the sale of shares by the selling shareholders.

     This offering is not being underwritten. The selling shareholders may sell the ADSs being offered by them from time to time on the NASDAQ Global Market, in market transactions, in negotiated transactions or otherwise, and at prices and at terms that will be determined by the then prevailing market price for the ADSs or by a combination of such methods of sale. For additional information on the methods of sale, you should refer to the section entitled “Plan of Distribution.”

     Our ADSs are quoted on the NASDAQ Global Market under the symbol “PSDV.” The last reported sale price of our ADSs on the NASDAQ Global Market on September 20, 2006 was US$2.31.

     Our ordinary shares are listed on the Australian Stock Exchange under the symbol “PSD.” On September 20, 2006, the closing price of our ordinary shares on the Australian Stock Exchange was A$0.30, equivalent to a price of approximately US$2.26 per ADS based on the Federal Reserve Bank of New York noon buying exchange rate on that date of A$1.00 = US$0.7544. Our ordinary shares are also listed on the Frankfurt, Berlin, Munich and Stuttgart stock exchanges under the symbol “PSI” and on the OFEX International Market Service under the symbol “PSD.”

Investing in our ADSs involves risks. See “Risk Factors” beginning on page 12.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this prospectus is                     , 2006

TABLE OF CONTENTS

THE COMPANY			1
RISK FACTORS			12
FORWARD-LOOKING STATEMENTS			27
CAPITALIZATION AND INDEBTEDNESS			27
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION			28
SELECTED CONSOLIDATED FINANCIAL DATA			36
THE OFFERING			39
USE OF PROCEEDS			39
SELLING SHAREHOLDERS			40
PLAN OF DISTRIBUTION			53
DESCRIPTION OF SECURITIES			55
PRICE HISTORY OF OUR SECURITIES			55
LEGAL MATTERS			56
EXPERTS			56
ENFORCEABILITY OF CIVIL LIABILITIES			56
EXPENSES			57
WHERE YOU CAN FIND ADDITIONAL INFORMATION			57
INCORPORATION BY REFERENCE			57
INDEX TO FINANCIAL STATEMENTS			F-1

     You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any jurisdiction where the offer or sale of these securities is not permitted. You should assume that the information contained in this prospectus is accurate as of the date on the front of this prospectus only.

     References in this prospectus to “pSivida,” “the company,” “we,” “us,” “our,” or similar terms refer to pSivida Limited, except as otherwise indicated. On December 30, 2005, we completed the acquisition of Control Delivery Systems, Inc., which was renamed pSivida Inc. We make reference to Control Delivery Systems as “CDS” or as “pSivida Inc.” generally depending on whether such reference relates to that company before or after the acquisition. As of July 1, 2006, the NASDAQ National Market changed its name to the NASDAQ Global Market. References to the NASDAQ Global Market relating to periods before such date refer to the NASDAQ National Market.

     In this registration statement, references to “A$” are to Australian dollars and references to “US$” and “US dollars” are to United States dollars, except for in the financial statements, where references to “$” are to Australian dollars and references to “US$” are to United States dollars. On June 30, 2005 , the Federal Reserve Bank of New York Noon Buying Rate was US$0.7618 = A$1.00, on December 31, 2005 such exchange rate was US$0.7342 = A$1.00 and on June 30, 2006 such exchange rate was US$0.7484 = A$1.00.

THE COMPANY

     We are an Australian public company listed on the Australian Stock Exchange, the NASDAQ Global Market, Frankfurt Stock Exchange and London’s OFEX International Market Service and existing pursuant to the Australian Corporations Act 2001. Our corporate headquarters are located at Level 12 BGC Centre, 28 The Esplanade, Perth WA 6000, Australia and our phone number is +61 (8) 9226 5099. We also operate subsidiaries in the United Kingdom, Singapore, Australia and the United States.

          We are a global nanotechnology company focused on the development of BioSilicon™, a novel porous form of nano-sized silicon, for therapeutic and diagnostic use in healthcare. BioSilicon is composed of elemental silicon, engineered to create a “honeycomb” structure of pores. These pores can be formed into a diverse array of shapes and sizes and can be filled with various drugs, genes and proteins. We are working toward developing applications for controlled slow release drug delivery and diagnostics. Initially, we are using BioSilicon to target primary liver cancer, but we intend to investigate BioSilicon’s use as a treatment for other inoperable tumors such as pancreatic, secondary liver and tumors within the peritoneum, brain and lung. We are currently conducting a Phase IIb dose optimization BioSilicon trial in inoperable primary liver cancer patients in seven centers in South-East Asia, including Singapore General Hospital. Other potential applications for BioSilicon may include tissue engineering, orthopedics and food science.

     On December 30, 2005, we completed the acquisition of CDS, which was renamed pSivida Inc. pSivida Inc. designs and develops innovative sustained-release drug delivery products. Our two proprietary drug delivery systems, AEON™ and CODRUG™, deliver specific quantities of drugs directly to a target site in the body at controlled rates for predetermined periods of time ranging from days to years. These systems are designed to address drawbacks of systemic drug delivery for our target diseases: adverse side effects characteristic of high dosing levels and reduced treatment benefits due to variations in drug levels at the target site.

     pSivida Inc. has two commercial products utilizing the AEON system approved by the U.S. Food and Drug Administration, or FDA, for treatment of two sight threatening eye diseases. These two products, Vitrasert® and Retisert™, are the only local sustained-release products approved by the FDA for the back of the eye. Marketed by Bausch & Lomb Incorporated and sold since 1996, Vitrasert is one of the most effective treatments for CMV retinitis, a disease that afflicts late-stage AIDS patients. Approved by the FDA in April 2005 and also marketed by Bausch & Lomb, Retisert treats chronic noninfectious uveitis affecting the posterior segment of the eye, or posterior uveitis, a leading cause of vision loss. Bausch & Lomb is also conducting two long-term multi-center clinical trials of Retisert for the treatment of diabetic macular edema, or DME, another leading cause of vision loss. Medidur™, an injectable AEON product, is also designed to treat DME and is currently in fast-track Phase III clinical trials conducted by Alimera Sciences Inc. pSivida Inc. also has two AEON product candidates in pre-clinical studies for other back of the eye diseases.

     Our lead BioSilicon product, BrachySil™ is based on a radioactive 32-phosphorous form of BioSilicon. BrachySil offers interventional radiologists a short-range, longer life isotope that can be delivered through a fine bore needle, making it a more user-friendly product for both patient and physician. We are currently conducting Phase IIb BrachySil dose optimization trials on inoperable primary liver cancer patients at Singapore General Hospital.

     BioSilicon is composed of elemental silicon, one of the most abundant elements on the earth’s crust, which is engineered to create a “honeycomb” structure of pores. We believe that BioSilicon’s features include:

	•		Biocompatibility – BioSilicon is biocompatible, meaning, it is not injurious and does not cause immunological rejection within the body.
	•		Non-toxicity – our studies have shown that BioSilicon degrades in the body into silicic acid, the non-toxic, dietary form of silicon which is found in beer, cereal grains and wine.
	•		Biodegradability – BioSilicon can be made biodegradable in vivo (in animals and humans) and in vitro (in solution). The rate of biodegradation depends on the degree of nanostructuring that is imparted on the material. Thus, we believe that BioSilicon can be made to dissolve in suitable environments in days, weeks or months, depending upon the size and nature of the BioSilicon implanted.

     Because of these qualities, BioSilicon has the potential to serve as a biomedical device in or on the body. pSivida believes that BioSilicon may have multiple potential applications in healthcare. pSivida is currently working toward developing applications for controlled slow release drug delivery and diagnostics. pSivida believes that other potential applications may include orthopedics, tissue engineering, and food science (food sensors and nutraceutical products).

Our Strategy

     Our commercialization strategy is to concentrate on: internal product development based on BioSilicon; licensing of the BioSilicon technology platform; and potential sale of non-core intellectual property. Following our recent acquisition of CDS, we will also focus on the development and commercialization of products based upon the AEON and CODRUG technologies, both internally and by means of strategic collaborations.

	•		The focus of our internal product development is BioSilicon drug delivery, with an initial emphasis on brachytherapy products. Other potential BioSilicon drug delivery products are localized chemotherapy, slow release drugs and the delivery of generic drugs (commonly referred to as re-delivered generics). We have established commercialization plans for BrachySil, pSivida’s lead product, based upon market sizes, benefits offered to patients and alternative competitive therapies.
	•		We believe that the platform has now been developed to a stage where licensing BioSilicon to large pharmaceutical and biotech companies for delivery of their patented drugs is possible. We also intend to license diagnostic and sensor applications of the BioSilicon platform technology developed by our subsidiary, AION Diagnostics.
	•		We believe that sales of early stage non-core applications for BioSilicon may become another possible source of near-term revenue. Such applications include biomaterial in orthopedics, tissue engineering and regenerative medicine producing.
	•		We believe that the acquisition of CDS will provide us with additional opportunities for strategic growth by providing us with a U.S. presence, greater access to the U.S. market, a range of products and product candidates based upon CDS’ drug-delivery technologies and strategic collaborations to develop and market these products.

Recent Developments

     In September 2005, we raised US$4.3 million (A$5.7 million) in gross proceeds in a private placement structured as a private investment in public equity, commonly known as a PIPE. In the PIPE, we sold 665,000 ADSs to investors at US$6.50 per ADS and issued three-year warrants exercisable for 133,000 ADSs at US$12.50 per ADS.

     On October 27, 2005, we signed a license with Beijing Med-Pharm Corporation for the clinical development, marketing and distribution of BrachySil in China. Under the terms of the license, we will manufacture BrachySil and Beijing Med-Pharm will be responsible for clinical development, securing regulatory approval, marketing and distribution in China. pSivida will retain manufacturing rights for BrachySil under the license.

     On November 16, 2005, we issued a subordinated convertible promissory note in the principal amount of US$15 million (A$19.7 million) to an institutional investor in a private placement. The note bears interest at a rate equal to 8% per year, which we can pay in ADSs instead of cash if certain conditions are met. The note has a term of three years and was convertible into ADSs at a conversion price of US$7.10 per ADS, subject to adjustment based upon certain events or circumstances, including, without limitation, the market price of ADSs for the ten trading days ending August 5, 2006, if such price was lower than US$6.57. We also issued a warrant with a term of six years which entitled the institutional investor to purchase up to 633,803 ADSs at US$7.20 per ADS, also subject to adjustment upon specified events. Since the completion of our rights issue on June 14, 2006, the exercise price under the warrant is US$7.17 per ADS. We have also entered into a registration rights agreement pursuant to which we have agreed to file a registration statement covering the resale of the ADSs underlying the note (as well as any ADSs received by the institutional investor as interest under the note) and the warrant, as soon as practicable and to have the registration statement declared effective within 180 days of issuance of the note and warrant. The gross proceeds received by us in the private placement were US$15.0 million, and may increase to approximately US$19.6 million if the warrant is exercised in full in cash. We expect to use these proceeds for the expanded development of BioSilicon and for general corporate purposes.

     On October 3, 2005, we entered into a merger agreement with CDS, a Boston-based company engaged in the design and development of drug delivery products. The merger agreement provided that a newly-formed subsidiary of pSivida would merge into CDS, with CDS surviving the merger as a wholly-owned subsidiary of pSivida with the name of pSivida Inc. After approval by the required majorities of both companies’ shareholders and the fulfillment of other closing conditions, the merger was completed on December 30, 2005. Pursuant to the merger, we issued a total of 161,047,790 ordinary shares (represented by 16,104,779 ADSs) consisting of (i) 150,820,380 ordinary shares (represented by 15,082,038 ADSs) in exchange for the outstanding CDS common and preferred shares on the date of the acquisition in accordance with the merger agreement, (ii) 1,211,180 nonvested ordinary shares (represented by 121,118 nonvested ADSs) in connection with CDS employee retention agreements, and (iii) 9,016,230 nonvested ordinary shares (represented by 901,623 nonvested ADSs) in exchange for the nonvested shares of CDS common stock outstanding on the date of the acquisition in accordance with retention agreements between CDS and its officers and employees. As of December 31, 2005, the ADSs received by the former CDS stockholders represented approximately 41.3% of the capital stock of the combined company. Certain former shareholders of CDS received cash rather than ADSs for their CDS shares. In addition, each outstanding option to purchase CDS stock was assumed by us and converted into an option to acquire such number of ADSs as the holder would have been entitled to receive in the merger if such holder had exercised such option in full immediately before completion of the merger. In connection with the merger, we entered into a registration rights agreement pursuant to which we agreed to file a registration statement covering the resale of the ADSs issued in the merger. The registration statement of which this prospectus is a part has been filed to comply with this obligation.

     On February 10, 2006, we announced that Bausch & Lomb and Novartis Ophthalmics, a business unit of Novartis Pharmaceutical Corp., had reached an agreement to co-promote Retisert in the United States.

     On February 21, 2006, we reported that preliminary data from Bausch & Lomb’s clinical trial of Retisert for the treatment of chronic non-infectious posterior segment uveitis showed a lower recurrence rate in eyes receiving Retisert than in non-implanted eyes. This study involved 278 patients from 27 hospitals in the United States and one in Singapore. The study showed that, at three years, control of uveitis in eyes implanted with Retisert was better than in non-implanted eyes, but was less effective than at two years and that some eyes may need to be re-implanted between 24 and 36 months. In the study, patients received either a 0.59 mg or a 2.1 mg Retisert device. Data presented was the aggregate of the two doses. At three years, the recurrence rate of uveitis was 33% in the eye receiving Retisert compared to 57% of fellow eyes. A greater number of eyes receiving Retisert experienced an improvement in vision of at least 15 letters (three lines on an eye chart) compared to fellow eyes (22% versus 6%). 45% of eyes receiving Retisert required an operation to relieve elevated intraocular pressure and 92% developed a cataract.

