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Bontan 3Q 2007 Financials

Bontan Corporation Inc.

Consolidated Financial Statements

For the Nine Months Ended December 31, 2006 and 2005

(Canadian Dollars)

(UNAUDITED – see Notice to Reader dated January 19, 2007)

BONTAN CORPORATION INC.

NOTICE TO READER OF THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying consolidated financial statements for Bontan Corporation Inc. for the nine months ended December 31, 2006 have been prepared by management in accordance with Canadian generally accepted accounting principles, consistently applied. These consolidated financial statements have not been reviewed by the auditors of the Company.

These financial statements are presented on the accrual basis of accounting. Accordingly, a precise determination of many assets and liabilities is dependent upon future events. Therefore, estimates and approximations have been made using careful judgement. Recognizing that the management is responsible for both the integrity and objectivity of the financial statements, management is satisfied that these financial statements have been fairly presented.

Canadian generally accepted accounting principles vary in certain significant respects from accounting principles generally accepted in the United States. Application of accounting principles generally accepted in the United States would have affected results of operations for the nine months ended December 31, 2006 and the shareholders’ equity as at that date to the extent summarised in Note 12 to the consolidated financial statements.

January 19, 2007

Bontan Corporation Inc.

Consolidated Statements of Operations

(Canadian Dollars)

(Unaudited –see Notice to Reader dated January 19, 2007)

	Note	December 31, 2006 (Unaudited)	March 31, 2006 (Audited)
Assets
Current
Cash		$ 2,153,543	$ 3,262,842
Short term investments	3	3,761,220	1,777,921
Deferred stock based compensation	4	41,179	314,208
Prepaid and other receivables		65,352	95,801
		$ 6,021,294	$ 5,450,772
Liabilities
Current
Accounts payable and accrued liabilities		$ 15,414	$ 161,517
Advances from shareholders, non-interest bearing		3,463	3,471
		18,877	164,988
Shareholders' Equity
Capital stock	5	27,354,387	30,585,691
Warrants	6	6,961,152	2,540,608
Contributed surplus		4,069,549	4,069,549
Deficit		(32,382,671)	(31,910,064)
		6,002,417	5,285,784
		$ 6,021,294	$ 5,450,772

Approved by the Board ”Kam Shah” Director ”Dean Bradley” Director

(signed) (signed)

The accompanying notes are an integral part of these financial statements.

Bontan Corporation Inc.

Consolidated Statements of Operations

(Canadian Dollars)

(Unaudited –see Notice to Reader dated January 19, 2007)

	Note	Three months ended		Nine months ended		Three months ended		Nine months ended
		December 31, 2006			December 31, 2005
Income
Gain on sale of interest in oil property		-	-		(371,068)		1,538,937
Realised gain on short term investments		111,089	144,518		179,495		183,432
Interest		18,872	72,331		17,692		20,176
		129,961	216,849		(173,881)		1,742,545
Expenses
Stock based compensation	4	75,009	289,455		211,198		1,851,710
Travel, promotion and consulting		47,858	116,218		88,696		254,786
Shareholders information		35,087	115,068		35,426		141,965
Translation exchange loss (Gain)		(54,151)	96,877		12,610		219,518
Professional fees		14,195	22,565		4,438		40,157
Office and general		11,164	19,365		7,312		19,073
Bank charges and interest		935	13,307		335		3,222
Communication		1,879	6,207		3,429		16,592
Rent		1,350	4,316		1,436		4,326
Interest in gas property written off		21	4,102		(384,748)		3,878,507
Transfer agent fees		(869)	1,976		1,036		6,441
		132,478	689,456		(18,832)		6,436,297
Net loss for period		(2,517)	(472,607)		(155,049)		(4,693,752)

Net loss per share – Basic and diluted	7	(0.00)	(0.02)		(0.01)		(0.32)

The accompanying notes are an integral part of these financial statements.

Bontan Corporation Inc.

Consolidated Statements of Cash Flows

(Canadian Dollars)

(Unaudited –see Notice to Reader dated January 19, 2007)

	Three months ended	Nine months ended	Three months ended	Nine months ended
	December 31, 2006		December 31, 2005
Cash flows from operating activities
Net loss for period	$ (2,517)	$ (472,607)	$ (155,049)	$ (4,693,752)
Interest in gas property written off	21	4,102	(384,748)	3,878,507
Gain on sale of interest in oil properties	-	-	371,068	(1,538,937)
Stock based compensation	75,009	289,455	164,487	1,864,252
Net change in working capital components
Prepaid and other receivable	(1,085)	30,450	(333,254)	(446,200)
Accounts payable and accrued liabilities	(32,511)	(146,103)	58,107	(18,324)
	38,917	(294,703)	(279,389)	(954,454)
Investing activities
Short term Investments	(326,594)	(1,983,299)	(626,256)	(1,244,120)
Disposal of (investment in) interest in oil properties net of direct costs	-	-	8,113	4,065,438
Interest in gas properties	(21)	(4,102)	384,748	(3,661,939)
	(326,615)	(1,987,401)	(233,395)	(840,621)
Financing activities
Net advances from shareholders	141	(8)	-	2,066
Common shares issued	-	1,172,813	211,464	2,315,431
	141	1,172,805	211,464	2,317,497
Increase (decrease) in cash during period	(287,557)	(1,109,299)	(301,320)	522,422
Cash at beginning of period	2,441,100	3,262,842	1,684,072	860,330
Cash at end of period	$ 2,153,543	$ 2,153,543	$ 1,382,752	$ 1,382,752

The accompanying notes are an integral part of these financial statements.

Bontan Corporation Inc.

Consolidated Statement of Shareholders’ Equity

(Canadian Dollars)

(Unaudited –see Notice to Reader dated January 19, 2007)

	Number of Shares	Share Capital	Warrants	Contributed surplus	Accumulated Deficit	Shareholders' Equity(Deficit)
Balance March 31, 2005	12,975,539	28,280,890	-	3,795,078	(27,125,131)	4,950,837
Options exercised	500,000	284,367		-	-	284,367
Value of options exercised transferred		381,308		(381,308)		-
Issued under 2003 Consultant stock compensation plan	196,212	238,390		-	-	238,390
Issued under 2005 Consultant stock compensation plan	1,000,000	327,827		-	-	327,827
Restricted shares issued in settlement of fees	23,500	32,027		-	-	32,027
Warrants exercised	2,162,452	2,256,738		-	-	2,256,738
Issued under private placement	3,900,000	1,139,146		-	-	1,139,146
Existing warrants revalued	-	(254,120)	254,120	-	-	-
Warrants issued under private placement	-	(2,286,488)	2,286,488			-
Subscribed and paid for under private placement but issued subsequent to the balance sheet date	2,000,000	583,550				583,550
Finder fee		(397,944)				(397,944)
Options granted				655,779		655,779
Net loss	-	-		-	(4,784,933)	(4,784,933)
Balance March 31, 2006	22,757,703	$ 30,585,691	$ 2,540,608	$ 4,069,549	$ (31,910,064)	$ 5,285,784
Issued under 2003 Consultant stock compensation plan	20,000	14,832				14,832
Issued under private placement	4,500,000	1,303,126				1,303,126
Warrants issued under private placement		(3,810,814)	3,810,814			-
Finder fee		(740,043)	609,730			(130,313)
Net loss for period					(378,651)	(378,651)
Balance June 30, 2006	27,277,703	$ 27,352,792	$ 6,961,152	$ 4,069,549	$ (32,288,715)	$ 6,094,778
Issued under 2003 Consultant stock compensation plan	22,500	7,575				7,575
Net loss for period					(91,439)	(91,439)
Balance September 30, 2006	27,300,203	27,360,367	6,961,152	4,069,549	(32,380,154)	6,010,914
Shares cancelled	(20,000)	(5,980)				(5,980)
Net loss for period					(2,517)	(2,517)
Balance December 31, 2006	27,280,203	27,354,387	6,961,152	4,069,549	(32,382,671)	6,002,417

