**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 (Mark
        One)
 
 x  QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 for
        the quarterly period ended April 30, 2006
 
 OR
  oTRANSITION
          REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
          1934
 
 Commission
        file number 1-8696
  
  
 **COMPETITIVE
        TECHNOLOGIES, INC.**
 (Exact
        name of registrant as specified in its charter)
 *www.competitivetech.net*
 
 Delaware
              
              36-2664428(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)
  
 1960
                  Bronson RoadFairfield,
                  Connecticut
              
              06824(Address
                  of principal executive offices)
              
              (Zip
                  code)
  (203)
        255-6044
 
 (Registrant's
        telephone number, including area code)
 
 N/A
 
 Former
        name, former address and former fiscal year, if changed since last
        report)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes x  No
o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act).
  Large
        accelerated filer o
        Accelerated filer x
        Non-accelerated filer o
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in rule
        12b-2 of the Exchange Act). Yes o  No
x
 
 The
        number of shares of the registrant’s common stock outstanding as of June 2, 2006
        was 7,891,940 shares.
  
 
 **COMPETITIVE
        TECHNOLOGIES, INC.**
 
 **INDEX
        TO QUARTERLY REPORT ON FORM 10-Q**
 **PART
                  I. FINANCIAL INFORMATION**
                
                **Page
                    No.**Item
                    1.
                Condensed
                    Consolidated Financial Statements (Unaudited)Condensed
                    Consolidated Balance Sheets at April 30, 2006, and July 31,
                    2005
                
                3Condensed
                    Consolidated Statements of Operations for the three months ended
                    April 30,
                    2006 and 2005
                
                4Condensed
                    Consolidated Statements of Operations for the nine months ended
                    April 30,
                    2006 and 2005
                
                5Condensed
                    Consolidated Statement of Comprehensive Loss and Changes in Shareholders’
                    Interest for the nine months ended April 30, 2006
                
                6Condensed
                    Consolidated Statements of Cash Flows for the nine months ended
                    April 30,
                    2006 and 2005
                
                7Notes
                    to Condensed Consolidated Financial Statements
                
                8
                    -
                    20Item
                    2.
                Management's
                    Discussion and Analysis of Financial Condition and Results of
                    Operations
                
                20
                    - 31Item
                    3.
                Quantitative
                    and Qualitative Disclosures About Market Risk
                
                31
                    - 32Item
                    4.
                Controls
                    and Procedures
                
                32**PART
                  II. OTHER INFORMATION**Item
                    1.
                Legal
                    Proceedings
                
                32Item
                    2.
                Unregistered
                    Sales of Equity Securities and Use of Proceeds
                
                33Item
                    4.
                Submission
                    of Matters to a Vote of Security Holders
                
                33Item
                    6.
                Exhibits
                
                33Signatures
                
                
                34
  Page
            2
 
 **PART
        I. FINANCIAL INFORMATION**
 
 **Item
        1.**  **Condensed
        Consolidated Financial Statements**
 
 COMPETITIVE
        TECHNOLOGIES, INC.
 Condensed
        Consolidated Balance Sheets





**April
                  30,**
                  **2006**(Unaudited)
            
            July
                  31,
                  2005***ASSETS**Current
                assets:Cash
                and cash equivalents
            
            **$**
            **14,460,351**
            
            $
            14,279,547Receivables
            
            
            **4,054,105**
            
            
            4,086,241Equity
                securities
            
            
            **368,220**
            
            
            -Prepaid
                expenses and other current assets
            
            
            **243,753**
            
            
            272,345Total
                current assets
            
            
            **19,126,429**
            
            
            18,638,133Equity
                securities
            
            
            **625,261**
            
            
            558,299Prepaid
                royalties
            
            
            **250,000**
            
            
            75,000Deferred
                equity financing costs, net
            
            
            **-**
            
            
            96,227Intangible
                assets, net
            
            
            **24,248**
            
            
            38,571Property
                and equipment, net
            
            
            **64,821**
            
            
            34,863TOTAL
                ASSETS
            
            **$**
            **20,090,759**
            
            $
            19,441,093**LIABILITIES
                AND SHAREHOLDERS' INTEREST**Current
                liabilities:Accounts
                payable
            