     On March 17, 2006, we announced that our ADSs had been included in the Nanotechnology.com ‘Small Technology’ Index. Nanotechnology.com is owned by The Nanotech Company, LLC an independent advisory firm specializing in advising nanotechnology companies.

     On March 20, 2006, we announced that an independent audit of our Boston, Massachusetts facility performed by a European Qualified Person had resulted in the issuance of a certificate indicating that our product Medidur is manufactured to the standard of Good Manufacturing Practice (GMP) set out in European Union directive 2003/94/EC and the EC Guide to Good Manufacturing Practice.

     On March 21, 2006, we announced that following a planned interim review, an independent data safety monitoring board, commonly known as a DSMB, had recommended the continuation of the Phase 3 clinical trial being conducted by us and Alimera Sciences involving our product Medidur.

     On April 3, 2006, we reported that randomized safety and efficacy trials conducted by Bausch & Lomb had demonstrated that after two years, 30% of eyes receiving repeat laser treatment, the current standard of care, had a worsening of their diabetic retinopathy compared with only 10% of eyes receiving a Retisert implant. We also reported that Retisert reduced retinal thickening involving the center most part of the macula responsible for sharp, central vision, or fovea, and led to a statistically significant three line improvement in vision compared to the current standard of care. The study involved 277 patients from hospitals in the U.S.

     On April 6, 2006, we reported that randomized safety and efficacy trials conducted by Bausch & Lomb had demonstrated that after two years, the recurrence rate for uveitis was significantly lower in eyes receiving Retisert than in eyes receiving systemic corticosteroid or other immunosuppressive agents, the current standard of care. The study involved 146 patients across ten countries in Europe and the Middle East.

     On April 6, 2006, we entered into an evaluation agreement with an undisclosed large medical device company to evaluate cardiovascular delivery of drugs using our drug delivery technologies.

     On May 25, 2006, we announced that the phase IIb clinical trial for inoperable primary liver cancer for BrachySil has been extended to centers in Vietnam and Malaysia and that we are negotiating further extension to centers in the Philippines and Taiwan. In addition, we announced that the phase IIa clinical trial for the treatment of pancreatic cancer for BrachySil is expected to commence in June 2006 in hospitals in London and Singapore.

     On May 30, 2006, we announced that the Medicines and Healthcare Products Regulatory Agency in the UK granted approval for the first human study of BrachySil for the treatment of inoperable pancreatic cancer. This six month phase IIa clinical trial study is expected to involve 15 patients at the Guy’s and St Thomas’ Hospitals in London and Singapore General Hospital, which are leading centers for cancer treatment.

     On June 7, 2006, we announced that regulatory agencies in the UK, Canada and India have approved the start of Phase III clinical trials for our product device Medidur for use in the treatment of DME.

     On June 8, 2006, we announced that our subsidiary AION Diagnostics has discovered that BioSilicon can be detected on the following key imaging platforms: x-ray, ultrasound, CT and MRI. This property of BioSilicon is expected to allow it to be used in tissue marker, contrast agent products and molecular imaging products currently under development by AION Diagnostics.

     On July 6, 2006, we announced that BioSilicon has shown the capability to act as an adjuvant when delivered with an antigen. An adjuvant is any substance that is capable of enhancing a host response towards an active agent and is often used in conjunction with antigens to enhance the immune response of humans and animals. An antigen is any substance capable of eliciting an immune response. A patent application has been filed in the UK for the use of BioSilicon as an adjuvant.

     On July 31, 2006, we announced that Gavin Rezos had resigned for personal and family reasons as Managing Director and Chief Executive Officer of pSivida and its subsidiaries. Mr. Rezos has agreed to make himself available in Australia as we may request his assistance to achieve certain goals pending the appointment of a permanent replacement.

     On August 28, 2006, we announced that Heather Zampatti resigned as a director of the Company.

     On September 14, 2006, revised the terms of the subordinated convertible promissory note that we issued on November 16, 2005 to an institutional investor. The note continues to have a three year term and bear 8% interest payable quarterly. We may make future interest payments in the form of our NASDAQ-listed ADSs, or, at our sole option, we may make such payments in cash. The holder of the note can now require repayment of the note in equal amounts of US$6.25 million on July 31, 2007 and July 31, 2008. The note is now convertible into ADSs at a conversion price of US$2.00 per ADS, subject to adjustment based upon certain events or circumstances, including, without limitation, if 108% of the market price of ADSs for the ten trading days ending April 30, 2007 is lower than the current conversion price. In connection with the amendments, we prepaid US$2.5 million of the outstanding principal note, and agreed to prepay US$1.0 million in related penalties. The investor retains its existing warrants to purchase 633,803 additional ADSs, exercisable for six years at a current exercise price of US$7.17 per ADS. In connection with the amendments, we have agreed with the institutional investor to extend the deadline for the registration statement required by the registration rights agreement with the selling security holder to be declared effective by the Securities and Exchange Commission through October 15, 2006, with increased penalties if that deadline is missed. We have also been released from the restrictions on future fundraising transactions contained in the note documentation. We also granted the investor an additional warrant to purchase 5.7 million ADSs exercisable for five years with an exercise price of US$1.80 per ADS and a security interest in our current royalties, subject to release of that security upon any disposition by us of the royalty stream.

Results of Operations For the Half Year Ended December 31, 2005 Compared to the Half Year Ended December 31, 2004

     The following discussion of our results of operations is presented in accordance with Australian Equivalents to International Financial Reporting Standards, or A-IFRS and should be read in conjunction with our unaudited interim consolidated financial statements which are included elsewhere herein. This discussion is not comparable to the discussion of our results of operations incorporated by reference to “Item 5: Operating and Financial Review and Prospects” of our Annual Report on Form 20-F for the fiscal year ended June 30, 2005, which are presented in accordance with accounting principles generally accepted in Australia, or A-GAAP.

Restatement of A-IFRS Amounts

     As a public company in Australia, the Company is required to file consolidated financial statements with the ASX and ASIC that comply with A-IFRS. In these statutory A-IFRS consolidated financial statements as of and for the six months ended December 31, 2005 (filed with the ASX and the ASIC on March 16, 2006), the balance of the convertible note was classified as current or non-current based on the repayment schedule contained in the convertible note agreement. Additionally, the transaction costs directly attributable to the issuance of the note and the face amount of the discount were set off against the debt liability and amortized using the effective interest method over the expected life term of the loan. The embedded conversion option was not bifurcated and accounted for separately.

     On June 29, 2006, the Company restated the A-IFRS amounts previously reported for the convertible note within the Registration Statement on Amendment No. 1 to Form F- 3 as follows:

	•		Embedded conversion option — Further consideration of the terms of the convertible note and the applicable guidance resulted in management’s conclusion that the embedded conversion option should be bifurcated and accounted for separately as a derivative financial instrument. In accordance with AASB139, a financial liability that is also a derivative should be classified as held for trading, and thus in conjunction with AASB 101, the derivative should be recognized as a current liability at fair value. After initial recognition, subsequent changes in the fair value of the embedded derivative are charged or credited to the statement of operations in each reporting period. The Company concluded the impact of the change in fair value of the embedded conversion option for the six months ended December 31, 2005 to be de minimis.
	•		Current liability classification — Upon further consideration of the applicable guidance under A-IFRS, including AASB 101, “Presentation of Financial Statements” (“AASB 101”), AASB 132 and AASB 139, management concluded that since the note is convertible at the option of the holder at any time, and the Company does not have the ability to defer settlement, the entire note should be classified as a current liability.
	•		Debt issuance costs — In conjunction with the reclassification of the convertible note as a current liability, management also concluded that under principles-based accounting, there is no justification for amortizing the debt issuance costs over the term of the loan, as such period is beyond the Company’s control due to the holder’s conversion option. Accordingly, such debt issuance costs should be expensed immediately at the date of issuance of the convertible note.

     Subsequent to the filing of Amendment No. 1 to the Registration Statement on Form F-3, inquiries by the SEC Staff caused the Company to reconsider the contractual terms of the note in accordance with various accounting literature. Accordingly, on September 15, 2006, the Company restated the A-IFRS amounts on Amendment No. 3 to the Registration Statement on Form F-3 related to the current liability classification and debt issuance costs as follows:

	•		Current liability classification – As disclosed in Note 7, the Company noted that the holder of the note could require payment in equal amounts of US$5.0 million on the 12, 18 and 24 month anniversaries of the note’s issuance. Upon further consideration of this term, the Company determined that this payment could be due on demand within one-year of the balance sheet. Upon further consideration of AASB 101, management concluded that the repayment due on demand within one-year be recorded as a current liability, net of related discount and issuance costs, with the remaining balance recorded as a non-current liability. The debt discount and debt issuance costs were allocated proportionately according to the classification of the note ..
	•		Debt issuance costs – Upon further consideration of AASB 139, paragraph 9, the Company concluded that in applying the effective interest rate method, all contractual terms of the financial instrument, including transaction costs, should be considered. Accordingly, the accounting treatment for the debt issuance costs was modified so that the debt issuance costs are amortized to each of the earliest redemption dates over the expected life of the note.

Refer to Note 11 of the unaudited interim consolidated financial statements included elsewhere in this registration statement for further information.

Restatement of U.S. GAAP Amounts

     On August 14, 2006, the Company restated the US GAAP amounts previously reported for the intangible assets acquired in the CDS acquisition and the related deferred taxes, as well as for the restricted cash related to the convertible note within the Registration Statement on Amendment No. 2 to Form F-3, as follows:

	•		Acquired intangible assets and related deferred taxes — Upon further consideration of the guidance in the AICPA Practice Aid: “Assets Acquired in a Business Combination to be Used in Research and Development Activities: A Focus on Software, Electronic Devices and Pharmaceutical Industries,” the Company determined that the portion of the CDS acquisition purchase price attributable to Medidur™ for DME previously allocated to patents ($31,539,980) meets the definition of IPR&D as the product is currently in Phase III clinical trials and has not been approved by the U.S. Food and Drug Administration. Although the product candidate may have significant future importance, the Company considers that Medidur™ for DME does not have an alternative future use other than the technological indications for which it is in development. As a result, the Company restated the reconciliation to U.S. GAAP and U.S. GAAP condensed consolidated financial statements as of and for the six months ended December 31, 2005 to write off an additional amount of IPR&D of $31,539,980, equal to the estimated fair value of the patents and patent applications that relate to Medidur™ on the acquisition of CDS. The decrease in the amount recognized as patents on the acquisition of CDS also results in a lower deferred tax liability in relation to acquired intangible assets on the basis that U.S. GAAP specifically prohibits the recognition of deferred income tax on IPR&D.
	•		Restricted cash — Upon further consideration of the guidance in SEC Regulation S-X, Rule 5-02, which requires separate disclosure of account balances that are restricted as to withdrawal or usage, the Company determined that the terms of the convertible note requiring the Company to hold a net cash balance in excess of 30% of the amount of the note outstanding should be classified as restricted cash. As a result, the Company restated the US GAAP condensed consolidated balance sheet as of December 31, 2005 to separately disclose the restricted cash in the amount of $6,163,539.

     Subsequent to the filing of Amendment No. 2 to the Registration Statement on Form F-3, inquiries by the SEC Staff caused the Company to reconsider the contractual terms of the note in accordance with various accounting literature. Accordingly, on September 15, 2006, the Company restated the US-GAAP amounts on Amendment No. 3 to the Registration Statement on Form F-3 related to the current liability classification and debt issuance costs as follows:

•

Debt issuance costs – Upon further consideration of FASB Concepts Statement No. 6: “Elements of Financial Statements”, the Company concluded that the debt discount and debt issuance costs should be accounted for in a similar manner. Accordingly, the accounting treatment for the debt issuance costs was modified so that the debt issuance costs are deferred and amortized to each of the earliest redemption dates over the contractual term of the note. The debt issuance costs are recorded as a deferred financing cost within the condensed consolidated balance sheet under US GAAP.

     Refer to Note 12 of the unaudited interim consolidated financial statements included elsewhere in this registration statement for further information.

Net Loss

     For reasons described further below, our net loss increased to A$10.7 million for the half year ended December 31, 2005 from A$7.3 million for the half year ended December 31, 2004, an increase of A$3.4 million, or 46.6%. The increase in net loss in the 2005 period is primarily attributable to the commencement of a BrachySil primary liver cancer Phase IIb dose profiling study in October 2005 and additional annual costs incurred in complying with the U.S. legal, regulatory and statutory reporting requirements following our listing of our ADSs on the NASDAQ Global Market.

Revenue

     Revenue decreased to A$296,921 for the half year ended December 31, 2005 from A$398,501 for the half year ended December 31, 2004, a decrease of A$101,580, or 25.5%. Revenue in the 2005 period consisted of A$246,189 in interest income compared to A$384,622 in interest income in the 2004 period. The decrease in interest income in the 2005 period is primarily attributable to lower average cash balances during the period. Additionally, we recognized A$42,282 as other income in the 2005 period which was earned in connection with a collaborative research and development agreement.

Research and Development

     Research and development expense increased to A$9.0 million for the half year ended December 31, 2005 from A$6.5 million for the half year ended December 31, 2004, an increase of A$2.5 million, or 38.5%. This increase is primarily attributable to the commencement of a BrachySil primary liver cancer Phase IIb dose profiling study in October 2005 together with a related increase in headcount, principally at our Malvern, UK and Singapore offices to support the commencement of the trial. In addition, this increase is attributable to an additional month of amortization brought to account on the amortization of intellectual property, being patents and licenses recognized by pSivida on the August 2004 acquisition of the minority interest pSiMedica of A$507,559.

Selling, General and Administrative

     Selling, general and administrative costs increased to A$4.4 million for the half year ended December 31, 2005 from A$2.0 million for the half year ended December 31, 2004, an increase of A$2.4 million, or 120.0%. This increase is primarily due to our listing of our ADSs on the NASDAQ Global Market and the resulting additional annual legal and accounting professional advisor costs incurred in complying with the U.S. legal, regulatory and statutory reporting requirements and increased investor relations activities and travel costs.