The accompanying notes are an integral part of these financial statements.

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

June 30, 2006 and 2005

(Unaudited –see Notice to Reader dated January 19, 2007)

1. NATURE OF OPERATIONS

Bontan Corporation Inc. (“the Company”) is a diversified natural resource company that invests in major oil and gas exploration and exploitation projects in countries around the globe through its subsidiary by acquiring joint venture, indirect participation interest and working interest in those projects.

The company focuses on projects where the other project partners have proven experience in oil and gas exploration, development and distribution.

2. ACCOUNTING PRINCIPLES AND USE OF ESTIMATES

These unaudited interim financial statements have been prepared on the same basis as the audited financial statements of the Company for the year ended March 31, 2006 and include all adjustments necessary for the fair statement of results of the interim periods.

These interim consolidated financial statements should be read in conjunction with the annual audited financial statements for the year ended March 31, 2006, and the summary of significant accounting policies included therein.

3. SHORT TERM INVESTMENTS

Short-term investments comprise marketable securities. The quoted market value of the securities on hand as at December 31, 2006 was $ 4,327,687 resulting in an unrealised gain of $566,467 which has not been accounted for according to the stated accounting policy.

Included in the short-term investments as at December 31, 2006 are:

50,000 preference shares held in a private corporation for a cost of US$50,000. The market value of these shares as at December 31, 2006 was not available and was therefore considered to be nil.

500,000 Class A shares held in a private corporation for a cost of US$50,000. The market value of these shares as at December 31, 2006 was not available and was therefore considered to be nil.

The quoted market value of the securities on hand as at December 31, 2005 was $1,787,222 resulting in an unrealised gain of $466,715 which was not accounted for according to the stated accounting policy.

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

June 30, 2006 and 2005

(Unaudited –see Notice to Reader dated January 19, 2007)

4. DEFERRED STOCK BASED COMPENSATION

Deferred stock option compensation relates to the fair value of shares and options issued under the Company’s Stock compensation and Option Plans to consultants for services that will be performed during the period subsequent to the balance sheet date. Changes during the period were as follows:

	Balance at April 1, 2006	Deferred during nine months to September 30, 2006	Returned for cancellation (Note 5(b)(iv))	Expensed during nine months to September 30, 2006	Balance at December 31, 2006
Options	$ -	$ -		$ -	$ -
Stocks	314,208	22,406	(5,980)	(289,455)	41,179
	$ 314,208	$ 22,406	(5,980)	$ (289,455)	$ 41,179

	Balance at April 1, 2005	Deferred during nine months to December 31, 2005	Expensed during nine months to December 31, 2005	Balance at December 31, 2005
Options	$ 1,145,152	-	$ (1,145,152)	$ -
Stocks	587,777	212,342	(706,558)	93,561
	$ 1,732,929	212,342	$ (1,851,710)	$ 93,561

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

June 30, 2006 and 2005

(Unaudited –see Notice to Reader dated January 19, 2007)

5. CAPITAL STOCK

(a)

Authorized

Unlimited number of common shares

(b)

Issued

		December 31, 2006		March 31, 2006
		Common		Common
		Shares	Amount	Shares	Amount
Beginning of year		22,757,703	$ 30,585,691	12,975,539	$ 28,280,890
Issued under a private placement	(i)	4,500,000	1,303,126	3,900,000	1,139,146
Subscribed under private placement			-	2,000,000	583,550
Warrants issued	Note 6	-	(3,810,814)	-	(2,540,608)
Expenses relating to private placement	(ii)	-	(740,043)	-	(397,944)
Restricted shares issued in settlement of fee				23,500	32,027
Warrants exercised				2,162,452	2,256,738
Issued under 2003 Consultant Stock Compensation Plan	(iii)	42,500	22,407	196,212	238,390
Issued under 2005 Consultant Stock Compensation Plan		-	-	1,000,000	327,827
Issued under 2005 Consultant Stock Compensation Plan returned for cancellation	(iv)	(20,000)	(5,980)
Options exercised		-	-	500,000	665,675
		27,280,203	$ 27,354,387	22,757,703	$ 30,585,691

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

June 30, 2006 and 2005

(Unaudited –see Notice to Reader dated January 19, 2007)

5. CAPITAL STOCK (b) – Continued…….

On February 24, 2006, the Company reached an agreement with certain accredited investors for a private placement of 10.4 million Units at US$0.25 per Unit for gross proceeds of US$2.6 million. Each Unit includes one common share and one common share purchase warrant. Each warrant entitles its holder to acquire one common share of the company at a price of US$0.35 within twenty-four months of the date of issuance of the Unit. Private placement was closed on April 16, 2006. The number of Units subscribed under the private placement between April 1, 2006 and the closing date was 4.5 million resulting in issuance of equal number of common shares.

The 10.4 million shares issued under this private placement were registered with the US Securities and Exchange Commission on November 30, 2006 and are therefore freely tradable.

Refer to Note 6 regarding the details of the warrants issued and their valuation.

ii)

Expenses relating to private placement relate to finder fee payable to Current Capital Corp., a related corporation, at the rate of 10% of the proceeds. Finder fee includes cash fee of $130,313 at 10% of the private placement proceeds of $1,303,126 received during the period and 1,040,000 warrants at 10% of the total number of Units at 10.4 million issued under the private placement. The warrants were issued on the closing date. Each warrant can be exercised to acquire one common share of the company at an exercise price of US$0.35 within 24 months of the date of its issuance. The warrants were valued at $609,730 as explained in Note 6.

iii)

42,500 shares were issued under 2003 Consultant Stock Compensation Plan to Jeffrey Robinson; brother of Mr. Terence Robinson, the key consultant. The shares were issued for various services provided under consulting contract and valued at the fair market value of shares on the date of issue. The consulting contract with Mr. Jeffrey Robinson expired on July 30, 2006 and has not been renewed.

iv)

On October 16, 2006, one of the non executive directors to whom 20,000 common shares of the Company were issued under 2005 Consultant Stock compensation Plan returned the shares for cancellation and was paid $4,059 (US$3,600) as fee for his services as chairman of the audit committee and $1,577 (US$1,400) as reimbursement towards expenses like printing, mailing, courier etc. incurred by him in the performance of his duties as chairman of the audit committee. The shares were cancelled on the same date.