            **$**
            **810,811**
            
            $
            642,868Accrued
                expenses and other liabilities
            
            
            **3,686,958**
            
            
            4,690,344Total
                current liabilities
            
            
            **4,497,769**
            
            
            5,333,212Noncurrent
                royalties payable
            
            
            **1,168,862**
            
            
            **-**Commitments
                and contingenciesShareholders'
                interest:5%
                preferred stock, $25 par value, 35,920shares
                authorized, 2,427 shares issued and outstanding
            
            
            **60,675**
            
            
            60,675Common
                stock, $.01 par value, 20,000,00shares
                authorized, 7,787,669 and 7,326,749shares
                issued, respectively
            
            
            **77,876**
            
            
            73,267Capital
                in excess of par value
            
            
            **33,485,746**
            
            
            31,285,496Accumulated
                deficit
            
            
            **(19,072,372**
            **)**
            
            (17,044,174
            )Accumulated
                other comprehensive loss
            
            
            **(127,797**
            **)**
            
            (267,383
            )Total
                shareholders' interest
            
            
            **14,424,128**
            
            
            14,107,881TOTAL
                  LIABILITIES AND SHAREHOLDERS'INTEREST
            
            **$**
            **20,090,759**
            
            $
            19,441,093




*See
        accompanying notes*
  **
        Balances were derived from the July 31, 2005 audited balance
        sheet.*
  Page
            3
 PART
          I. FINANCIAL INFORMATION (Continued)
 
 COMPETITIVE
          TECHNOLOGIES, INC.
 Condensed
          Consolidated Statements of Operations
 (Unaudited)
  Three
                    months ended
                  April
                      30,**2006**
                
                2005**Revenues**Retained
                    royalties
                
                **$**
                **1,043,112**
                
                $
                2,078,013Royalty
                    legal award
                
                
                **-**
                
                
                221,121Dividend
                    received
                
                
                **-**
                
                
                104,360Investment
                    income
                
                
                **155,490**
                
                
                92,931Other
                    income
                
                
                **-**
                
                
                36,411**1,198,602**
                
                
                2,532,836**Expenses**Personnel
                      and other direct expensesrelating
                      to revenues
                
                
                **1,353,549**
                
                
                1,169,779General
                    and administrative expenses
                
                
                **623,875**
                
                
                1,029,759Patent
                      enforcement expenses, net of reimbursements
                
                
                **275,218**
                
                
                7,131**2,252,642**
                
                
                2,206,669Income
                    (loss) before income taxes
                
                
                **(1,054,040**
                **)**
                
                326,167Benefit
                    for income taxes
                
                
                **-**
                
                
                (33,735
                )**Net
                    income (loss)**
                
                **$**
                **(1,054,040**
                **)**
                $
                359,902Net
                    income (loss) per common share:Basic
                
                **$**
                **(0.14**
                **)**
                $
                0.05Diluted
                
                **$**
                **(0.14**
                **)**
                $
                0.05Weighted
                    average number of common shares
                    outstanding:Basic
                
                
                **7,710,134**
                
                
                6,867,774Diluted
                
                
                **7,710,134**
                
                
                7,685,033
  *See
          accompanying notes*
  Page
              4


PART
        I. FINANCIAL INFORMATION (Continued)
 
 COMPETITIVE
        TECHNOLOGIES, INC.
 Condensed
        Consolidated Statements of Operations
 (Unaudited)




Nine
                  months ended
                  April
                    30,**2006**
              
              2005**Revenues**Retained
                  royalties
              
              **$**
              **3,433,181**
              
              $
              9,520,370Royalty
                  legal awards
              
              
              **-**
              
              
              1,036,613Dividends
                  received
              
              
              **-**
              
              
              783,509Investment
                  income
              
              
              **390,984**
              
              
              305,776Other
                  income
              
              
              **12,000**
              
              
              100,972**3,836,165**
              
              
              11,747,240**Expenses**Personnel
                    and other direct expensesrelating
                    to revenues
              