Interest and Finance Expenses

     Interest and finance expenses increased to A$287,613 for the half year ended December 31, 2005 from A$3,406 for the half year ended December 31, 2004, an increase of A$284,207. This increase is primarily due to the interest expense on the convertible note (issued in November 2005).

Foreign Exchange Gain/(Loss)

     Foreign exchange gain/(loss) increased to a gain of A$306,841 for the half year ended December 31, 2005 from a loss of A$1.5 million for the half year ended December  31, 2004, an increase of A$1.8 million. This increase is primarily due to the recognition of significant unrealized foreign exchange gains as a result of favorable movements in the Pound Sterling and U.S. dollar against Australian dollar foreign exchange rates on significant cash deposits held in foreign currencies.

Foreign Exchange Gain/(Loss)

     Foreign exchange gain/(loss) increased to a gain of A$211,608 for the half year ended December 31, 2005 from a loss of A$1.5 million for the half year ended December 31, 2004, an increase of A$1.7 million. This increase is primarily due to the recognition of significant unrealized foreign exchange gains as a result of favorable movements in the Pound Sterling and U.S. dollar against Australian dollar foreign exchange rates on significant cash deposits held in foreign currencies.

Income Tax Benefit

     Income tax benefit increased to A$2.4 million for the half year ended December 31, 2005 from A$1.9 million for the half year ended December 31, 2004, an increase of A$498,355 or 26.7%. This increase is primarily is due to the recognition of additional deferred tax assets on the additional tax losses available to be carried forward.

Liquidity and Capital Resources

     We have incurred operating losses since inception, and at December 31, 2005, we had a deficit accumulated during the development stage of A$35.7 million. Since our inception, we have relied primarily on the proceeds from private sales of our equity securities, consulting revenue, license fees and collaboration payments to fund our operations.

     Cash and cash equivalents totaled A$27.7 million at December 31, 2005 compared to A$22.0 million at December 31, 2004.

     Net cash used in operating activities totaled A$8.7 million for the half year ended December 31, 2005 compared to A$5.3 million for the half year ended December 31, 2004. Research and development expenditure is the most significant expenditure item resulting in increased cash flows during the half years ended December 31, 2005 and 2004 and amounted to A$5.2 million and A$3.7 million respectively. Payments to suppliers and employees during the half years ended December 31, 2005 and 2004 were A$4.3 million and A$2.0 million, respectively. The increase in payments from the half year ended December 31, 2004 to the half year ended December 31, 2005 consisted of increased expenses relating to additional administrative activities and the timing of cash payments related to these activities.

     Net cash used in investing activities totaled A$1.9 million for the half year ended December 31, 2005 compared to A$6.1 million for the half year ended December 31, 2004. Cash flows from investing activities during the half year ended December 31, 2004 included A$4.6 million cash paid on the acquisition of the remaining minority interest in pSiMedica and the for the half year ended December 31, 2005 included $1.1 million cash paid on the acquisition of CDS (net of cash acquired). The reduction in net cash used in investing activities was also attributable to a reduced level of expenditure required on plant and equipment following the completion of our cleanroom facility in Germany during 2005.

     Net cash flows from financing activities totaled A$25.1 million for the half year ended December 31, 2005 compared to A$3.6 million for the half year ended December 31, 2004. Cash flows from financing activities during the half year ended December 31, 2005 reflected the following:

	•		in September 2005, we issued 665,000 ADSs (representing 6,650,000 of our ordinary shares) at a price of US$6.50 (A$8.48) each, raising A$5.6 million before costs of A$468,873 through a private investment in public equity (“PIPE”); and
	•		in November 2005, we issued a subordinated promissory note in the principal amount of US$15 million (A$20.5 million) before costs of A$607,196 to an institutional investor. That note was amended and partially repaid via a payment of US$3.5 million in August 2006 and is currently in the principal amount of US$12,500,000 and convertible into 6,250,000 ADSs at a conversion price of US$2.00 per ADS, subject to adjustment based on certain events or circumstances, including a reset provision based on the market price as of April 30, 2007.

     Cash flows from financing activities during the half year ended December 31, 2004 reflected that during the half year ended December 31, 2004, we raised A$3.7 million on the issue of additional share capital upon the exercise of options previously issued. At various times during the half year, a total of 13,070,000 options were exercised at a price of A$0.20, 2,200,000 options were exercised at a price of A$0.40, 150,000 were exercised at a price of A$0.50 and 150,000 options were exercised at a price of A$0.65.

     Our existing cash resources will not likely be sufficient to support the commercial introduction of any of our current product candidates. In order to fund our operating losses, therefore, we will need to raise additional funds through public or private equity offerings, debt financings or additional corporate collaboration and licensing arrangements. Our future funding requirements will depend upon many factors, including, but not limited to:

	•		Costs and timing of obtaining regulatory approvals;
	•		The costs and timing of obtaining, enforcing and defending our patent and intellectual property;
	•		The progress and success of pre-clinical and clinical trials of BioSilicon;
	•		The costs and timings of CDS research programs in development;
	•		The timing and degree of sales activity leading to revenue on the sale of CDS marketed product; and
	•		The progress and number of our research programs in development.

     We do not know whether such additional financing will be available when needed or on terms favorable to us or our stockholders. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs or to obtain funds through collaborations with others that are on unfavorable terms or that may require us to relinquish certain rights to our technologies or products, including potentially our lead BioSilicon product, that we would otherwise seek to develop on our own.

     As the registration statements in relation to the PIPE, the convertible note financing and the acquisition of CDS are yet to be declared effective, we may be incurring monetary penalties as further detailed below under “Contractual Obligations and Commercial Commitments – Registration Rights Agreements.”

Off-Balance Sheet Arrangements

     We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources.

Contractual Obligations and Commercial Commitments

     Our major outstanding contractual obligations relate to our operating leases, employment agreements, and license agreements with our strategic partners. Since June 30, 2005, there have been no material changes with respect to our contractual obligations as disclosed in our annual report on Form 20-F for the year ended June 30, 2005, other than as described below.

     CDS Acquisition. In connection with the acquisition of CDS in December 2005, we became obligated under CDS’ operating leases, employment agreements and license agreements.

     Convertible Note. Debt service payments under our subordinated promissory note began on January 1, 2006 and were US$746,301 through the end of the fiscal year ended June 30, 2006. Following the repayment of US$2.5 million on the principal amount of the convertible note outstanding, interest is expected to amount to approximately US$1 million in the year ending June 30, 2007, US$1 million in the year ending June 30, 2008 and US$0.4 million in the year ending June 30, 2009, assuming no prior redemptions of principal thereunder. We expect to be able to pay some amount of such interest in ADSs beginning in the year ending June 30, 2007. We also granted the holder a security interest in our current royalties, subject to release of that security upon any disposition by us of the royalty stream.

     Registration Rights Agreements. During the half year ended December 31, 2005, we entered into registration rights agreements with purchasers of our equity securities in the PIPE, the purchaser of our convertible note and former shareholders of CDS. These registration rights agreements require us to register with the SEC the resale of ADSs issued to such persons. Our obligation to register ADSs in each of these transactions is subject to a deadline, which may be extended in certain situations, and our failure to meet this deadline results in monetary penalties against us as follows:

	•		With respect to the PIPE, we were required to complete the registration no later than February 19, 2006. While we believe that the agreement permits us to delay registration through the date of this registration statement, we may be subject to monthly cash penalties equal to one percent of the PIPE purchase price, or US$43,225 (A$59,200), from February 19 until the date the registration statement is declared effective.
	•		With respect to the convertible note financing, we were required to complete the initial registration no later than May 15, 2006. Since that date we have been paying and expect to continue to pay for each 30-day period from such date a cash penalty equal to one and one-half percent of the outstanding principal amount of the note until the registration statement is declared effective. From May 15, 2006 until July 31, 2006, that penalty was equal to US$225,000 (A$308,200) per 30-day period, and we were required to make payments of US$577,500 (A$791,096) through that period. We will be required to make additional payments at the same rate for the period from August 1, 2006 until the completion of the amendment documentation. Our failure to register the shares issuable under the convertible note and associated warrants by October 15, 2006 will result in a retroactive increase of the penalties described above to two and one-half percent of the initial principal amount of the note or US$375,000 (A$513,700) per 30-day period. In addition, our failure to register such shares within 60 days of such date will result in an event of default under the note. Upon such an event of default, the holder of the note would have the right, until 30 days after the registration statement becomes effective to require us to repay the entire principal amount of the note plus accrued interest at a premium.
	•		We were also required to complete the registration of ADSs issued in connection with our acquisition of CDS no later than June 28, 2006. Our agreement to register these ADSs requires that we pay cash penalties equal to one percent of the number of such ADSs multiplied by the deemed value of such ADSs at the time of closing, or $5.087 per ADS, for every 30-day period until the registration statement becomes effective. Such penalties could amount to US$813,089 (A$1,113,700) per thirty day period. We are seeking a waiver of this payment requirement from the holders of ADSs issued in connection with the acquisition of CDS, however, such persons may not grant us such a waiver on reasonable terms or at all.

     Alimera Sciences. In February 2005, CDS entered into a collaborative development and product license agreement with Alimera Sciences relating to the development of our Medidur product. According to the agreement, Alimera and pSivida share all development costs. The agreement was assigned to us by virtue of the CDS merger. Should development efforts be successful, Alimera Sciences will manufacture and sell the product for us subject to a revenue sharing arrangement. The agreement expires on the latest of ten years after the effective date, the expiration or abandonment of the patents relevant to the covered products or until Alimera Sciences is no longer selling any licensed products. Alimera Sciences may terminate the agreement if we fail to make a development payment or may terminate the agreement with respect to a particular product if we notify Alimera Sciences that it has abandoned the product or upon 30 days’ notice following our failure to make development payments exceeding US$2 million for that product. As of June 30, 2006, we have chosen not to make development payments to Alimera Sciences in an aggregate amount of approximately US$1.5 million. Alimera Sciences may decide not to continue with or commercialize any or all of the licensed products, change strategic focus, pursue alternative technologies, develop competing products or terminate its agreement with us.

     Bausch and Lomb Incorporated. In June 1999, CDS entered into a development and product license agreement with Bausch & Lomb Incorporated relating to the development of our Retisert and Vitrasert products. According to the agreement as amended, Bausch & Lomb pays all marketing and development costs and pays us a royalty. The agreement was assigned to us by virtue of the CDS merger. Bausch & Lomb is currently manufacturing and selling these products and paying us royalties on such sales. The agreement expires upon the last to expire of patents covering the products being sold. B&L may decide not to continue with or commercialize any or all of the licensed products, change strategic focus, pursue alternative technologies, develop competing products or terminate its agreement with us at any time.

In-Process Research and Development

     CDS’ injectable Medidur product is currently in Phase III trials for treatment of DME, a disease causing swelling in the macula, the most sensitive part of the retina, and a major cause of vision loss in diabetics. CDS is not aware of any approved drug treatment for this disease. The disease is currently treated by laser therapy, which burns the retina in specific sites or in a grid, and vitrectomy, eye surgery that involves the removal of the vitreous gel from the cavity of the eye. Both have serious limitations, which include repeat treatments or invasive surgical procedures. Both treatments generally only temporarily reverse vision loss and slow the progression f the disease. Medidur is an implant small enough to be injected through a needle to the back of the eye and is expected to release drug for up to three years. Alimera Sciences is currently conducting Phase III clinical trials for Medidur to treat DME which will follow 900 patients in the U.S. and Europe for 36 months.

     We determined that the portion of the purchase price attributable to the patents and patent applications relating to Medidur for DME (A$31,539,980) meets the definition of IPR&D as the product is currently in Phase III clinical trials and has not been approved by the FDA. This amount has been determined based on a discounted cash flow analysis of Medidur for DME prepared at the time of the acquisition by us, considering known royalty rates for the product, standard industry and market discount rates and what we considered to be reasonable market penetration rate assumptions. The patents and patent applications that support Medidur for DME were evaluated by our investment banker and by management and valued in light of the Phase III stage of product development, nearness to commercialization, a license agreement in place for the use of the technology and an assessment of the risk of failure of the product.

     As stated above, the product is currently in a 36 month Phase III clinical trial for treatment of DME performed by Alimera Sciences. Many factors could contribute to the delay or failure of these trials and we depend on collaborations with third parties to develop and commercialize this product, and such arrangements may not be available or scientifically or commercially successful, or may be terminated.

     Although Medidur for DME may have significant future importance, we consider that Medidur for DME does not have an alternative future use other than the technological indications for which it is in development.

     Smaller IPR&D projects that have been identified by us which were being undertaken by CDS at the time of the acquisition have been determined to have a fair value of A$2,741,706. As these projects are at a very early stage of development, we determined the fair value of the projects with reference to the costs incurred by CDS at the time of the acquisition. Such IPR&D projects do not have an alternative future use.

     The total amount of IPR&D recognized by us on the acquisition of CDS is A$34,281,686 and has been capitalized under A-IFRS and expensed at the date of acquisition under U.S. GAAP for the six months ended December 31, 2005.

Our Address and Phone Number

     Our principal offices are located at Level 12 BGC Centre, 28 The Esplanade, Perth WA 6000, Australia, and our telephone number is: +61 (8) 9226 5099. Our website address is www.psivida.com. We do not incorporate the information on, or accessible through, our website into this prospectus, and you should not consider it part of this prospectus.

RISK FACTORS

     In considering whether to invest in our ADSs, you should carefully read and consider the risks described below, together with all of the information we have included in this prospectus.

Risks related to our company and our business

We will need additional capital to conduct our operations and develop our products, and our ability to obtain the necessary funding is uncertain.