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

June 30, 2006 and 2005

(Unaudited –see Notice to Reader dated January 19, 2007)

6. WARRANTS

		December 31, 2006		March 31, 2006
		(Unaudited)		(Audited)
		# of warrants	Fair value	# of warrants	Fair value
Issued and outstanding at beginning of period		5,667,410	2,540,608	8,879,571
Issued during period	i	6,500,000	3,810,814	3,900,000	2,286,488
Issued in settlement of finders fee	ii	1,040,000	609,730
Issued previously being revalued			-		254,120
Exercised during period		-		(2,162,452)
Expired during period		(45,450)		(4,949,709)
Issued and outstanding at end of year		13,161,960	$6,961,152	5,667,410	$2,540,608

(i)

The company issued 6.5 million warrants under a 2006 private placement. 2 million warrants relating to Units subscribed and paid for prior to March 31, 2006 and the balance of 4.5 million relating to Units subscribed during the current period as explained in Note 5(b)(i). These warrants are convertible into equal number of common shares at an exercise price of US$0.35 per warrant and expiry within two years of their issue. As at December 31, 2006, none of the warrants were exercised or expired.

The fair value of these warrants has been estimated using a Black-Scholes option price model with the following assumptions:

Risk free interest rate

Expected dividend

nil

Expected volatility

130%

Expected life

30 days

Market price

US$0.67

The amount of $3,810,814 has been accounted for as a reduction of the value of the shares issued.

(ii)

On April 16, 2006, the Company issued 1,040,000 warrants to Current Capital Corp., a related party as part of the finder’s fee in connection with a private placement as explained in Note 5(b)(ii). The warrants are convertible into equal number of common shares at an exercise price of US$0.35 per warrant and expiry within two years of their issue.

The fair value of these warrants has been estimated using a Black-Scholes option price model with the assumptions detailed in 6(i) above. The amount of $609,730 has been accounted for as a finder’s fee.

The shares issuable upon exercise of these warrants were registered with the US Securities and Exchange Commission on November 30, 2006 and will therefore be freely tradable when issued.

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

June 30, 2006 and 2005

(Unaudited –see Notice to Reader dated January 19, 2007)

7. LOSS PER SHARE

Loss per share is calculated on the weighted average number of common shares outstanding during the period, which were 27,280,203 shares for the three months ended December 31, 2006 and 27,281,314 for the nine months ended on that date. (15,781,385 for three months ended December 31, 2005 and 14,622,240 for nine months ended December 31, 2005).

The Company had approximately 13.2 million warrants and 4.8 million options which were not exercised as at December 31, 2006. Inclusion of these warrants and options in the computation of diluted loss per share would have an anti-dilutive effect on loss per share and are therefore excluded from the computation. Consequently, there is no difference between loss per share and diluted loss per share.

8. COMMITMENTS AND CONTINGENT LIABILITIES

(a)

The Company entered into media relations and investor relations contracts with Current Capital Corp., a shareholder corporation, effective July 1, 2004 initially for a period of one year and renewed automatically unless cancelled in writing by a 30-day notice for a total monthly fee of US$10,000.00

(b)

The Company entered into a new consulting contract with Mr. Kam Shah, the Chief Executive Officer and Chief Financial Officer on April 1, 2005 for a five-year term up to March 31, 2010. The fee for each of the years is to be decided at the board meeting after the end of the third quarter of the calendar year. Fee for the calendar year ending December 31, 2006 was settled by issuance of 288,000 common shares under 2005 Consultant stock compensation plan. The fee for the calendar year ending December 31, 2007 has not yet been decided. Further, the contract provides for a lump sum compensation of US$250,000 for early termination of the contract without cause. The contract also provides for entitlement to stock compensation and stock options under appropriate plans as may be decided by the board of directors from time to time.

(c)

The Company entered into a consulting contract with Mr. Terence Robinson, the Chief Executive Officer on April 1, 2003 for a six-year term up to March 31, 2009. The contract provides for a monthly fee of $10,000 inclusive of taxes plus reimbursement of expenses and a lump sum compensation of $250,000 for early termination of the contract without cause. Mr. Robinson resigned as Chief Executive Officer effective May 17, 2004 but continued as Consultant under the same terms and conditions. Fee for the year ended December 31, 2006 was settled by issuance of 480,000 common shares under 2005 Consultant stock compensation plan. Fee for the year ending December 31, 2007 has not yet been agreed.

(d)

On January 18, 2006 the Board extended Mr. John Robinson’s contract for another year to June 30, 2007 and issued 179,048 common shares under the 2005 Consultant stock compensation plan. Mr. John Robinson is a brother of Mr. Terence Robinson, the former Chief Executive Officer and currently a key consultant with the Company. Mr. John Robinson is sole owner and President of Current Capital Corp., a firm with which the Company has a media relations contract (See 8(a)). Mr. Robinson provides services that include reviewing, analysing and monitoring the oil and gas projects that the Company may participate in from time to time.

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

June 30, 2006 and 2005

(Unaudited –see Notice to Reader dated January 19, 2007)

9. RELATED PARTY TRANSACTIONS

Transactions with related parties are incurred in the normal course of business and are measured at the exchange amount. Related party transactions and balances have been listed below, unless they have been disclosed elsewhere in the financial statements. The amounts are for the nine months ended December 31, 2006 with comparatives for the same period in fiscal 2005:

(a)

Included in shareholders information expense is $101,132 (2005: $108,991) to Current Capital Corp, (CCC) for media relations services. CCC is a shareholder corporation. Its sole director of the Company, Mr. John Robinson, provides consulting services to the Company and a director of the Company provides accounting services as a consultant.

(b)

CCC charged $4,316 for rent, telephone, consultants’ fees and other office expenses (2005: $26,394).

(c)

Finders fee of $740,043 (2005: $225,674 in connection with warrants exercised) was payable to CCC in connection with the private placement. The fee included cash fee of $130,313 at the rate of 10% of the proceeds from the private placement plus 1,040,000 warrants valued at $609,730 using a Black-Scholes option price model, at 10% of the number of Units subscribed and paid for.

(d)

Included in professional and consulting fees are fees of $69,069 (2005: $3,016 paid in cash) paid to directors of the Company in the form of shares under Plans and $3,600 in cash and $107,640 (2005: $nil) paid to a former director, who is now a key consultant, for consulting services in the form of shares under Plans.

(e)

Business expenses of $7,752 (2005: $13,382) were reimbursed to a director of the corporation and $73,485 (2005: $123,306) to a former director who provides consulting services to the Company.