              
              **3,347,758**
              
              
              4,288,985General
                  and administrative expenses
              
              
              **2,154,874**
              
              
              1,844,630Patent
                    enforcement expenses, net of reimbursements
              
              
              **373,812**
              
              
              291,555**5,876,444**
              
              
              6,425,170Income
                  (loss) before income taxes
              
              
              **(2,040,279**
              **)**
              
              5,322,070Provision
                  (benefit) for income taxes
              
              
              **(12,081**
              **)**
              
              37,000**Net
                  income (loss)**
              
              **$**
              **(2,028,198**
              **)**
              $
              5,285,070Net
                  income (loss) per common share:Basic
              
              **$**
              **(0.27**
              **)**
              $
              0.80Diluted
              
              **$**
              **(0.27**
              **)**
              $
              0.73Weighted
                    average number of commonshares outstanding:Basic
              
              
              **7,565,254**
              
              
              6,631,269Diluted
              
              
              **7,565,254**
              
              
              7,241,606




*See
        accompanying notes*
  Page
            5




PART
        I. FINANCIAL INFORMATION (Continued)
 
 COMPETITIVE
        TECHNOLOGIES, INC.
 Condensed
        Consolidated Statement of Comprehensive Loss and Changes in Shareholders'
        Interest
 For
        the
        nine months ended April 30, 2006
 (Unaudited)


**Preferred
                  Stock**
              
              **Common
                  Stock****Shares**issued
                    andoutstanding
              
              **Amount**
              
              **Shares**issued
              
              **Amount**
              
              **Capital**in
                    excess ofpar
                  value
              
              **Accumulated**Deficit
              
              **Accumulated**othercomprehensiveloss
              
              **Total**Shareholders'InterestBalance
                  - July 31, 2005
              
              
              2,427
              
              $
              60,675
              
              
              7,326,749
              
              $
              73,267
              
              $
              31,285,496
              
              $
              (17,044,174
              )
              $
              (267,383
              )
              $
              14,107,881Comprehensive
                  loss:Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,028,198
              )
              
              -
              
              
              (2,028,198
              )Net
                      unrealized holding loss on securities held
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (99,444
              )
              
              (99,444
              )Unrealized
                    foreign currency translation gain
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,906
              
              
              6,906Unrealized
                    gain from reversal of sale restriction discount
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              232,124
              
              
              232,124Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,888,612
              )Compensation
                    expense related to common stock options
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              337,417
              
              
              -
              
              
              -
              
              
              337,417Exercise
                  of common stock options
              
              
              -
              
              
              -
              
              
              6,250
              
              
              62
              
              
              16,203
              
              
              -
              
              
              -
              
              
              16,265Stock
                  issued under 401(k) Plan
              
              
              -
              
              
              -
              
              
              15,943
              
              
              159
              
              
              99,803
              
              
              -
              
              
              -
              
              
              99,962Stock
                  issued to Directors
              
              
              -
              
              
              -
              
              
              12,500
              
              
              125
              
              
              49,875
              
              
              -
              
              
              -
              
              
              50,000Sales
                    and issuances of stock pursuant to equity financing
              
              
              -
              
              
              -
              
              
              426,227
              
              
              4,263
              
              
              1,793,179
              
              
              -
              
              
              -
              
              
              1,797,442Amortization
                    of deferred equity financing costs
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (96,227
              )
              
              -
              
              
              -
              
              
              (96,227
              )**Balance
                  - April 30, 2006**
              
              
              **2,427**
              
              **$**
              **60,675**
              
              
              **7,787,669**
              
              **$**
              **77,876**
              
              **$**
              **33,485,746**
              
              **$**
              **(19,072,372**
              **)**
              **$**
              **(127,797**
              **)**
              **$**
              **14,424,128**





*See
        accompanying notes*


Page
          6




PART
        I. FINANCIAL INFORMATION (Continued)
 