          We expect to require substantial additional capital resources in order to conduct our operations and develop our products. The timing and degree of any future capital requirements will depend on many factors, including:

	•		the accuracy of the assumptions underlying our estimates for our capital needs in the near and long term;
	•		continued scientific progress in our research and development programs;
	•		the magnitude and scope of our research and development programs;
	•		our ability to maintain and establish strategic arrangements for research, development, clinical testing, manufacturing and marketing;
	•		our progress with preclinical and clinical trials;
	•		the time and costs involved in obtaining regulatory approvals; and
	•		the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims.

          If and when it is required, we will attempt to acquire additional funding through strategic collaborations, public or private equity financings, capital lease transactions or other financing sources that may be available. Additional financing may not be available on acceptable terms, or at all. Additional equity financings could result in significant dilution to stockholders. Further, in the event that additional funds are obtained through arrangements with collaborative partners, these arrangements may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise seek to develop and commercialize ourselves. If sufficient capital is not available, we may be required to delay, reduce the scope of or eliminate one or more of our research or development programs, each of which could have a material adverse effect on our business.

We have a history of losses; we expect to continue to incur losses; and we may never become profitable.

          pSivida was formed in 2000. As primarily a research and development company, we have incurred operating losses in every year of existence. Under A-IFRS (effective from July 1, 2005), we incurred a net loss of A$10.7 million for the six months ended December 31, 2005 and under A-GAAP, we incurred a net loss of A$14.7 million, A$3.7 million and A$2.8 million for the years ended June 30, 2005, 2004 and 2003, respectively. As of December 31, 2005, we had an accumulated deficit under A-IFRS of A$39.5 million. We have not achieved profitability and expect to continue to incur net losses through at least 2007, and we may incur losses beyond that time, particularly if we are not successful in having BrachySil approved and widely marketed by that time. Even if BrachySil is approved and is being marketed at some point in 2007 or beyond, we may not achieve sufficient sales of BrachySil or any other product to become profitable at that time or at any other time. The extent of future losses and whether or how long it may take for us to achieve profitability are uncertain.

          We recently acquired CDS which has incurred net losses in each of its last five fiscal years (ending December 31). CDS had positive net income for the 12 month period ended June 30, 2005. As a result of the acquisition, we expect to receive royalties from sales of Vitrasert, CDS’ first commercial product. However, such sales have declined in each of the past four years and we do not expect that they will comprise a significant portion of our future revenue. We also expect to receive royalties from future sales of Retisert, but we are unable to predict the amount of such future royalties.

We may not have sufficient funds to pay principal of and interest on our convertible notes.

     On November 16, 2005, we issued a subordinated convertible promissory note in the principal amount of US$15 million (A$20.5 million) to an institutional investor. On September 14, 2006, repaid US$2.5 million (A$3.33 million)of the principal and amended the note. The convertible note must be repaid in full in cash on the third anniversary of its issuance, unless the principal is earlier converted. In addition, the holder may require payment in cash of up to US$6.25 million ($8.32 million) of the principal on each of July 31, 2007 and January 31, 2008. The note is currently convertible at a conversion price of US$2.00 per ADS, subject to adjustment based on certain events or circumstances, including the market price of ADSs for the ten trading days ended on April 30, 2007. The holder of the notes has been provided with a security interest in our existing royalty streams which represent substantially all of our current revenue. If we are unable to pay interest or principal that become due or otherwise make payments under the notes or related agreements, the holder may foreclose on and collect those royalties or sell that collateral. The proceeds of any sale would be applied to satisfy amounts owed to the holder.

     We may make quarterly interest payments on the notes by issuing ADSs if certain conditions are met including the effectiveness of a registration statement covering the ADSs, continued listing of our shares or ADSs, and timely delivery of conversion ADSs during the period preceding the payment date, among others. If any of the conditions are not met, we will be required to pay the interest due in cash. Given the cash needs of our business and our current level of revenue, we cannot predict whether or not we will be able to meet any of these cash payment obligations or what impact these obligations might have on our business and operations.

If we fail to register the resale of ADSs by the applicable deadlines, we may be subject to substantial penalties.

     In connection with the acquisition of CDS and the convertible note financing, we have entered into agreements to register with the SEC the resale of ADSs issued to investors and CDS stockholders. Our obligation to register ADSs in each of these transactions is subject to a deadline, which may be extended or waived in certain situations, and our failure to meet this deadline in each case may result in monetary penalties or other remedies being available against us.

     With respect to the convertible note financing, we were required to complete the initial registration no later than May 15, 2006. Since that date we have been paying and expect to continue to pay for each 30-day period from such date a cash penalty equal to one and one-half percent of the outstanding principal amount of the note until the registration statement is declared effective. From May 15, 2006 until September 14, 2006, that penalty was equal to US$225,000 (A$308,200) per 30-day period, and we were required to make payments of US$915,000 (A$1,298,391) through that period. We also paid an additional amount of US$129,667 (A$184,000) in exchange for the extension of the registration deadline. Our failure to register the shares issuable under the convertible note and associated warrants by the new deadline of October 15, 2006 will result in an additional penalty of US$765,000 (A$1,085,540) and an increase in the prospective penalty rate to two percent per 30-day period. In addition, our failure to register such shares within 60 days of such date will result in an event of default under the note. Upon such an event of default, the holder of the note would have the right, until 30 days after the registration statement becomes effective to require us to repay the entire principal amount of the note plus accrued interest at a premium, and we may not have sufficient funds to do so.

     We were also required to complete the registration of ADSs issued in connection with our acquisition of CDS no later than June 28, 2006. Our agreement to register these ADSs requires that we pay cash penalties equal to one percent of the number of such ADSs multiplied by the deemed value of such ADSs at the time of closing, or $5.087 per ADS, for every 30-day period until the registration statement becomes effective. Such penalties could amount to US$813,089 (A$1,113,700) per thirty day period. We are seeking a waiver of this payment requirement from the holders of ADSs issued in connection with the acquisition of CDS, however, such persons may not grant us such a waiver on reasonable terms or at all. If we are forced to pay the registration penalties, we may not have sufficient funds to continue developing our products or funding our operations.

     We expect to have other registration obligations with similar penalty provisions related to registration deadlines in connection with other financing activities.

     Once the registrations are completed, we are obligated to keep them effective for specified periods, our failure or inability to do so may subject us to additional penalties.

Most of our products and planned products are based upon new and unproven technologies.

          We are currently developing products based upon BioSilicon™, a biocompatible and biodegradable form of the element silicon, for multiple applications across many sectors of healthcare, including controlled slow release drug delivery, diagnostics, orthopedics and tissue engineering. BioSilicon is a new and unproven technology. The successful development and market acceptance of BioSilicon is subject to many risks. These risks include the potential for ineffectiveness, lack of safety, unreliability, failure to receive necessary regulatory clearances or approvals and the emergence of superior or equivalent products, as well as the effect of changes in future general economic conditions. Our failure to develop products based on BioSilicon that overcome these risks would have a material adverse effect on our business, financial condition and results of operations.

          We have recently acquired CDS (now renamed pSivida Inc.), which develops drug delivery products based upon its proprietary AEON and CODRUG drug delivery systems. To date pSivida Inc. has developed two such products, Vitrasert and Retisert, which have been approved by the FDA for treatment of two sight-threatening eye diseases. However, these technologies may prove useful in other products which would be subject to many of the same risks as described above for BioSilicon.

We rely heavily upon patents, trade secrets and other proprietary technologies and any future claims that our rights to such intellectual property are invalid or limited could seriously harm our business.

          Protection of intellectual property rights is crucial to our business, since that is how we keep others from copying the innovations which are central to our existing and future products. Our success is dependent on whether we can obtain patents, defend our existing patents and operate without infringing on the proprietary rights of third parties. We currently have 36 patents and over 90 pending patent applications, including patents and pending applications covering BioSilicon and various uses thereof. This does not include the patents and patent applications we acquired in the acquisition of CDS. We expect to aggressively patent and protect our proprietary technologies. However, we cannot be sure that any additional patents will be issued to us as a result of our pending or future patent applications or that any of our patents will withstand challenges by others. If we were determined to be infringing any third party patent, we could be required to pay damages, alter our products or processes, obtain licenses or cease certain operations. We may not be able to obtain any required licenses on commercially favorable terms, if at all. Our failure to obtain a license for any technology that we may require to commercialize BioSilicon or our ophthalmic drug delivery products could have a material adverse effect on our business, financial condition and results of operations. In addition, many of the laws of foreign countries in which we intend to operate may treat the protection of proprietary rights differently from, and may not protect our proprietary rights to the same extent as, laws in Australia, the United States and Patent Co-operation Treaty countries.

          Prior art may reduce the scope or protection of, or invalidate, patents. Previously conducted research or published discoveries may prevent patents from being granted, invalidate issued patents or narrow the scope of any protection obtained. Reduction in scope of protection or invalidation of our licensed or owned patents, or our inability to obtain patents, may enable other companies to develop products that compete with our products and product candidates on the basis of the same or similar technology. As a result, our patents and those of our licensors may not provide any or sufficient protection against competitors.

          While we have not been and we are not currently involved in any litigation over intellectual property, such litigation may be necessary to enforce any patents issued or licensed to us or to determine the scope and validity of third party proprietary rights. We may also be sued by a third party alleging that we infringe its intellectual property rights. Any intellectual property litigation would be likely to result in substantial costs to us and diversion of our efforts. If our competitors claim technology also claimed by us and if they prepare and file patent applications in the U.S., we may have to participate in interference proceedings declared by the U.S. Patent and Trademark office to determine priority of invention, which could result in substantial cost to us and diversion of our efforts. Any such litigation or interference proceedings, regardless of the outcome, could be expensive and time consuming. Litigation could subject us to significant liabilities to third parties, requiring disputed rights to be licensed from third parties or require us to cease using certain technologies and, consequently, could have a material adverse effect on our business, financial condition and results of operations.

     We also rely on trade secrets, know-how and technology that are not protected by patents to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as our corporate partners, collaborators, employees, and consultants. Any of these parties could breach these agreements and disclose our confidential information, or our competitors might learn of the information in some other way. If any material trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our competitive position could be materially harmed.

     We rely, in part, on confidentiality agreements with employees, advisors, vendors and consultants to protect our proprietary expertise. These agreements may be breached and we may not have adequate remedies in the event of a breach. In addition, our unpatented proprietary technological expertise may otherwise become known or independently discovered by competitors.

Our ability to commercialize our products depends on our ability to achieve regulatory approvals.

     Our current and future activities are and will be subject to regulation by governmental authorities in the U.S., Europe, Singapore and other countries. Before we can manufacture, market and sell any of our products, we must first obtain approval from the FDA and/or foreign regulatory authorities. In order to obtain these approvals, pre-clinical studies and clinical trials must demonstrate that each of our products is safe for human use and effective for its targeted disease. Our proposed products are in various stages of pre-clinical and clinical testing. If clinical trials for any of these products are not successful, that product cannot be manufactured and sold and will not generate revenue from sales. Clinical trials for our product candidates may fail or be delayed by many factors, including the following:

	•		inability to attract clinical investigators for trials;
	•		inability to recruit patients in sufficient numbers or at the expected rate;
	•		adverse side effects;
	•		failure of the trials to demonstrate a product’s safety or efficacy;
	•		failure to meet FDA requirements for clinical trial design or for demonstrating efficacy for a particular product;
	•		inability to follow patients adequately after treatment;
	•		changes in the design or manufacture of a product;
	•		inability to manufacture sufficient quantities of materials for use in clinical trials; and
	•		governmental or regulatory delays.

     Results from pre-clinical testing and early clinical trials often do not accurately predict results of later clinical trials. Data obtained from pre-clinical and clinical activities are susceptible to varying interpretations which may delay, limit or prevent regulatory approval. Data from pre-clinical studies, early clinical trials and interim periods in multi-year trials are preliminary and may change, and final data from pivotal trials for such products may differ significantly. Adverse side effects may develop that delay, limit or prevent the regulatory approval of products, or cause their regulatory approvals to be limited or even rescinded. Additional trials necessary for approval may not be undertaken or may ultimately fail to establish the safety and efficacy of proposed products. The FDA may not approve proposed products for manufacture and sale.

          In addition to testing, the FDA imposes various requirements on manufacturers and sellers of products under its jurisdiction, such as labeling, manufacturing practices, record keeping and reporting requirements. The FDA also may require post-marketing testing and surveillance programs to monitor a product’s effects. Furthermore, changes in existing regulations or the adoption of new regulations could prevent us from obtaining, or affect the timing of, future regulatory approvals.

          At present Vitrasert and Retisert are our only products that have been approved for sale in the U.S. for specific purposes. BrachySil and other product candidates utilizing BioSilicon have not been approved and their approval in the future remains uncertain. In addition, the FDA may determine to regulate it as a drug, in which case we would incur significant additional cost and time in order to achieve the required regulatory approvals. Any product approvals we achieve could also be withdrawn for failure to comply with regulatory standards or due to unforeseen problems after the product’s marketing approval.

We have a limited ability to market our products ourselves, and if we are unable to find marketing partners, or our marketing partners do not successfully market our products then our business will suffer.

          We presently have no marketing or sales staff. Achieving market acceptance for the use of BioSilicon and other products (including drug delivery products originated by CDS) will require extensive and substantial efforts by experienced personnel as well as expenditure of significant funds. We may not be able to establish sufficient capabilities necessary to achieve market penetration.

          We intend to license and/or sell BioSilicon and our other products to companies who will be responsible in large part for sales, marketing and distribution of products utilizing BioSilicon and our other products. The amount and timing of resources which may be devoted to the performance of their contractual responsibilities by these licensees are not expected to be within our control. These partners may not perform their obligations.