(f)

Payable includes $5,665 (2005: $7,536) due to CCC, $2,317 (2005: $41,291) due to a former director who provides consulting services to the Company and $1,292 (2005: $251) due to a director.

(g)

Interest income includes $1,398 (2005: $nil) representing interest received from Chief Executive Officer on loan of $25,000 repaid by him during the quarter ended December 31, 2006.

10. SEGMENTED INFORMATION

As at December 31, 2006 and 2005, the Company had only one major business segment:

Energy sector: This segment includes the Company’s acquisition of interests in joint ventures and projects relating to exploration and commercial drilling of oil and gas and related products.

The accounting policies of the segments are same as those described in Note 2 of the audited consolidated financial statements for the year ended March 31, 2006.

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

June 30, 2006 and 2005

(Unaudited –see Notice to Reader dated January 19, 2007)

10. SEGMENTED INFORMATION - Continued

Geographic Information

The Company operates from one location in Canada. Its assets are located as follows:

	December 31, 2006	March 31, 2006	December 31, 2005

Canada	$ 6,015,466	$ 5,432,531	$ 2,883,547
USA	5,828	18,241	386,431

	$ 6,021,294	$ 5,450,772	$ 3,269,978

11. FINANCIAL INSTRUMENTS

The fair value for all financial assets and liabilities are considered to approximate their carrying values due to their short-term nature.

12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

These financial statements have been prepared in accordance with generally accepted accounting principles in Canada (“Canadian GAAP”). Material variations in the accounting principles, practices and methods used in preparing these consolidated financial statements from principles, practices and methods used in the United States “US GAAP”) and in SEC Regulation S-X are described and quantified below.

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

June 30, 2005 and 2004

(Unaudited –see Notice to Reader dated January 19, 2007)

12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - Continued

	December 31, 2006			March 31, 2006
	Balance under Canadian GAAP	Adjustment	Balance under US GAAP	Balance under Canadian GAAP	Adjustment	Balance under US GAAP
Balance Sheets

Current assets	$ 6,021,294	$ 566,467	$ 6,587,761	$ 5,450,772	$ 746,928	$ 6,197,700
Total assets	$ 6,021,294	$ 566,467	$ 6,587,761	$ 5,450,772	$ 746,928	$ 6,197,700

Current Liabilities	18,877		18,877	164,988		164,988
Capital stock	27,354,387		27,354,387	30,585,691		30,585,691
Warrants	6,961,152		6,961,152	2,540,608		2,540,608
Accumulated other comprehensive income		1,034,221	1,034,221		564,631	564,631
Contributed surplus	4,069,549		4,069,549	4,069,549		4,069,549
Deficit	(32,382,671)	(467,754)	(32,850,425)	(31,910,064)	182,297	(31,727,767)
Liabilities and shareholders' equity	$ 6,021,294	$ 566,467	$ 6,587,761	$ 5,450,772	$ 746,928	$ 6,197,700

The impact of significant US GAAP variations on the Consolidated Statement of Operations is as follows:

Nine months ended December 31	2006	2005
Net Loss for period, Canadian GAAP	(472,607)	(4,538,703)
Reclassification of exchange loss (gain) on period end translation of foreign currency items and balances (ii)	96,877	206,908
Loss for year US GAAP	(375,730)	(4,331,795)
Reclassification of exchange gain (loss) on period end translation of foreign currency items and balances (ii)	(96,877)	(206,908)
Unrealised gain on short term investments (i)	566,467	45,284
Comprehensive loss for year, US GAAP	93,860	(4,493,419)
Basic and diluted loss per share, US GAAP	(0.01)	(0.31)

There was no impact of the above differences between Canadian GAAP and US GAAP on the consolidated statements of cash flows.

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

June 30, 2005 and 2004

(Unaudited –see Notice to Reader dated January 19, 2007)

12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES – Continued

(i) Short-term Marketable securities

In accordance with Canadian GAAP, short-term marketable securities are carried at the lower of aggregate cost and current market values, with unrealized losses being included in the determination of net income (loss) for the year. Statement of Financial Accounting Standard (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, requires that equity securities that have readily determinable fair values be classified as either available-for-sale or trading securities, and that they be reported at fair market values. For available-for-sale securities, unrealized gains or losses are to be reported as other comprehensive income, a separate component of shareholders’ equity, until realized.

(ii)

Exchange gains or losses on period end translation of foreign currency items

Under the Canadian GAAP, these items are part of the net income or loss for period. However, under SFAS No. 130 “reporting Comprehensive Income”, such gains or losses are to be reported as other comprehensive income or loss, a separate component of shareholders’ equity. Accordingly, these items were eliminated from computation of net loss for period under US GAAP and included in the computation of Comprehensive loss for period.

New accounting pronouncements

The following were new accounting developments in the US standards that would affect the results of operations or financial position of the Company in addition to those detailed in the audited consolidated financial statements for the year ended March 31, 2006.

In September 2006, FASB issued Standard 157 ‘Fair Value Measurements’. FAS 157 provides enhanced guidance for using fair values to measure assets and liabilities and applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. FAS 157 does not expand the use of fair values in any new circumstances. FAS 157 is effective for fiscal years beginning after November 15, 2007.

The Company has not yet determined the effect of future implementation of this new interpretation on its financial statements.

In September 2006, FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R). This Statement applies to employers that sponsor single-employer defined benefit pension and other postretirement plans.

The requirement to recognize the funded status of a benefit plan and the disclosure requirements for entities with publicly traded equity securities are effective as of the end of the fiscal year ending after December 15, 2006.

Bontan Corporation Inc.

Notes to Consolidated Financial Statements

(Canadian Dollars)

June 30, 2005 and 2004

(Unaudited –see Notice to Reader dated January 19, 2007)

12. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES – Continued

The Company currently does not have any defined benefit plan or any other postretirement plans. The Company will therefore determine the effect of future implementation of these new FAS, if and when it introduces any postretirement plans.

In September 2006, the Securities and Exchange Commission released SAB No. 108 regarding the effects of prior year misstatements in considering current year misstatements for the purpose of a materiality assessment. The opinion in SAB 108 is that in the case of an error that has occurred and been immaterial in a number of previous years, the cumulative effect should be considered in assessing the materiality of the error in the current year. If the cumulative effect of the error is material, then the current year statements, as well as prior year statements should be restated. In the case of restated prior year statements, previously filed reports do not need to be amended, if the error was considered immaterial to previous year’s financial statements. However the statements should be amended the next time they are filed. The effects of this guidance should be applied cumulatively to fiscal years ending March 31, 2007 onw ards. Additional disclosure should be made regarding any cumulative adjustments made in the current year financial statements. The Company does not believe the adoption of this SAB will have significant impact on the Company’s consolidated financial statements.