 COMPETITIVE
        TECHNOLOGIES, INC.
 Condensed
        Consolidated Statements of Cash Flows
 (Unaudited)
 Nine
                          months ended April 30,**2006**
                
                2005**Cash
                    flows from operating activities:**Net
                    income (loss)
                
                **$**
                **(2,028,198**
                **)**
                $
                5,285,070Noncash
                    and other expenses (income)included
                    in net income (loss):Depreciation
                    and amortization
                
                
                **33,583**
                
                
                25,475Share-based
                    compensation - stock options
                
                
                **337,417**
                
                
                170,350Stock
                    compensation accrued
                
                
                **131,250**
                
                
                131,250Stock
                    dividend received
                
                
                **-**
                
                
                (679,149
                )Accrued
                    dividend receivable
                
                
                **-**
                
                
                (104,360
                )Other
                
                
                **-**
                
                
                (44,341
                )(Increase)
                    decrease in assets:Receivables
                
                
                **(182,093**
                **)**
                
                (2,237,093
                )Prepaid
                    expenses and other current assets
                
                
                **(146,408**
                **)**
                
                39,020Increase
                    in liabilities:Accounts
                      payable and accrued expenses and other liabilities, and Noncurrent
                      royalties payable
                
                
                **270,764**
                
                
                5,713,180Net
                    cash provided by (used in) operating activities
                
                
                **(1,583,685**
                **)**
                
                8,299,402**Cash
                    flows from investing activities:**Purchases
                    of property and equipment
                
                
                **(49,218**
                **)**
                
                (31,178
                )Collection
                    on Unilens receivable, net
                
                
                **-**
                
                
                527,532Net
                    cash provided by (used in) investing activities
                
                
                **(49,218**
                **)**
                
                496,354**Cash
                    flows from financing activities:**Proceeds
                    from exercises of stock options
                
                
                **16,265**
                
                
                977,817Payment
                    of deferred equity financing costs
                
                
                **-**
                
                
                (45,645
                )Proceeds
                    from sales of common stock
                
                
                **1,797,442**
                
                
                2,517,539Net
                    cash provided by financing activities
                
                
                **1,813,707**
                
                
                3,449,711Net
                    increase in cash and cash equivalents
                
                
                **180,804**
                
                
                12,245,467Cash
                    and cash equivalents at beginning of period
                
                
                **14,279,547**
                
                
                4,309,680Cash
                    and cash equivalents at end of period
                
                **$**
                **14,460,351**
                
                $
                16,555,147




*See
        accompanying notes*
  Page
            7


PART
      I.
      FINANCIAL INFORMATION (Continued)





COMPETITIVE
      TECHNOLOGIES, INC.





Notes
      to
      Condensed Consolidated Financial Statements


(Unaudited)





1. Basis
      of Presentation





The
      interim condensed consolidated financial information presented in the
      accompanying condensed consolidated financial statements and notes hereto is
      unaudited.





Competitive
      Technologies, Inc. (“CTT”) and its majority owned subsidiary (collectively, “we”
or “us”) provide patent and technology licensing and commercialization services
      throughout the world (with concentrations in the U.S.A. and Asia) with respect
      to a broad range of life, electronic, physical, and nano science technologies
      originally invented by various individuals, corporations and universities.
      We
      are compensated for our services primarily by sharing in the license and royalty
      fees we generate from the successful licensing of our clients’ technologies. The
      condensed consolidated financial statements include the accounts of CTT and
      its
      subsidiary. Intercompany accounts and transactions have been eliminated in
      consolidation. Certain prior year amounts in these notes were reclassified
      to
      conform to the current year’s presentation.





We
      believe that we have made all adjustments, primarily normal and recurring
      adjustments, which are necessary to present the unaudited condensed consolidated
      financial statements fairly in conformity with accounting principles generally
      accepted in the United States of America. The results for the three and nine
      months ended April 30, 2006, are not necessarily indicative of the results
      that
      can be expected for the full year.