          Moreover, our licensees may have rights of termination under our agreements with them. Exercise of termination rights by those parties may leave us temporarily or permanently without any marketing or sales resources which may have an adverse effect on our business, financial condition and results of operations. Additionally, our interests may not continue to coincide with those of our partners, and our partners may develop independently or with third parties products or technologies which could compete with our products. Further, disagreements over rights or technologies or other proprietary interests may occur.

     pSivida Inc., formerly CDS, has exclusively licensed its technology with respect to Vitrasert, Retisert and certain other ophthalmic uses to Bausch & Lomb, and with respect to Medidur for DME and certain other ophthalmic uses to Alimera Sciences. Bausch & Lomb is responsible for funding and managing the development and commercialization of all products under its agreement with pSivida Inc. and can terminate the agreement at any time upon 90 days’ written notice. Alimera Sciences and pSivida Inc. are jointly funding the development of products licensed under that agreement, and Alimera Sciences may terminate its agreement with pSivida Inc. if pSivida Inc. fails to make a development payment or may terminate the agreement with respect to a particular product if pSivida Inc. notifies Alimera Sciences that it has abandoned the product or upon 30 days’ notice following pSivida Inc.’s failure to make development payments exceeding US$2 million for that product. As of June 30, 2006, we have chosen not to make development payments to Alimera Sciences in an aggregate amount of approximately US$1.5 million. Alimera Sciences was incorporated in June 2003 and has limited resources. Either Bausch & Lomb or Alimera Sciences may decide not to continue with or commercialize any or all of the licensed products, change strategic focus, pursue alternative technologies, develop competing products or terminate their agreements with pSivida Inc. While Bausch & Lomb has significant experience in the ophthalmic field and substantial resources, there is no assurance as to whether and the extent to which that experience and those resources will be devoted to pSivida Inc.’s technologies. Because we do not currently have sufficient funding or internal capabilities to develop and commercialize these products and proposed products, decisions, actions, breach or termination of these agreements by Bausch & Lomb or Alimera Sciences could delay or stop the development or commercialization of Retisert, Medidur for DME or other of our products licensed to such entities.

          Our business strategy includes entering into collaborative agreements for the development and commercialization of our product candidates. The curtailment or termination of any of these agreements could adversely affect our business and our ability to develop and commercialize our products and proposed products and fund our operations.

     The success of these and future collaboration agreements will depend heavily on the experience, resources efforts and activities of our collaborators. Our collaborators have and are expected to have significant discretion in making these decisions. Risks that we face in connection with our collaboration strategy include:

	•		collaboration agreements are, and are expected to be, subject to termination under various circumstances, including, in some cases, on short notice and without cause;
	•		we are required, and expect to be required, under our collaboration agreements not to conduct specified types of research and development in the field that is the subject of the collaboration. These agreements may have the effect of limiting the areas of research and development that we can pursue;
	•		our collaborators may develop and commercialize, either alone or with others, products that are similar to or competitive with our products;
	•		our collaborators may change the focus of their development and commercialization efforts. Pharmaceutical and biotechnology companies have historically re-evaluated and changed their priorities for many reasons. The ability of our products to reach their potential could be limited if our collaborators decrease or fail to increase spending related to such products; and
	•		our collaborators may lack the funding or experience to develop and commercialize our products successfully or may otherwise fail to do so.

     To the extent that we choose not to or we are unable to enter into future license agreements with marketing and sales partners, we may experience increased capital requirements to develop the ability to market and sell future products. We may not be able to market or sell our technology or future products independently in the absence of such agreements.

Our markets are competitive and our competitors could develop more effective products, making our products less competitive, uneconomical or obsolete, thereby impacting our future operations.

     We are or plan to be engaged in the rapidly evolving and competitive fields of drug delivery, tissue engineering, diagnostics and orthopedics technologies. Our competitors include many major pharmaceutical companies and other biotechnology, drug delivery, diagnostics and medical products companies.

     Many of our potential competitors have substantially greater financial, technological, research and development, marketing and personnel resources. Our competitors may succeed in developing alternate technologies and products that are more effective, easier to use, more economical than those which we have developed or that would render our technologies and products obsolete and non-competitive in these fields. These competitors may also have greater experience in developing products, conducting clinical trials, obtaining regulatory approvals or clearances and manufacturing and marketing such products or technologies.

     We believe that pharmaceutical, drug delivery and biotechnology companies, research organizations, governmental entities, universities, hospitals, other nonprofit organizations and individual scientists are seeking to develop the drugs, therapies, products, approaches or methods to treat our targeted diseases or their underlying causes. For many of our targeted diseases, competitors have alternate therapies that are already commercialized or are in various stages of development ranging from discovery to advanced clinical trials. Any of these drugs, therapies, products, approaches or methods may receive government approval or gain market acceptance more rapidly than our products and proposed products, may offer therapeutic or cost advantages or may cure our targeted diseases or their underlying causes completely, which could reduce demand for our products and proposed products and could render them noncompetitive or obsolete. For example, sales of pSivida Inc.’s Vitrasert product for the treatment of CMV retinitis, a disease which affects people with late-stage AIDS, have declined significantly, because of new treatments that delay the onset of late-stage AIDS.

     Our competitive position is based upon our ability to:

	•		create and maintain scientifically-advanced technology and proprietary products and processes;
	•		attract and retain qualified personnel;

	•		develop safe and efficacious products, alone or in collaboration with others;
	•		obtain patent or other protection for our products and processes;
	•		obtain required government approvals on a timely basis;
	•		manufacture products on a cost-effective basis; and
	•		successfully market products.

If we are not successful in meeting these goals, our business could be adversely affected.

We face risks in expanding our efforts beyond our core area of experience and expertise.

          We plan to expand our focus outside of our initial areas of experience and expertise to seek to broaden our product pipeline and will require additional internal expertise or external collaborations in areas in which we currently do not have internal resources and expertise. Such expertise and collaborations may be difficult to obtain. We are currently focused on targeted controlled drug delivery with a specialty, through pSivida Inc., on ophthalmic drug delivery and, through pSiMedica and pSiOncology, on brachytherapy and other controlled delivery mechanisms utilizing BioSilicon. We have begun to expand our focus into diagnostics (through AION Diagnostics) and the food industry (through pSiNutria) and plan to expand into other areas at a later time. In connection with the foregoing, we may have to enter into collaboration arrangements with others that may require us to relinquish rights to certain of our technologies or products that we would otherwise pursue independently. We may be unable to acquire the necessary expertise or enter into collaboration agreements on acceptable terms.

Problems associated with international business operations could affect our ability to manufacture and sell our products.

          We currently maintain offices in Australia, the UK, Singapore and the U.S.; BioSilicon is produced for us in Germany and the UK; we are conducting product trials in Singapore, Vietnam and Malaysia; we have research and development facilities in the UK and the U.S.; and we intend to license and/or sell products in most major world healthcare markets. A number of risks are inherent in our international strategy. In order for us to license and manufacture our products, we must obtain country-specific regulatory approvals or clearances or comply with regulations regarding safety and quality in a variety of jurisdictions. We may not be able to obtain or maintain regulatory approvals or clearances in such countries and we may be required to incur significant costs in obtaining or maintaining foreign regulatory approvals or clearances. In addition, our operations and revenues are subject to a number of risks associated with foreign commerce, including the following:

	•		managing foreign distributors;
	•		staffing and managing foreign operations;
	•		political and economic instability;
	•		foreign currency exchange fluctuations;
	•		foreign tax laws, tariffs and freight rates and charges;
	•		timing and availability of export licenses;
	•		inadequate protection of intellectual property rights in some countries; and
	•		obtaining required governmental approvals.

There are risks relating to product manufacturing which could cause delays in product development and commercialization and impact our future profitability.

     Our ability to conduct timely preclinical and clinical research and development programs, obtain regulatory approvals, commercialize our product candidates and fulfill our contract manufacturing obligations to others will depend, in part, upon our ability to manufacture our products, either directly or through third parties, in accordance with FDA and other regulatory requirements. We currently have BioSilicon production capability at our facilities in the UK, which may be augmented where required by QinetiQ’s UK production facilities for use in internal and collaborative research. BrachySil is currently manufactured under contract in accordance with applicable FDA regulations by Hosokawa Micron Group, Atomising Systems Ltd, HighForce Ltd and AEA Technology QSA GmbH.

     If we are unable to manufacture BioSilicon or BrachySil or other product candidates by ourselves or acquire BioSilicon from QinetiQ or acquire BioSilicon or BrachySil or other product candidates from third parties, we would be unable to proceed with or could experience delays in development and commercialization of our proposed products. We may not be able to manufacture our proposed products successfully or in a cost-effective manner at our own or third party facilities. If we are unable to develop our own manufacturing facilities or to obtain or retain third-party manufacturing on acceptable terms, we may not be able to conduct certain future preclinical and clinical testing or to supply commercial quantities of our products.

     Our recently acquired subsidiary pSivida Inc. also has limited manufacturing experience and has exclusively licensed Bausch & Lomb the rights to manufacture Vitrasert, Retisert and other products covered by its license agreement with pSivida Inc., and Alimera Sciences, the rights to manufacture Medidur for DME, if approved for marketing, and other products covered by its license agreement with pSivida Inc. Our current reliance on third party manufacturers for some of our products entails risks, including:

	•		the possibility that third parties may not comply with the FDA’s current good manufacturing practices, regulations, other regulatory requirements, and those of similar foreign regulatory bodies, and employ adequate quality assurance practices;
	•		supply disruption, deterioration in product quality or breach of a manufacturing or license agreement by the third party because of factors beyond CDS’ control;
	•		the possible termination or non-renewal of a manufacturing or licensing agreement with a third party at a time that is costly or inconvenient to CDS; and
	•		inability to identify or qualify an alternative manufacturer in a timely manner, even if contractually permitted to do so.

Fast track status for Medidur may not actually lead to faster development, regulatory review or approval.

     The FDA has granted fast track designation to Medidur for the treatment of DME. Although this designation makes this product eligible for expedited approval procedures, it does not ensure faster development, review or approval compared to the conventional FDA procedures. Further, the FDA may withdraw the fast track designation if it determines that the designation is no longer supported by emerging data from clinical trials or if it determines that the criteria for the designation is no longer satisfied.

Our proposed products will be subject to the uncertainty of third-party reimbursement and health care reform measures which may limit market acceptance.

     In both domestic and foreign markets, our ability to commercialize our products will depend, in part, upon the availability of reimbursement from third-party payors, such as government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price and cost-effectiveness of medical products. If our products are not considered cost-effective, third-party payors may limit reimbursement. Government and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new therapeutic products approved for marketing by the FDA and by refusing, in some cases, to provide any coverage for uses of approved products for disease indications for which the FDA has not granted marketing approval. If government and third-party payors do not provide adequate coverage and reimbursement levels for uses of our products, the market acceptance of our products would be limited.

     There have been a number of U.S. federal and state proposals during the last few years to subject the pricing of pharmaceuticals to government control and to make other changes to the health care system of the U.S. It is uncertain what legislative proposals will be adopted or what actions federal, state or private payors for health care goods and services may take in response to any health care reform proposals or legislation. We cannot predict the effect health care reforms may have on our business.

The loss of some or all of our key personnel could harm our business.

     We are dependent upon the principal members of our management and scientific staff. In addition, we believe that our future success in developing BioSilicon and other products and achieving a competitive position will depend to a large extent on whether we can attract and retain additional qualified management and scientific personnel. There is strong competition for such personnel within the industry in which we operate and we may not be able to continue to attract such personnel either to Malvern in the United Kingdom or to Massachusetts, where our research and development is conducted. As we do not have large numbers of employees and our products are unique and highly specialized, the loss of the services of one or more of the senior management or scientific staff, or the inability to attract and retain additional personnel and develop expertise as needed, could have a material adverse effect on our results of operations and financial condition.

We may be subject to product liability suits, and we may not have sufficient insurance to cover damages.

     The testing, manufacturing, and future marketing and sale of the products utilizing BioSilicon and our other products involves risks that product liability claims may be asserted against us or our licensees. Our current clinical trial insurance may not be adequate or continue to be available, and we may be unable to obtain adequate product liability insurance on reasonable commercial terms, if at all. In the event clinical trial insurance is not adequate, our ability to continue with planned research and development in the relevant area could be negatively impacted.

We have experienced rapid growth and changes in our business, and our failure to manage this and any future growth and changes could harm our business.

     As evidenced by our purchase of the remaining shares of pSiMedica on August 4, 2004, the incorporation and planned spin-off of AION Diagnostics, the incorporation of pSiNutria Limited and our acquisition of CDS on December 30, 2005, our business is rapidly changing. See “Risks related to our recent acquisition of CDS and other recent transactions.”

     We expect to continue increasing the number of our employees, and we may suffer if we do not manage and train our new employees effectively. Further, our efforts span various geographies. Continued rapid growth and operation in multiple locations may place significant strains on our managerial, financial and other resources. The rate of any future expansion, in combination with our complex technologies and products, may demand a level of managerial effectiveness in anticipating, planning, coordinating and meeting our operational needs which we may not be able to successfully provide.

     In addition, if we make additional acquisitions or divestitures, we could encounter difficulties that harm our business. We may acquire companies, products or technologies that we believe to be complementary to our business. If we do so, we may have difficulty integrating the acquired personnel, operations, products or technologies. In addition, acquisitions may distract our management and employees and increase our expenses, which could harm our business. We may also sell businesses or assets as part of our strategy or if we receive offers from third parties. If we do so, we may sell an asset or business for less than its full value or may lose valuable opportunities attendant to such asset or business.

If we fail to comply with environmental laws and regulations, our ability to manufacture and commercialize products may be adversely affected.

     Medical and biopharmaceutical research and development involves the controlled use of hazardous materials, such as radioactive compounds and chemical solvents. We are subject to federal, state and local laws and regulations in the U.S. and abroad governing the use, manufacture, storage, handling and disposal of such materials and waste products. We could be subject to both criminal liability and civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. Compliance with environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development or production efforts or harm our operating results.