13. SIGNIFICANT POST BALANCE SHEET EVENT

On January 16, 2007, the Company registered 2007 Consultant Stock Compensation Plan with US Securities and Exchange Commission. The Company registered 1.5 million common shares under this Plan to be offered to consultants, directors and employees in lieu of fees for services rendered or to be rendered.

Converted by EDGARwiz

BONTAN CORPORATION INC.

NINE MONTHS ENDED DECEMBER 31, 2006

MANAGEMENT’S DISCUSSION AND ANALYSIS

Prepared as at January 19, 2007

Index

Overview	3
Summary of results	3
Number of common shares, options and warrants	4

Business environment Risk factors	5 5
Forward looking statements	5
Business plan	6

Results of operations	6

Liquidity and Capital Resources	12
Working capital	12
Operating cash flow	12
Investment cash flows	12
Financing cash flows	13

Key contractual obligations	13

Off balance sheet arrangements	13

Transactions with related parties	13

Financial and derivative instruments	14

Critical accounting estimates	14

Evaluation of disclosure controls and procedures	15

Legal Proceedings	15

Current Outlook	15

Public securities filing	16

Management Discussion and Analysis

The following discussion and analysis by management of the financial condition and financial results for Bontan Corporation Inc. for the third quarter ended December 31, 2006 should be read in conjunction with the unaudited Consolidated Financial Statements for the nine months ended December 31, 2006, unaudited Consolidated Financial Statements and Management Discussion and Analysis for the three months ended June 30, 2006 and six months ended September 30, 2006 and the audited Consolidated Financial Statements and Management Discussion and Analysis for the year ended March 31, 2006. The financial statements and the financial information herein have been prepared in accordance with generally accepted accounting principles in Canada. Reference is made to Financial Statement Notes for a discussion of the material differences between Canadian GAAP and U.S. GAAP, and their effect on the Company's financial statements.

This management discussion and analysis is prepared by management as at January 19, 2007. The Company’s auditors have not reviewed it.

In this report, the words “us”, “our”, “the Company” and “Bontan” have the same meaning unless otherwise stated and refer to Bontan Corporation Inc. and its subsidiaries.

Overview

Summary of Results

During the quarter ended December 31, 2006, the management continued to review projects involving participation in exploration of oil or gas or both. Several proposals were received involving participation in oil or gas exploration projects during the quarter under review. We short listed one oil exploration project that met our criteria and subjected it to our detailed due diligence. This involved technical review by an independent geologist and/or engineering firm on our behalf. Unfortunately, our due diligence provided negative results and further negotiations were discontinued in respect of the proposal. As a result, at the end of the quarter, the Company had no exploration projects and had no proven reserves of oil or gas.

Meanwhile, the surplus cash on hand continued to be invested in short-term marketable securities due to positive results and cash flow achieved to date from such investments.

The following table summarizes financial information for the 3rd quarter ended December 31, 2006 and the preceding seven quarters: (All amounts in ‘000 CDN$ except Net income (loss) per share, which are actual amounts).

Quarters ended	Dec. 31, 2006	Sept. 30, 2006	June30, 2006	March 31, 2006	Dec. 31, 2005	Sept. 30, 2005	June 30, 2005	March 31, 2005
Other Income	130	89	(2)	116	(174)	1,914	2	241
Income from operations	-	-	-	116	(174)	1,914	2	258
Net loss from continuing operations	(3)	(91)	(379)	(91)	(155)	(3,148)	(1,391)	(4,200)
Loss from discontinued operations	-	-	-	-	-	-	-	2
Net income(loss) per share - basic and diluted	(0.00)	(0.01)	(0.00)	(0.01)	(0.21)	(0.11)	(0.40)	(0.01)

Comments on significant quarterly results:

Quarter ended September 30, 2005

Revenue mainly comprised gain on sale of indirect participation interest in oil exploration project in Papua New Guinea, 33% due to realised gain on disposal of short term investments of the surplus funds on hand and the balance consisted of interest earned primarily on the escrow account balance relating to gas project in Louisiana.

The expenses mainly related to the write off of working interest in gas exploration project in Louisiana, 30% ($2 million) of the expenses comprised value of shares and options issued to consultants and directors under the Company’s various Plans.

Quarter ended March 31, 2005

Revenue was mainly relating to the gain from disposal of shares in Interoil Corporation received by the Company in exchange for the reduction in its indirect participation interest in the oil exploration project in Papua New Guinea from .88% to .75%. Substantial part of the loss and contributed surplus for fiscal 2005 are attributable to the accounting for options granted to various consultants during 2005 under the Company’s two option plans for services.

Number of common shares, options and warrants

These are as follows:

	As at December 31, 2006	As at January 19, 2007
Shares issued and outstanding	27,280,203	27,280,203
Warrants issued and outstanding ( a)	13,161,960	13,161,960
Options granted but not yet exercised (b)	4,795,000	4,795,000

(a)

Warrants are convertible into equal number of common shares of the Company within two years of their issuance, at an exercise prices ranging from US$ 1 per warrant to US$0.35 as follows:

Dec. 31, 2006 Jan. 19, 2007

Exercise price

Expiry date

----------------No. of warrants----------

US$1.00

March 31, 2007

1,721,960

1,767,410

US$0.35

March-April, 2007

11,440,000

(b)

Options are exercisable into equal number of common shares at an average exercise price of US$0.48 and have a weighted average remaining contractual life of approximately 4 years.

Business Environment

Risk factors

Please refer to the Management discussion and analysis for the fiscal 2006 for detailed information as the economic and industry factors that are substantially unchanged. In addition, however, we believe the following risks are particularly relevant to our current fiscal year operations:

We are in the process of seeking oil and gas opportunities and currently do not own any interests or properties.

Currently, we do not own any interest in any oil or gas project or any natural resource project. We are assessing various opportunities, none of which may meet our eligibility requirements. Consequently, we may not own any interest for an indeterminate amount of time. As a result, we will use our cash resources to pay for expenses and costs we incur in our efforts to identify appropriate opportunities as well as for our standard operating costs.

Our short term investments are susceptible to market fluctuations and other risks.

We have about $6,000,000 in cash ($2.2 million) and marketable securities ($3.8 million) as of December 31, 2006. Our marketable securities are primarily securities of publicly held Canadian corporations in the resource sector. The value of these securities is subject to market fluctuations as well as industry risk and the specific risks of each particular issuer. We may lose some of our original investment in the event that an investment does not perform as anticipated.

Forward looking statements

Certain statements contained in this report are forward-looking statements as defined in the U.S. Federal Securities Laws. All statements, other than statements of historical facts, included herein or incorporated by reference herein, including without limitation, statements regarding our business strategy, plans and objectives of management for future operations and those statements preceded by, followed by or that otherwise include the words “believe”, “expects”, “anticipates”, “intends”, “estimates” or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that such forward looking statements will prove to be correct.

Each forward-looking statement reflects our current view of future events and is subject to risks, uncertainties and other factors that could cause actual results to differ materially from any results expressed or implied by our forward-looking statements.

Risks and uncertainties include, but are not limited to:

Our lack of substantial operating history;

The success of the exploration prospects, in which we have interests;

Uninsured risks;

The impact of competition;

The enforceability of legal rights;

The volatility of oil and gas prices;

Weather and unforeseen operating hazards;

Important factors that could cause the actual results to differ materially from our expectations are disclosed in more detail set forth under the heading “Risk Factors” in herein. Our forward-looking statements are expressly qualified in their entirety by this cautionary statement.

The exploration projects in which we hold interests currently have no reserves as defined in Canadian National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). All information contained herein regarding resources is references to undiscovered resources under NI 51-101, whether stated or not.

Business plan

Our long-term business plan continues to be focused on becoming a diversified natural resource company that invests in major oil and gas exploration prospects. Through our wholly owned subsidiaries, we will continue to seek highly visible opportunities in countries around the globe with a history of natural resource production that offer exciting and attractive propositions. We will seek to minimize risk by bringing in either joint venture, carried or working interest partners, depending on the size and scale of the project.

It is our current belief that oil and gas exploration is a high priority all over the world and especially in North America. Higher price levels for both these natural resources which have occurred over the past twelve months encourage new drilling activities. Our past experience with our two oil and gas projects enables us to more efficiently select and evaluate potential exploration projects in the oil and gas sector than in the other resource sectors. During the past several months, we have received without solicitation opportunities to participate in oil and gas exploration projects as a result of our past involvement in similar projects.

Results of operations

Three months ended December 31	2006	2005
	in 000' CDN $	in 000' CDN $
Income	130	(174)
Expenses	(180)	19
Net loss for year	(91)	(155)
Deficit at end of period	(32,383)	(31,819)

Overview

The following were the key events in the three months ended December 31, 2006:

The company received several exploration participation proposals, of which it carried out detailed due diligence on one oil project proposal but eventually decided against participating in it due to unsatisfactory results of the due diligence.

During the quarter, we also initiated preparation of a prospectus and registration statement in Form F-3 for submission to the US Securities and Exchange Commission in respect of shares issued and issuable under warrants issued under a private placement completed in April 2006. The prospectus became effective on November 30, 2006.

During the quarter, the Directors approved a new plan – 2007 Consultants Stock Compensation Plan covering 1.5 million common shares of the company for issuance to consultants in settlement of their fees for services to be rendered during 2007. The Plan was formally filed with a registration statement Form S-8 with the US Securities and Exchange Commission and became effective on January 16, 2007.

The surplus funds continued to be gainfully invested in short-term marketable securities. The market value of cash and marketable securities at December 31, 2006 went up to $6.5 million from $6.3 million as at September 30, 2006.

The following were the key activities in the quarter ended December 31, 2005:

Drilling on the Gas exploration project in the State of Louisiana, in which the Company held 49% working interest, was completed in October 2005 and the project operators concluded that the quality of gas found was not commercially exploitable and that the well should be abandoned and plugged. The Company was aware of this situation while preparing its second quarter financials and had therefore written off its investment of approximately $4.3 million as at September 30, 2005. However, in December 2005, the Company was informed of a surplus fund with the project operator, which was refunded in January 2006. Accordingly, a credit of approximately $380,000 was accounted for and corresponding receivable set up at December 31, 2005.

At the end of the previous quarter, the Company held approximately $2 million in cash. Management decided to invest these funds into short-term investments rather than leave them with banks at minimum interest. This strategy enabled the Company to earn approximately $650,000 in realised and unrealised gain from such investments and increase the overall liquid assets from $2.4 million at September 30, 2005 to $3.2 million at December 31, 2005 at market value – about 33% increase in three months. This is further discussed later in this report.

1.1 million options valued at $345,030 were granted to Mr. Terence Robinson on December 5, 2005 under a Plan that was registered on the same date. These options were for his services in connection with sale of Indirect Participation Interest in an oil exploration project in Papua New Guinea in September 2005. The options are exercisable to acquire equal number of Common shares of the Company at an exercise price of US$0.50 per share. The option value was reduced from the gain on sale of the said project.

Income

Three months ended December 31	2006	2005
	(In 000$)

Gain on sale of interest in oil property	-	(371)
Realised gain on short term investments	111	179
Interest	19	18
	$ 130	$ (174)

Realised gain on short term investments reflects gains on disposal of marketable securities. The Company decided to place its surplus funds, while awaiting appropriate exploration projects, in short term marketable securities with brokerage firms. During the quarter ended December 31, 2006, the Company invested an average of about $3.5 million in several securities trading primarily on Canadian stock exchanges. The Company also had an unrealized gain of $566,467 on the portfolio on investments held at December 31, 2007. This gain was not recognized according to the current accounting policy of the Company.

Income during the quarter ended December 31, 2006 was mainly earned on funds held with brokerage firms.

The main item of income for the three months ended December 31, 2005 was a net gain of $179,495 realized on sale of short-term investments. As stated earlier, the Company had a surplus cash of around $2 million at the beginning of the quarter. The management decided to invest the funds in short-term marketable securities rather than leave it in a bank with a view to significantly increasing the returns. The decision was mainly influenced by the availability of services of Mr. Terence Robinson and Mr. John Robinson, two of the consultants with extensive investment experience. The strategy resulted in the net gain on sale. In addition, there was an unrealized gain on the short-term investments on hand at December 31, 2005 of approximately $470,000 which has not been recorded as per the existing accounting policy of the Company.

The Company also earned an interest of $17,692 – which mainly related to the interest earned on the funds remitted to the project operator of the Louisiana gas project. These funds were held in an escrow account until spent and were subjected to interest.

The income from the above two sources was off set by a charge of $371,068 during the quarter ended December 31, 2005. The charge related mainly to the value of option allowed to Mr. Terence Robinson for services rendered in connection with the sale of indirect participation interest in an oil exploration project in Papua New Guinea (IPI interest) in September 2005. The charge was an off set against the gain on sale of IPI interest recorded in the previous quarter.

The net result of the above three items was a negative income of $173,881 for the quarter.

Expenses

The overall analysis of the expenses is as follows:

Three months ended December 31	2006	2005
	In 000$
Operating expenses	$ 111	$ 142
Interest in gas property written off	-	(385)
Stock based compensation	75	211
Translation exchange loss (gain)	(54)	13
	$ 132	$ (19)

Operating Expenses

Travel, promotion and consulting

Three months ended December 31	2006	2005
	In 000$
Travel, meals and entertainment	$ 25	$ 75
Consulting	17	8
Promotion	6	6
	$ 48	$ 89

% of operating expenses	43%	63%

Travel, meals and entertainment

These expenses were substantially incurred by the key consultant, Mr. Terence Robinson, in club fees and traveling to US in connection with meeting prospective investors and exploring project developers for potential investment leads. Mr. Robinson’s extensive network in the business and finance sectors in North America and Europe has been the main reason for the company’s success in raising funds, in attracting qualified consultants with minimum cash outlay and in securing suitable projects.