Risks related to our being headquartered and incorporated outside of the United States

You may have difficulty in effecting service of legal process and enforcement of judgments against us or our management.

     We are a public company limited by shares, registered and operating under the Australian Corporations Act 2001. Several of our directors and most of our officers reside outside the U.S. Substantially all or a substantial portion of the assets of those persons are located outside the U.S. As a result, it may not be possible to effect service on such persons in the U.S. or to enforce, in foreign courts, judgments against such persons obtained in U.S. courts and predicated on the civil liability provisions of the federal securities laws of the U.S. Furthermore, a large percentage of our directly owned assets are located outside the U.S., and, as such, any judgment obtained in the U.S. against pSivida may not be collectible within the U.S. There is doubt as to the enforceability in the Commonwealth of Australia, in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated solely upon federal or state securities laws of the U.S., especially in the case of enforcement of judgments of U.S. courts where the defendant has not been properly served in Australia.

As a foreign private issuer we do not have to provide you with the same information as an issuer of securities based in the U.S.

     Because we are a foreign private issuer within the meaning of the rules under the Exchange Act, we are exempt from certain provisions of that law that are applicable to U.S. public companies, including (i) the rules under the Exchange Act requiring the filing with the U.S. Securities and Exchange Commission, or SEC, of quarterly reports on Form 10-Q or current reports on Form 8-K; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a registered security; and (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time. Thus, you are not afforded the same protections or information which would be made available to you were you investing in a U.S. public corporation.

     In accordance with the requirements of the Australian Stock Exchange, we disclose annual and semi-annual results. Our results are presented in accordance with A-GAAP. Effective July 1, 2005, our results are presented in accordance with A-IFRS. Our annual results reported in the U.S. with the SEC include a reconciliation to U.S. GAAP. Based on our evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, we have concluded that, as of June 30, 2005, our disclosure controls and procedures were ineffective in that we had insufficient accounting personnel who have sufficient knowledge and experience in U.S. GAAP and the U.S. SEC accounting requirements.

     Our annual results are audited, and our semi-annual results undergo a limited review by our independent auditors. Subject to certain exceptions, we are also required to immediately disclose to the Australian Stock Exchange any information concerning us that a reasonable person would expect to have a material effect on the price or value of our shares. This would include matters such as (i) any major new developments relating to our business which are not public knowledge and may lead to a substantial movement in our share price; (ii) any changes in our board of directors; (iii) any purchase or redemption by pSivida of its own equity securities; (iv) interests of directors in our shares or debentures; and (v) changes in our capital structure. We are required to provide our semi-annual results and other material information that we disclose in Australia in the U.S. under the cover of Form 6-K. Nevertheless, this information is not the same and may not be as much information as would be made available to you were you investing in a U.S. public corporation.

Risks related to our stock and our ADSs

If we are a passive foreign investment company, holders of our shares and ADSs may suffer adverse tax consequences.

     U.S. holders of our ADSs can experience unfavorable tax consequences if we are treated as a passive foreign investment company, or PFIC, under the U.S. Internal Revenue Code of 1986, as amended, for any year during which the U.S. holder owns our ADSs. For example, if a U.S. holder disposes of an ADS at a gain, and during any year of its holding period we were a PFIC, then such gain would be taxable as ordinary income and not as capital gain and would be subject to additional taxation based on the length of time the U.S. holder held such stock. Most of the tax consequences of our being a PFIC can be mitigated if the U.S. holder makes certain elections as described in our Annual Report on Form 20-F for the fiscal year ended June 30, 2005, filed with the SEC on January 18, 2006 in Item 10.E under “U.S. Federal Income Tax Considerations.”

     In general, we will be a PFIC for any taxable year if either (1) 75% or more of our gross income in the taxable year is passive income, or (2) 50% or more of the average value of our assets in the taxable year produces, or is held for the production of, passive income. We do not yet know whether we will be classified as a PFIC in the year ending June 30, 2006 or thereafter. Most of the tax consequences of pSivida being a PFIC can be mitigated if the U.S. holder makes certain mitigating elections as described in Item 10.E of our Annual Report. In the event we are classified as a PFIC, we intend to provide U.S. holders with sufficient information to enable them to make a mitigating election if so desired. However, we may fail to provide such information, and if we do, you may not be aware of our status as a PFIC and may be subject to additional taxes and penalties.

Holders of ADSs may have limited rights relative to holders of our Ordinary Shares in certain circumstances.

     The rights of holders of ADSs with respect to voting of ordinary shares and the right to receive certain distributions may be limited in certain respects by the deposit agreement entered into by us and Citibank, N.A. For example, although ADS holders are entitled under the deposit agreement, subject to any applicable provisions of Australian law and of our constitution, to instruct the depositary as to the exercise of the voting rights pertaining to the ordinary shares represented by the American Depositary Shares, and the depositary has agreed that it will vote the ordinary shares so represented in accordance with such instructions, ADS holders may not receive notices sent by depositary in time to ensure that the depositary will vote the ordinary shares. This means that holders of ADSs may not be able to exercise their right to vote. In addition, under the deposit agreement, the depositary has the right to restrict distributions to holders of the ADSs in the event that it is unlawful or impractical to make such distributions. We have no obligation to take any action to permit distributions to holders of our American Depositary Receipts, or ADRs. As a result, holders of ADRs may not receive distributions made by us.

Our stock price is volatile and can fluctuate significantly based on events both within and outside our control; our trading volume may affect the liquidity of our ADSs.

     Since December 2000, the price of our ordinary shares has ranged from A$0.09 to A$1.44 per share, and since January 27, 2005, the price of our ADSs has ranged from US$2.06 to US$12.14. The price of our ordinary shares and ADSs may be affected by developments directly affecting our business and by developments out of our control or unrelated to pSivida. The biotechnology sector in particular and the stock market generally are vulnerable to abrupt changes in investor sentiment. Prices of securities and trading volume of companies in the biotechnology industry, including ours, can swing dramatically in ways unrelated or that bear a disproportionate relationship to operating performance. Our share and ADS prices and their trading volume may fluctuate based on a number of factors including, but not limited to:

	•		clinical trial results and other product and technological developments and innovations;
	•		FDA and other governmental regulatory actions, receipt and timing of approvals of our proposed products, and any denials and withdrawals of approvals;
	•		competitive factors including new product ideas and technologies, clinical trial results and approvals of competitive products in our markets;
	•		advancements with respect to treatment of the diseases targeted by our proposed products;

	•		developments relating to collaborative partners including execution and termination of agreements, achievement of milestones and receipt of payments;
	•		availability and cost of capital and our financial and operating results;
	•		changes in reimbursement policies or other practices related to our proposed products or the pharmaceutical industry generally;
	•		meeting, exceeding or failing to meet analysts’ or investors’ expectations, and changes in evaluations and recommendations by securities analysts;
	•		economic, industry and market conditions, changes or trends; and
	•		other factors unrelated to us and the biotechnology industry.

     In addition, low trading volume may increase the volatility of the price of our ADSs. Trading volume in our ordinary shares on other markets has not been historically high, and trading volume of our ADSs on the NASDAQ Global Market has also been low. Further, because each of our ADSs represents ten of our ordinary shares, trading volume in our ADSs may be lower than that for our ordinary shares. A thin trading market could cause the price of our ADSs to fluctuate significantly more than the stock market as a whole. For example, trades involving a relatively small number of our ADSs may have a greater impact on the trading price for our ADSs than would be the case if their trading volume were higher. Accordingly, holders of our ADSs may not be able to liquidate a position in our ADSs in the desired time or at the desired price.

The fact that we do not expect to pay cash dividends may lead to decreased prices for our stock.

     We have never paid a cash dividend on our Ordinary Shares and we do not anticipate paying any cash dividend. We intend to retain future cash earnings, if any, for reinvestment in the development and expansion of our business. Our convertible note agreement limits our ability to pay dividends.

Future issuances and sales of our stock could dilute your ownership and cause our stock price to decline.

     As of December 31, 2005, we have outstanding options to purchase 31,169,162 of our ordinary shares, representing 8.1% of the total outstanding ordinary shares. In 2005, we raised capital through the issuance of 665,000 ADSs and warrants to acquire 133,000 ADSs and issued a convertible note currently convertible into 6,250,000 ADSs together with warrants to acquire an additional 633,803 ADSs and 5,700,000 ADSs, respectively. In addition, under certain circumstances, the convertible note will become convertible into a larger number of ADSs and the accrued interest on the principal amount of the note may be converted, in either case, potentially resulting in the issuance of a substantially larger number of ADSs. We issued a further 150,820,380 ordinary shares (represented by 15,082,038 ADSs) in exchange for the outstanding CDS common and preferred shares on the date of the acquisition in accordance with the merger agreement, 1,211,180 nonvested ordinary shares (represented by 121,118 nonvested ADSs) in connection with employee retention agreements, and 9,016,230 nonvested ordinary shares (represented by 901,623 nonvested ADSs) in exchange for the shares of nonvested CDS common stock outstanding on the date of the acquisition in accordance with retention agreements between CDS and its officers and employees. Exercise and conversion of these options, warrants and convertible securities would dilute existing shareholders. Further, we intend to continue to finance our operations through the issuance of equity securities, if feasible.

Certain of our shareholders own a significant percentage of our ordinary shares and therefore may be able to influence our business in ways that are less beneficial to you.

     Our executive officers, directors (including the officers and directors of our subsidiaries) and their affiliates beneficially own or control approximately 15.20% of our outstanding ordinary shares (based on the number of our ordinary shares outstanding on December 31, 2005 and assuming the issuance of shares upon the exercise of options vested or vesting within 60 days of December 31, 2005). As a result, if our executive officers and directors and their affiliates were all to vote in the same way, they would have the ability to exert significant influence over our board of directors and how we operate our business. The concentration of ownership may also have the effect of delaying, deferring or preventing a change in control of our company.

If we fail to comply with internal controls evaluations and attestation requirements our stock price could be adversely affected.

          We are subject to United States securities laws, including the Sarbanes-Oxley Act of 2002 and the rules and regulations adopted by the SEC pursuant to such Act. Under Section 404 of the Sarbanes-Oxley Act and the related regulations, we are required to perform an evaluation of our internal controls over financial reporting and have our independent registered public accounting firm publicly attest to this evaluation beginning in the year ending June 30, 2008. We will however shortly commence the evaluation and expect to complete it in the second quarter of 2007. We expect internal control evaluations and attestation requirements to be time-consuming and expensive. If we fail to complete the evaluation of our internal controls over financial reporting in time, if we identify material weaknesses in these internal controls or if our independent accountant does not timely attest to our evaluation, we could be subject to regulatory scrutiny and decreased public confidence in our internal controls, which may adversely affect the market price of our stock.

Risks related to our recent acquisition of CDS and other recent transactions

          The following risk factors relate to our December 30, 2005 acquisition of CDS, as well as two recently completed transactions: (1) our US$4.3 million private placement structured as a private investment in public equity, referred to herein as the PIPE, and (2) our US$15 million convertible note financing, referred to herein as the convertible note financing. For a description of the CDS acquisition, the PIPE and the convertible note financing, see, “The Company—Recent Developments.”

We may fail to integrate our operations successfully with the operations of CDS. As a result, pSivida and CDS may not achieve the anticipated benefits of the merger, which could adversely affect the price of ADSs.

     We entered into the merger agreement and consummated the merger with the expectation that the merger will result in benefits to the combined companies, including the opportunities to combine the two companies’ technologies, products and product candidates and the opportunity for pSivida to establish a substantial presence in the U.S. which would facilitate access to U.S. markets. However, these expected benefits may not be fully realized. Failure of the combined company to meet the challenges involved with successfully integrating the personnel, products, technology and research and development operations of the two companies following the merger or to realize any of the other anticipated benefits of the merger, could have a material adverse effect on our business, financial condition and results of operations as well as on that of our subsidiaries, including CDS (now pSivida Inc.). These integration efforts may be difficult and time consuming, especially considering the highly technical and complex nature of each company’s products. The challenges involved in this integration include the following:

	•		coordinating research and development operations in a rapid and efficient manner;
	•		combining platform technologies of disparate sources;
	•		demonstrating to collaboration partners that the merger will not result in adverse changes in technology focus or development standards;
	•		retaining key alliances with collaboration partners;
	•		absorbing costs and delays in implementing overlapping systems and procedures, including financial accounting systems and accounting principles;
	•		persuading employees that our business culture and that of CDS are compatible, maintaining employee morale and retaining key employees; and
	•		overcoming potential distraction of management attention and resources from the business of the combined company.

     We may not successfully integrate our operations and technology with those of CDS in a timely manner, or at all. We may not realize the anticipated benefits of the merger to the extent, or in the timeframe, anticipated, which could significantly harm our business.

Our operating results could be adversely affected as a result of purchase accounting treatment, and the corresponding impact of amortization or impairment of other intangibles relating to the merger, if the results of the combined company do not offset these additional expenses.

     Under A-IFRS (effective from July 1, 2005), we accounted for the merger with CDS using the purchase method of accounting. Under purchase accounting, we recorded the market value of our ADSs, cash, and other consideration issued in connection with the merger and the amount of direct transaction costs as the cost of acquiring the business of CDS. We allocated that cost to the individual assets acquired and liabilities assumed, including identifiable intangible assets, based on their respective estimated fair values. Based on our preliminary allocation of the purchase price, which is subject to change, the amount allocated to goodwill is approximately A$28.7 million, the amount allocated to patents is approximately A$88.5 million and the amount allocated to IPR&D is approximately A$34.3 million, giving rise to a gross deferred tax liability of approximately A$49.8 million (approximately A$29.1 million net of deferred tax assets). Goodwill is not subject to amortization but is subject to at least an annual impairment analysis, which may result in an impairment charge if the carrying value of the cash-generating unit to which goodwill has been allocated exceeds its fair value. If patents were amortized in equal quarterly amounts over a 12 year period following completion of the merger, the amortization attributable to these items would be approximately A$1.8 million per quarter and A$7.4 million per fiscal year. As a result, purchase accounting treatment of the merger will increase our net loss or decrease our net income in the foreseeable future, which could have a material and adverse effect on the future market value of our ADSs.