Expenses in the third quarter ended December 31, 2005 include travel and hotel costs for Mr. Kam Shah, the CEO and Mr. Terence Robinson in relation to their visits to New York to attend a presentation to a group of financial analysts in October 2005 and other visits to meet with potential business connections including a visit to New York to meet a Mongolian delegation regarding exploration opportunity in Mongolia and promoters in Florida regarding gas exploration opportunities in Colorado and surrounding areas. The significant increase in expenses reflected increased promotional activities in October and prior period while increased search for more projects in the later part of the quarter.

Consulting costs

Consulting fees during the quarter ended December 31, 2006 mainly consisted of cash fees paid to administrative assistant and US$3,000 paid to Mr. Dean Bradley, an independent director for services rendered as chairman of our audit committee. Both Mr. Shah, the CEO and CFO, and Mr. Robinson, the key consultant, accepted shares in lieu of their fees to minimize the cash outlay of the Company.

The Company prefers to settle the fees of their consultants in shares and options in order to retain its funds for business investments purposes.

Consulting fee for the quarter ended December 31, 2005 includes the cash fees paid to administrative assistant.

Promotion costs

Promotion costs during the quarter ended December 31, 2006 consisted of costs of entertaining prospective and existing investors and business prospects.

Main promotional costs during the quarter ended December 31, 2005 included a fee of approximately US$5,000 paid to an independent agency providing news dissemination services.

Other operating costs

Three months ended December 31	2006	2005
	In 000$
Shareholder information	33	35
Other	30	18
	$ 63	53
% of operating costs	57%	37%

Shareholder information

Shareholder information costs comprise investor and media relations fee, costs of holding annual general meeting of the shareholders and various regulatory filing fees.

Major cost for the three months ended December 31, 2006 and 2005 consisted of media relation and investor relation services provided by Current Capital Corp. under contracts dated July 1, 2004, which are being renewed automatically unless canceled in writing by a 30-day notice for a total monthly fee of US$10,000. Current Capital Corp. is a related party.

Other operating costs

These costs include rent, professional fee, telephone, Internet, transfer agents fees and other general and administration costs.

Major part of the other operating costs was professional fees which were approximately $14,000 for the quarter ended December 31, 2006 and included mostly legal fee in connection with review and filing of a prospectus and registration statement for the shares and warrants issued under the last private placement closed in April 2006. The professional fee also included a fee of approximately $2,600 for preparation and filing of the US tax returns

Professional fees for the quarter ended December 31, 2005 were approximately $4,400 and consisted mainly of legal fees.

Interest in Gas Property written off (Quarter ended December 31, 2005)

During the second quarter ended September 30, 2005, the Company fully wrote off its interest in a gas exploration project due to a dry well. However, an analysis of final account was carried out by the operators in December 2005 and a refund of US$332,271 including interest of US$13,708 was determined as payable to the Company. The amount that pertained to the refund of the project costs was accounted as recovery of the project costs written off earlier.

Stock based compensation

Three months ended December 31	2006	2005
	In 000$
Stock compensation	75	204
Options granted	-	7
	75	211
Deferred stock compensation	41	94

Stock based compensation is made up of the Company’s common shares and options to acquire the Company’s common shares being issued to various consultants and directors of the Company for services provided. The Company used this method of payment mainly to conserve its cash flow for business investments purposes. This method also allows the Company to avail the services of consultants with specialized skills and knowledge in the business activities of the Company without having to deplete its limited cash flow.

During the quarter ended December 31, 2006, no new Plans were created. However, as at that date, the company still had 2005 Stock Option Plan covering one million stock options. No options have been allotted under this Plan.

Value of stock compensation expensed related to the part of the deferred stock compensation, which mainly related to the services rendered during the quarter by three consultants, including directors.

During the quarter ended December 31, 2005, stock compensation was paid to six consultants and option to one consultant. The company registered one option plan on December 5, 2005 for options granted to Mr. Robinson, the key consultant, for services rendered in connection with the sale of Papua New Guinea oil interest. The value of the options granted, $345,050 was expensed against the gain on sale of the said oil interest.

Translation Exchange Loss (Gain)

The Company’s reporting unit of currency is Canadian dollar. At the end of the quarter, all transactions in US dollar and other currencies are translated using either average rate for the period or the rates on the dates of transactions depending upon the nature of the transactions. All assets and liabilities in non-Canadian currencies are translated at either the closing rate or rates on the dates of the underlying transactions again depending upon the nature of these balances.

During the quarter ended December 31, 2006, the Company had a gain of $54,151 mainly due to decline in value of the Canadian dollar compared to the US dollar. The exchange rate between these currencies declined from US$1 for CDN$1.12 at September 30, 2006 to CDN$1.17 at December 31, 2006. The Company held approximately US$1.5 million in short-term investments and cash at the end of the quarter which resulted in higher value than the recorded value in Canadian currency.

During the quarter ended December 31, 2005, the Canadian dollar got marginally stronger compared to the US Dollar – the exchange rate moving from CDN$1.18 per US$1 at September 30, 2005 to CDN$1.16 at December 31, 2005. The Company held approximately $1.5 million in US Dollars at that date. Thus, there was a small exchange loss of $12,610 on period end translation.

Liquidity and Capital Resources

Working Capital

As at December 31, 2006, the Company had a net working capital of approximately $6.0 million compared to a working capital of $5.3 million as at March 31, 2006.

Almost entire working capital at December 31, 2006 was in the form of cash and short term investments compared to 96% - $5 million at March 31, 2006.

Improvement in the liquid working capital was due to receipt of funds from private placement, which closed in April 2006.

Operating cash flow

During the quarter ended December 31, 2006, operating activities generated a net cash inflow of $38,917 compared to the cash outflows of $279,389 during the quarter ended September 30, 2005.

Main inflow during the current quarter was from surplus of the proceeds from sale of short-term investments over their costs and interest earned on funds with brokerage firms.

Investment cash flows

A net sum of approximately $327,000 was invested in short-term marketable securities through various brokerage firms during the three months ended December 31, 2006.

The funds required were primarily met from the operating cash flow surplus and the available cash.

The following is a summary of short term investments activities and profile for the quarter ended December 31, 2006:

The Company has accounts with two brokerage firms in Canada. However, almost all of its transactions are done through only one brokerage firm, which held $ 2 million in cash and $3.4 million in marketable securities of about twenty Canadian public companies as at December 31, 2006. About 47% or $1.6 million of the funds are invested in marketable securities of one Canadian public company whose market value was $2.3 million as at December 31, 2006.

During the three months ended December 31, 2005, approximately $626,000 was invested in short-term marketable securities, while approximately $ $385,000 was recovered from the gas project where our interest was fully written off in the previous quarter. The balance of the cash flow requirement was met from the proceeds of warrants exercised.

Financing cash flows

During the three months ended December 31, 2006, there was no new financing activity.