We incurred significant costs in connection with the merger.

     We incurred direct transaction costs of approximately US$3.8 million (approximately A$5.2 million) associated with the merger, which are included as a part of the total purchase consideration for accounting purposes. In addition, prior to completing the merger, CDS incurred direct transaction costs for accounting, investment banking and legal services of approximately US$2.4 million (approximately A$3.3 million), which were expensed in the period in which they were incurred. We believe the combined entity may incur charges to operations, which currently are not reasonably estimable, in the quarter in which the merger was completed or the following quarters, to reflect costs associated with integrating the two companies and that such charges may be material.

Regulatory agencies, private parties, state attorneys general and other antitrust authorities may raise challenges to the merger on antitrust grounds.

     We believe that the merger could be completed without making any filings with the Federal Trade Commission, or FTC, the Antitrust Division of the U.S. Department of Justice, or the Antitrust Division, or any other governmental authority whether under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act, or otherwise and without waiting for the expiration of any waiting period requirements. However, the FTC and the Antitrust Division frequently scrutinize the legality under the antitrust laws of transactions like the merger, and at any time after the completion of the merger, the FTC or the Antitrust Division could take any action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking the divestiture of our substantial assets or those of CDS. In addition, certain private parties, as well as state attorneys general and other antitrust authorities, may challenge the transaction under antitrust laws under certain circumstances.

     In addition, the merger may be subject to the antitrust laws of Australia or other foreign jurisdictions. Anti-competitive mergers or acquisitions in Australia are regulated under sections 50 and 50A of the Commonwealth Trade Practices Act, or TPA, which generally prohibits any acquisition of shares or assets which is likely to have the effect of substantially lessening competition in a market in Australia. The Australian antitrust regulator, the Australian Competition and Consumer Commission, or ACCC, may on its own initiative apply to an Australian Court under that law in order to block a merger, or to obtain orders for the divestiture of assets, or for other remedies. A private party may also apply to an Australian Court under that law for a more limited range of remedies.

     There can be no assurance that a challenge to the merger on antitrust grounds will not be made, or, if such a challenge is made, what the result will be.

If CDS’ former stockholders sell substantial amounts of ADSs after the merger, the market price of ADSs may decline.

     The resale by former CDS stockholders of pSivida ADSs after the merger could cause the market price of our ADSs to decline. In connection with the merger, we have issued 16,104,779 ADSs. While those ADSs will not initially be freely tradable, we have agreed to register their resale within six months (subject to certain extensions) for stockholders entering into the registration rights agreement. Therefore, approximately 16,104,779 pSivida ADSs issued in the merger are expected to become freely tradable under U.S. securities laws six months from the closing date of the merger which was December 30, 2005. However, certain shareholders are subject to lock-ups for as long as nine months after the closing date of the merger.

     We may have liability under the U.S. securities laws related to the recent changes to our outstanding convertible note.

     On September 15, 2006, we revised certain terms of the subordinated convertible promissory note that we issued on November 16, 2005. In connection with the amendments, we prepaid US$2.5 million of the outstanding principal of the existing note and granted the holder an additional warrant to purchase 5,700,000 ADSs and a security interest in our current royalties. Because we had earlier filed a registration statement related to the ordinary shares represented by ADSs underlying the original note and the warrant issued with it, the revisions to the note and the issuance of the additional warrant, and our subsequent filing of an amendment to our registration statement to include the shares issuable pursuant thereto, may have resulted in a violation of the federal securities laws.

     If the investor were to bring an action in court successfully making such an argument, we could be required to rescind the modified note and warrants for a period of one year following the date of the violation. In addition, if it is determined that we offered securities without properly registering them under federal or state law, or securing an exemption from registration, regulators could impose monetary fines or other sanctions as provided under these laws.

FORWARD-LOOKING STATEMENTS

     The statements incorporated by reference or contained in this prospectus discuss our future expectations, contain projections of our results of operations or financial condition, and include other forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended. Our actual results may differ materially from those expressed in forward-looking statements made or incorporated by reference in this prospectus. Forward-looking statements that express our beliefs, plans, objectives, assumptions or future events or performance may involve estimates, assumptions, risks and uncertainties. Therefore, our actual results and performance may differ materially from those expressed in the forward-looking statements. Forward-looking statements often, although not always, include words or phrases such as the following: “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “intends,” “plans,” “projection” and “outlook.”

     You should not unduly rely on forward-looking statements contained or incorporated by reference in this prospectus. Various factors discussed in this prospectus, including, but not limited to, all the risks discussed in “Risk Factors” may cause actual results or outcomes to differ materially from those expressed in forward-looking statements. You should read and interpret any forward-looking statements together with these risks.

     Any forward-looking statement speaks only as of the date on which that statement is made. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made.

CAPITALIZATION AND INDEBTEDNESS

     The following table sets forth our capitalization and indebtedness as of July 31, 2006 in accordance with A-IFRS. We have not included an “As Adjusted” column because we will not receive proceeds from the sale of ADSs by the selling shareholders.

		As of
		July 31, 2006
		Actual
		(In Australian Dollars)
Indebtedness
Short-term debt (unsecured, unguaranteed) (1), (2)			10,952,655
Long-term debt (unsecured, unguaranteed) (1), (2)			3,915,212
Total debt			14,867,867
Stockholders’ equity
Share capital			231,827,334
Reserves			(5,015,358	)
Deficit accumulated prior to development stage			(3,813,181	)
Deficit accumulated during development stage			(61,946,598	)
Total stockholders’ equity			161,052,197
Total capitalization and indebtedness in accordance with A-IFRS			175,920,064

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

     On December 30, 2005, we completed the acquisition of 100% of the issued capital of CDS. The acquisition of CDS has been accounted for under the purchase method of accounting.

     The unaudited pro forma consolidated statements of operations for the six months ended December 31, 2005 and the year ended June 30, 2005 are prepared in accordance with US GAAP, and are derived from, and should be read in conjunction with: (i) the historical audited consolidated financial statements of pSivida, which are incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended June 30, 2005, filed with the SEC on January 18, 2006; and (ii) the historical unaudited interim consolidated financial statements of pSivida, which are included elsewhere in this registration statement. Although pSivida and CDS have different fiscal year ends, the historical consolidated financial statements of CDS have been adjusted to reflect the same fiscal year as pSivida.

     The adjustments necessary to fairly present the unaudited pro forma consolidated statements of operations have been made based on available information and assumptions that pSivida’s management believes are reasonable. The unaudited pro forma consolidated statements of operations are for informational purposes only and do not purport to present what pSivida’s results would actually have been had the acquisition actually occurred on the dates presented or to project pSivida’s results of operations for any future period. The unaudited pro forma consolidated statements of operations reflect preliminary estimates of the allocation of the purchase price for the acquisition of CDS that may be adjusted based on the actual outcome of an independent valuation expected to be finalized during the first quarter of the fiscal year ending June 30, 2007.

PSIVIDA LIMITED AND SUBSIDIARIES

Unaudited Pro Forma Consolidated Statement of Operations
Six Months Ended December 31, 2005
(in Australian dollars except number of shares)

		pSivida				CDS
		Historical				Historical				Pro Forma
		(3a)				(3b)				Adjustments								Pro Forma
Revenue:
Revenue, related party			—				446,226				—								446,226
Revenue, other			50,732				197,831				—								248,563
Total revenue			50,732				644,057				—								694,789
Operating expenses:
Research and development			9,058,338				1,312,649				3,685,834				(3e	)			14,135,350
											78,529				(3f	)
Selling, general and administrative			4,369,570				6,117,630				55,450				(3f	)			10,542,650
Write off of in-process research and development			34,281,686				—				—								34,281,686
Foreign exchange gain			(306,841	)			—				—								(306,841	)
Total operating expenses			47,402,753				7,430,279				3,819,813								58,652,845
Loss from operations			(47,352,021	)			(6,786,222	)			(3,819,813	)							(57,958,056	)
Interest and other income (expense), net			(41,424	)			30,178				—								(11,246	)
Loss before income tax benefit			(47,393,445	)			(6,756,044	)			(3,819,813	)							(57,969,302	)
Income tax benefit			2,380,063				—				4,230,343				(3g	)			6,610,406
Net loss			(45,013,382	)			(6,756,044	)			410,530								(51,358,896	)
Accretion of redeemable convertible preferred stock			—				(1,742,780	)			1,742,780				(3h	)			—
Net income (loss) attributable to common stockholders			(45,013,382	)			(8,498,824	)			2,153,310								(51,358,896	)
Basic and diluted loss per common share			(0.20	)			(4.08	)											(0.14	)
Basic and diluted weighted average number of shares			225,327,359				2,083,072								(6	)			376,147,739

See accompanying notes to the unaudited pro forma consolidated statements of operations.

PSIVIDA LIMITED AND SUBSIDIARIES

Unaudited Pro Forma Consolidated Statement of Operations
Year Ended June 30, 2005
(in Australian dollars except number of shares)

		pSivida				CDS
		Historical				Historical				Pro Forma
		(3c)				(3d)				Adjustments								Pro Forma
Revenue:
Revenue, related party			—				12,768,626				—								12,768,626
Revenue, other			161,666				158,385				—								320,051
Total revenue			161,666				12,927,011				—								13,088,677
Operating expenses:
Research and development expense			14,445,241				2,107,953				7,371,668				(3e	)			25,426,549
											1,501,687				(3f	)
Selling, general and administrative			5,320,930				8,242,608				672,769				(3f	)			14,236,307
Foreign currency loss			1,623,484				—				—								1,623,484
Total operating expenses			21,389,655				10,350,561				9,546,124								41,286,340
Income (loss) from operations			(21,227,989	)			2,576,450				(9,546,124	)							(28,197,663	)
Interest and other income (expense), net			667,310				(213,568	)			—								453,742
Income (loss) before income tax benefit			(20,560,679	)			2,362,882				(9,546,124	)							(27,743,921	)
Income tax benefit			3,620,891				—				2,873,297				(3g	)			6,494,188
Net loss attributable to minority interest			378,276				—				—								378,276
Net income (loss)			(16,561,512	)			2,362,882				(6,672,827	)							(20,871,457	)
Accretion of redeemable convertible preferred stock			—				(3,246,135	)			3,246,135				(3h	)			—
Net loss attributable to common stockholders			(16,561,512	)			(883,253	)			(3,426,692	)							(20,871,457	)
Basic and diluted loss per common share			(0.08	)			(0.43	)											(0.06	)
Basic and diluted weighted average number of shares			207,802,540				2,068,990								(6	)			358,622,920

See accompanying notes to the unaudited pro forma consolidated statements of operations.

PSIVIDA LIMITED AND SUBSIDIARIES

Notes to Unaudited Pro Forma Consolidated Financial Statements
(in Australian dollars)

1.		Basis of Presentation
		The unaudited pro forma consolidated statements of operations have been prepared in accordance with US GAAP and are presented in Australian dollars.
2.		Purchase Price Allocation
		The primary reasons for the acquisition of CDS were: CDS’ commercialized products, including Vitrasert® for cytomegalovirus retinitis and the recently launched Retisert™ for uveitis; diversified product portfolio; existing license and development agreements, including those with Bausch & Lomb and Alimera Sciences; and extensive patent portfolio. CDS also could provide a base for us near Boston, Massachusetts which is a biotechnology hub that would allow our further expansion into the US market. In addition, as a result of the acquisition, we will receive royalty income which is expected to contribute significantly to the continued development of the expanded product portfolio. These factors contributed to the purchase price that resulted in recognition of a significant amount of goodwill as further noted below.
		The purchase price of $143,081,155 consists of:

	§		$114,319 cash;
	§		150,820,380 ordinary fully paid shares of pSivida (represented by 15,082,038 ADSs), with an estimated fair value of $130,610,449 ($0.866 per share, represented by US$6.602 per ADS). The fair value of the shares was determined based on the weighted average of the closing share prices of pSivida for the period two days before and two days after October 3, 2005, being the date that the terms of the acquisition were agreed to and announced;
	§		9,016,230 nonvested ordinary shares of pSivida (represented by 901,623 nonvested ADSs), with an estimated fair value of $6,231,034, net of $1,577,021 allocated to unearned compensation based on the portion of the fair value at the consummation date related to the future service (vesting) period. As the holders of the nonvested ADSs have the rights of a normal shareholder, the fair value of these nonvested ADSs was determined based on the fair value of pSivida’s ordinary ADSs as stated above;
	§		1,724,460 share options in pSivida (represented by 172,446 options over ADSs), with an estimated fair value of $876,204; and
	§		direct acquisition costs of $5,249,149.

The purchase price does not include 1,211,180 nonvested ordinary shares (represented by 121,118 nonvested ADSs) issued by pSivida in connection with employee retention agreements for which employee service subsequent to the consummation date of the acquisition is required in order for the shares to vest. As the holders of the nonvested ADSs have the rights of a normal shareholder, the fair value of these nonvested ADSs was determined at the grant date based on the fair value of pSivida’s ordinary ADSs;

A final determination of required purchase accounting adjustments, including the allocation of the purchase price, has not yet been made. Accordingly, the purchase accounting adjustments made in connection with these unaudited pro forma consolidated financial statements are preliminary. The amounts that we may record based on the final assessment and determination of fair values may differ significantly from those based on the preliminary purchase price allocation. In particular, the amounts allocated to intangible assets (being primarily intellectual property in the form of patents acquired), the related deferred tax liability, IPR&D and goodwill may be revised and may ultimately differ from those used in these consolidated financial statements, any of which could have a material impact on the financial position and results of our operations.