During the three months ended December 31, 2005, 200,000 warrants were exercised for the equal number of common shares for which the Company received approximately $211,000 net of direct expenses, which consisted of finder’s fee at 10% of the amount collected.

Key Contractual obligations

These are detailed in Note 8 – commitments and contingent liabilities to the consolidated unaudited financial statements for the nine months ended December 31, 2006.

The contractual obligations mainly comprised investor and media relation contract and consulting contracts with various key consultants and related parties.

The company has no contractual or any other obligations relating to the interest it held in oil and gas projects in the past.

Off balance sheet arrangements

At December 31, 2006 and 2005, the Company did not have any off balance sheet arrangements, including any relationships with unconsolidated entities or financial partnership to enhance perceived liquidity.

Transactions with related parties

Transactions with related parties are incurred in the normal course of business and are measured at the exchange amount. Related party transactions and balances have been listed in Note 9 of the consolidated unaudited financial statements for the nine months ended December 31, 2006.

Given below is background information on some of the key related parties and transactions with them:

Current Capital Corp. (CCC). CCC is a related party in following ways:

Director/President of CCC, Mr. John Robinson, is a consultant with Bontan.

CCC provides media and investor relation services to Bontan under a consulting contract.

Chief Executive and Financial Officer of Bontan is providing services to CCC as CFO.

CCC and John Robinson hold significant shares in Bontan.

Bontan shares premises with CCC for which CCC charges on a quarterly basis for the rent, phone and utilities based on the actual costs and area occupied. Charges from CCC reflect actual costs and do not include any mark ups.

Another charge from CCC relates to the investor relations and media relations services provided under a contract. The charge is a fixed sum of US$10,000 per month plus taxes.

CCC also charged a finder’s fee at the rate of 10% of the gross money raised for the Company through issuance of shares and warrants under private placements. In addition, it also received 1,040,000 warrants at 10% of the Units issued.

Mr. Kam Shah is a Director of the Company and also provides services as Chief Executive and Financial Officer under a five-year contract. The compensation is decided by the board on an annual basis and is usually given in the form of shares and options.

Mr. Terence Robinson used to be providing services as Chief Executive Officer until May 2004 and was also a Director until that date. Currently, Mr. Robinson is providing services as a key consultant under a five-year contract. His services include sourcing of new business opportunities on behalf of the company using his extensive network of business contacts. His remuneration is paid mostly in shares on an annual basis.

Financial and derivative Instruments

Except for the balances with a brokerage firm, none of our financial assets were interest bearing as at September 30, 2006. The balances with the brokerage firm earned average interest rate of 3% per annum (2005: Average of 2% per annum).

Credit risk is minimised as all cash amounts are held with large bank and brokerage firm which have acceptable credit ratings determined by a recognised rating agency.

Short-term investments represent funds and shares held for disposal within the next twelve months. As at December 31, 2006, the fair market value of all investments on hand, which basically represented the quoted market price as at December 31, 2006, was approximately $4.3 million compared to the carrying value of $3.8 million. The carrying value of all other cash and cash equivalent, trade receivables, all other current assets, accounts payable and accrued liabilities, and amounts due to related parties’ approximate fair values due to the short-term maturities of these instruments.

The Company never entered into and did not have at the end of the quarters ended December 31, 2006 and 2005, any foreign currency hedge contracts.

Critical accounting estimates

The Company’s unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Canada. The significant accounting policies used by the Company are same as those disclosed in note 2 to the consolidated financial statements for the year ended March 31, 2006. Certain accounting policies require that the management make appropriate decisions with respect to estimates and assumptions that affect the assets, liabilities, revenue and expenses reported by the Company. The Company’s management continually reviews its estimates based on new information, which may result in changes to current estimated amounts.

There were no major changes in the accounting policies during the quarter ended December 31, 2006.

Evaluation of Disclosure Control and Procedures

The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Our management, including our Chief Executive Officer, who also acts as Chief Financial Officer, together with the members of our audit committee, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer has concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

There were no changes to our internal control over financial reporting since March 31, 2006 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

Legal Proceedings

We are not a party to any legal proceedings nor is our property the subject of any legal proceedings. Our management is not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our property. No director, Officer or affiliate of ours is (i) a party to adverse to us in any legal proceedings, or (ii) has an adverse interest to us in any legal proceedings. Management is not aware of nay other legal proceedings pending or that have been threatened against us or our property.

Current Outlook

While the management is anxious to secure oil and gas exploration projects as soon as possible so that the company can have its source of revenue and the shareholders, who have so patiently waited and even participated in funding from time to time, can see growth in the value of their investments. The management is equally cognizant of the failure of the first test well in the Louisiana gas project to produce commercial gas which resulted in a write off of over US$3 million.

Financial loss suffered as a result of a dry well was mostly off set by the significant profit made on the disposal of our interest in the oil exploration project and on disposal of short-term marketable securities.

The management has however learned some valuable lessons from this experience and has accordingly reviewed its project selection criteria to ensure that the future projects that we participate in have better chances of success.

Therefore, our current business model, based on our experience with resource projects handled over the recent past and our assumptions set forth above, envisions the following key features:

We will focus only on oil and gas exploration projects;

Preference will be given to projects that have proven but undeveloped reserves rather than probable or potential reserves;

We will invest our resources in project which involves multiple well exploration potentials;

Preference will be given to explorations involving shallow wells (up to 7,500 ft.) rather than deep wells (over 15,000 ft.);

Preference will be given to project with other experienced partners who are involved in the project;

We will attempt to allocate 100% of our cash or liquidity resources to more than one project, rather than one project.

The Company currently has approximately $6 million in cash and short-term securities and has no significant debt. Our cash and short term securities holdings at market value are over $7 million on the date of this report.

We remain extremely bullish on the natural resource sector and at this time are evaluating new oil and gas drilling prospects as well as joint venture opportunities. We are very confident that we will identify an appropriate opportunity relatively quickly.

Public securities filings

Additional information, including the Company’s annual information form in the Form 20-F annual report, is filed with the Canadian Securities Administrators at www.Sedar.com and with the United States Securities and Exchange Commission and can be viewed at www.Edgar.com.

Form 52-109FT2 – Certification of Interim Filings during Transition Period

Form 52-109F2 – Certification of Interim Filings

I, Kam Shah, Chief Financial Officer of Bontan Corporation Inc., certify that:

I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings) of Bontan Corporation Inc. (the Issuer) for the interim period ended December 31, 2006;

Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made with respect to the period covered by the interim filings;

Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the interim filings;

The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures for the issuer, and we have designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared.

Date: January 19, 2007

/s/__Kam Shah____________

Kam Shah

Chief Financial Officer

Form 52-109FT2 – Certification of Interim Filings during Transition Period

Form 52-109F2 – Certification of Interim Filings

I, Kam Shah, Chief Executive Officer of Bontan Corporation Inc., certify that:

Date: January 19, 2007

/s/__Kam Shah____________

Kam Shah

Chief Executive Officer