PSIVIDA LIMITED AND SUBSIDIARIES

Notes to Unaudited Pro Forma Consolidated Financial Statements
(in Australian dollars)

Following is a preliminary estimate of the allocation of the purchase price:

		Total fair value
		(in Australian dollars)
Cash			228,464
Receivables			460,351
Other			282,588
Patents			88,460,020
In-Process Research and Development			34,281,686
Property, Plant and Equipment			624,035
Payables			(3,549,399	)
Provisions			(621,399	)
Deferred Revenue			(1,826,699	)
Deferred Tax Liability, Net			(14,679,007	)
Total			103,660,640
Purchase price			143,081,155
Goodwill			39,420,515

3.		Pro Forma Adjustments
		Footnotes to the pro forma statements

	(a)		Reflects the historical results of operations of pSivida for the six months ended December 31, 2005 on a U.S. GAAP basis, as restated. Refer to Note 12 to our unaudited interim consolidated financial statements included elsewhere in this registration statement for a description and summary of the significant effects of the restatement.
	(b)		Reflects the historical results of operations of CDS on a US GAAP basis for the period July 1, 2005 to December 29, 2005, derived from internal accounting records. The historical statement of operations data was translated from US dollars to Australian dollars using a weighted average exchange rate of $0.752 for the period July 1, 2005 to December 29, 2005.
	(c)		Reflects the historical results of operations of pSivida for the year ended June 30, 2005 on a US GAAP basis.
	(d)		Reflects the historical results of operations of CDS on a US GAAP basis for the period July 1, 2004 to June 30, 2005, which have been derived by combining the US GAAP results of operations for the year ended December 31, 2004 minus the US GAAP results of operations for the six months to June 30, 2004 plus the US GAAP results of operations for the six months to June 30, 2005. The historical statement of operations data was translated from US dollars to Australian dollars using a weighted average exchange rate of $0.754 for the year ended June 30, 2005. Refer to Note 7 to our unaudited interim consolidated financial statements included elsewhere in this registration statement,
	(e)		Reflects the amortization of the fair value of patents acquired over an estimated useful life of 12 years (see Note 5).
	(f)		Reflects the recognition of compensation cost over the requisite service period for both the 1,211,180 non-vested ordinary shares issued by pSivida in connection with the employee retention agreements and the unearned compensation attributable to the 9,016,230 non-vested ordinary shares issued by pSivida as part of the purchase price. At the date of grant, the individual awards were scheduled to vest over a minimum service period of six months to a maximum service period of 29 months from the acquisition date. In April 2006, the individual awards with six month and 12 month vesting periods were modified pursuant to an agreement between us and the employees to extend the vesting of these awards to periods ranging from 13 to 15 months from the date of the acquisition. The modification is not reflected in the pro forma statements of operations as the modification is not directly attributable to the acquisition.

PSIVIDA LIMITED AND SUBSIDIARIES

Notes to Unaudited Pro Forma Consolidated Financial Statements
(in Australian dollars)

	(g)		Reflects the deferred tax benefit attributable to the reduction of the gross deferred tax liability for the difference between the fair value and tax basis of the acquired patents over the 12 year amortization period, partially offset by deferred tax expense due to a change in the CDS historical valuation allowance as a result of the acquisition, using the CDS combined federal and state statutory tax rate of 40%. There is no impact on current income taxes due to the net operating loss of the combined entity.
	(h)		Reflects the elimination of accretion of the CDS Series A redeemable preferred stock due to the elimination of such stock.

4.		In-process research and development
		As indicated in Note 2, pSivida recorded IPR&D of $34,281,686 in connection with the acquisition. The IPR&D was expensed at the acquisition date since the acquired IPR&D projects had no alternative future use. Such adjustment has been excluded from the pro forma consolidated statement of operations for the year ended June 30, 2005 as the charge is a non-recurring charge directly attributable to the acquisition.
5.		Patents
		As indicated in Note 2, we acquired patents and filed patent applications with respect to multiple aspects of CDS’ technologies, products, and processes, including but not limited to, Vitrasert®, Retisert™, Medidur™, CODRUG™ and AEON.
		In determining the allocation of the purchase price to patents, we only considered patents and patent applications that relate to the Retisert™ for Uveitis product. We determined the estimated fair value of these patents acquired with reference to a discounted cash flow analysis of the Retisert™ product.
		In determining the estimated useful life of the patents acquired to be 12 years, we considered the following attributes described by paragraph 11 of SFAS No. 142, “Goodwill and Other Intangible Assets”, to be key factors :

	§		The patents are currently being commercialized in the form of the Retisert™ for Uveitis product identified above.
	§		The patents acquired related to this product will expire from 12 to 15 years from the time of the acquisition.
	§		Although technological progress may cause some of the existing technology to become commercially obsolete before the expiration of the related patent life, on an overall basis we believe that the products developed using the capitalized intellectual property will continue to be sold over the next 12 years.
	§		The patents do not require any material maintenance expenditure to obtain the expected future cash flows.

		We will evaluate the patents for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
6.		Loss per share
		Pro forma per share data is based on the number of shares of pSivida’s ordinary shares that would have been outstanding had the acquisition of CDS occurred on July 1, 2004. In order to compute the number of ordinary shares used in the calculation of pro forma basic and diluted loss per common share, the number of ordinary shares (represented by ADSs) to be issued by pSivida to former holders of shares in CDS common stock and preferred stock was added to the weighted average number of pSivida ordinary shares outstanding for the six months ended December 31, 2005 and the year ended June 30, 2005. Under the terms of the agreements a total of 150,820,380 ordinary shares (represented by 15,082,038 ADSs) have been issued in exchange for the outstanding CDS common and preferred shares on the date of the acquisition. A reconciliation of shares used to compute historical basic and diluted loss per share to shares used to compute pro forma basic and diluted loss per common share follows:

PSIVIDA LIMITED AND SUBSIDIARIES

Notes to Unaudited Pro Forma Consolidated Financial Statements
(in Australian dollars)

		Six months ended				Year ended June
		December 31, 2005				30, 2005
Ordinary shares used to compute pSivida historical basic and diluted loss per share			225,327,359				207,802,540
Ordinary shares issued to former holders of shares of vested CDS common stock			74,307,640				74,307,640
Ordinary shares issued to former holders of shares of CDS convertible redeemable preferred stock			76,512,740				76,512,740
Ordinary shares used to compute pro forma basic and diluted loss per share			376,147,739				358,622,920

		Securities that could potentially dilute earnings (loss) per share in the future, including the pSivida nonvested ordinary shares, share options, warrants and convertible note, are not included in the computation of pro forma diluted loss per share because the effect would be antidilutive due to the net loss attributable to common stockholders.
7.		CDS historical results of operations
		The following table demonstrates how the historical results of operations of CDS were conformed to pSivida’s fiscal year-end for purposes of the pro forma consolidated statement of operations for the year ended June 30, 2005.

						Six months				Six months				Six months
		Year ended				ended				ended				ended				Year ended
		December				June 30,				December				June 30,				June 30,				Year ended
		31, 2004				2004				31, 2004				2005				2005				June 30,
		CDS				CDS				CDS				CDS				CDS				2005
		Historical				Historical				Historical				Historical				Historical				CDS
		US GAAP				US GAAP				US GAAP				US GAAP				US GAAP				Historical
		US$				US$				US$				US$				US$				US GAAP
		A				B				C=A–B				D				=C+D				A$
Revenue:
Revenue, related party			3,120,086				51,631				3,068,455				6,552,960				9,621,415				12,768,626
Revenue, other			—				—				—				119,346				119,346				158,385
Total revenue			3,120,086				51,631				3,068,455				6,672,306				9,740,761				12,927,011
Operating expenses:
Research and development			3,083,525				1,960,803				1,122,722				465,663				1,588,385				2,107,953
Selling, general and administrative			5,705,148				2,614,520				3,090,628				3,120,341				6,210,969				8,242,608
Total operating expenses			8,788,673				4,575,323				4,213,350				3,586,004				7,799,354				10,350,561
Income (loss) from operations			(5,668,587	)			(4,523,692	)			(1,144,895	)			3,086,302				1,941,407				2,576,450
Interest and other income (expense), net			(206,727	)			(97,507	)			(109,220	)			(49,154	)			(158,374	)			(213,568	)

						Six months				Six months				Six months
		Year ended				ended				ended				ended				Year ended
		December				June 30,				December				June 30,				June 30,				Year ended
		31, 2004				2004				31, 2004				2005				2005				June 30,
		CDS				CDS				CDS				CDS				CDS				2005
		Historical				Historical				Historical				Historical				Historical				CDS
		US GAAP				US GAAP				US GAAP				US GAAP				US GAAP				Historical
		US$				US$				US$				US$				US$				US GAAP
		A				B				C=A–B				D				=C+D				A$
Income (loss) before income tax benefit			(5,875,314	)			(4,621,199	)			(1,254,115	)			3,037,148				1,783,033				2,362,882
Income tax benefit			—				—				—				—				—				—
Net loss attributable to minority interest			—				—				—				—				—				—
Net income (loss)			(5,875,314	)			(4,621,199	)			(1,254,115	)			3,037,148				1,783,033				2,362,882
Accretion of redeemable convertible preferred stock			(2,123,761	)			(947,941	)			(1,175,820	)			(1,270,208	)			(2,446,028	)			(3,246,135	)
Net income (loss) attributable to common stockholders			(7,999,075	)			(5,569,140	)			(2,429,935	)			1,766,940				(662,995	)			(883,253	)
Basic and diluted income (loss) per common share			(3.50	)			(2.83	)			(1.34	)			0.85				(0.32	)			(0.43	)
Basic and diluted weighted average number of shares			2,284,730				1,971,332				1,810,746				2,083,072				2,068,990				2,068,990

SELECTED CONSOLIDATED FINANCIAL DATA

     The following table presents our selected historical consolidated financial data as of the dates and for each of the periods indicated. The information set forth below is not necessarily indicative of future results and should be read in conjunction with (i) the historical audited consolidated financial statements of pSivida, which are incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended June 30, 2005, filed with the SEC on January 18, 2006; and (ii) the historical unaudited interim consolidated financial statements of pSivida, which are included elsewhere in this registration statement.

     We will adopt A-IFRS for the first time in our financial statements for the year ending June 30, 2006, which will include comparative financial statements for the year ended June 30, 2005. AASB 1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards” (“AASB 1”) requires that an entity develop accounting policies based on the standards and related interpretations effective at the reporting date of its first annual A-IFRS financial statements (e.g., June 30, 2006). AASB 1 also requires that those policies be applied as of the date of transition to A-IFRS (e.g., July 1, 2004) and throughout all periods presented in the first A-IFRS financial statements. The selected consolidated financial data as of December 31, 2005 and for the six month periods ended December 31, 2005 and 2004 have been derived from our unaudited interim consolidated financial statements and the notes thereto included elsewhere in this registration statement, which have been prepared in accordance with AASB standards and Urgent Issues Group (“UIG”) interpretations issued and effective, or issued and early-adopted, at June 29, 2006. As a result, the accounting policies used to prepare the unaudited interim consolidated financial statements are subject to change up to the reporting date of our first A-IFRS financial statements. An explanation of how the transition from superseded policies to A-IFRS has affected our financial position, financial performance and cash flows is discussed in Note 9 to the unaudited interim consolidated financial statements. In the opinion of our management, the unaudited interim consolidated financial statements include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

     The selected consolidated financial data as of June 30, 2005 and 2004 and for each of the three years in the period ended June 30, 2005 have been derived from our audited consolidated financial statements and the notes thereto, prepared in accordance with superseded policies (A-GAAP), which are incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended June 30, 2005. The selected consolidated financial data as of June 30, 2003, 2002 and 2001, for the year ended June 30, 2002 and for the period from December 1, 2000 (inception date) to June 30, 2001 have been derived from our audited consolidated financial statements and notes thereto, prepared in accordance with superseded policies (A-GAAP), which are not included in this document.

     A-IFRS and superseded policies (A-GAAP) differ in certain significant respects from U.S. GAAP. Please refer to Note 12 to the unaudited interim consolidated financial statements included elsewhere herein for a description of the differences between A-IFRS and U.S. GAAP as they relate to us, and a reconciliation of net loss and total equity to U.S. GAAP for the periods and as of the dates indicated. Also refer to Note 27 to the audited consolidated financial statements incorporated by reference to our Annual Report on Form 20-F for the fiscal year ended June 30, 2005 for a description of the differences between superseded policies (A-GAAP) and U.S. GAAP as they relate to us, and a reconciliation of net loss and total equity to U.S. GAAP for the periods and as of the dates indicated.

		Six months ended December 31,
		2005				2004
		(In Australian Dollars)
STATEMENT OF OPERATIONS DATA:
A-IFRS (as restated for the six months ended December 31, 2005) (1)
Revenue			296,921				398,501
Loss before income tax			(13,070,400	)			(9,598,661	)
Net loss			(10,702,745	)			(7,330,165	)
Loss per share – basic and diluted			(0.05	)			(0.04	)
U.S. GAAP (as restated for the six months ended December 31, 2005) (2)
Revenue			50,732				13,879
Loss from operations			(47,352,021	)			(10,050,086	)
Net loss			(45,013,382	)			(7,421,294	)
Loss per share – basic and diluted			(0.20	)			(0.04	)

		As of December
		31, 2005
BALANCE SHEET DATA:
A-IFRS (as restated) (1)
Total assets			256,114,314
Net assets			189,230,222
Contributed equity			224,897,860
U.S. GAAP (as restated) (2)
Total assets			240,621,265
Net assets			187,998,912
Contributed equity			263,418,932