You
      should read the interim unaudited condensed consolidated financial statements
      and notes thereto, as well as the accompanying Management's Discussion and
      Analysis of Financial Condition and Results of Operations, in conjunction with
      our Annual Report on Form 10-K for the year ended July 31, 2005.





2. Stock-Based
      Compensation





Effective
      August 1, 2005 (the beginning of our current fiscal year), we adopted Financial
      Accounting Standards Board Statement No. 123(R), “Share-Based Payment” (“FAS
      123R”), which establishes the accounting required for share-based compensation. FAS 123R
      requires us to measure the fair value at the grant date, as defined in FAS
      123R,
      of all share-based awards and recognize such value as compensation expense
      in
      our statements of operations over the requisite service (vesting) period. We
      elected to adopt FAS 123R using a modified prospective application, whereby
      the
      provisions of the statement were applied going forward only from the date of
      adoption to new (issued subsequent to July 31, 2005) stock option awards, and
      for the portion of any previously issued and outstanding stock option award
      which vests after the date of adoption. Thus, we recognize as expense the fair
      value of stock options issued prior to August 1, 2005, but vesting after August
      1, 2005, over the remaining vesting period. In addition, compensation expense
      must be recognized for any awards modified, repurchased, or cancelled after
      the
      date of adoption. Under the modified prospective application, no restatement
      of
      previously issued results was required. We use the Black-Scholes option-pricing
      model to measure fair value, which is the same method we used in prior years
      for
      disclosure purposes.




Page
          8




The
      adoption of this pronouncement has resulted in our recognizing expense related
      to stock options granted to employees, the expense of which is included in
      personnel and other direct expenses related to revenues, and stock options
      granted to our directors, the expense of which is included in general
      and administrative expenses.




Pursuant
      to our 1997 Employees’ Stock Option Plan, as amended (the “1997 Plan”), either
      incentive common stock options or non-qualified common  stock option
      awards may be granted to employees. The stock options must be granted at
      exercise prices not less than 100% of the fair market value of our common stock
      at the grant date. The Compensation Committee or the Board of Directors
      determines vesting provisions when stock options are granted, and stock options
      granted generally vest over three or four years. The maximum life of stock
      options granted under this plan is ten years from the grant date. For the three
      and nine months ended April 30, 2006, we recognized $70,245 and $193,549,
      respectively, of compensation expense (included in personnel and other direct
      expenses relating to revenues), from stock options vesting during the period,
      without any associated income tax benefit. In addition, during the three and
      nine months ended April 30, 2006 and 2005, we recognized $9,887 and $97,750,
      respectively, of compensation expense related to modifications made to extend
      the vesting and exercise terms of awards previously granted to former
      employees.




Pursuant
      to our Directors Stock Option Plan, we grant each non-employee director 10,000
      fully vested, non-qualified common stock options when the individual first
      is
      elected a director, and 10,000 more common stock options on the first business
      day of January thereafter, as long as the individual remains a director. All
      such stock options are granted at exercise prices not less than 100% of the
      fair
      market value of our common stock at the grant date. The maximum life of stock
      options granted under this plan is ten years from the grant date. Since these
      stock options are fully vested upon grant, the full fair value of these stock
      options is recorded as expense at the grant date. For the three and nine months
      ended April 30, 2006, we recognized $3,981 and $133,981, respectively, of
      compensation expense (included in general and administrative expenses), from
      stock options issued and vesting during the period, without any associated
      income tax benefit. During the three and nine months ended April 30, 2005,
      we
      recognized $72,600 of compensation expense related to modifications made to
      extend the exercise term of awards previously granted to a former director.




The
      following assumptions were used to estimate the fair value of stock options
      granted for the periods indicated using the Black-Scholes option valuation
      method:




Three
                Months Ended April 30,
            
            Nine
                Months Ended April 30,**2006**
            
            
            2005
            
            **2006**
            
            2005Dividend
                yield (1)
            
            
            **0.0%**
            
            
            
            —
            
            
            **0.0%**
            
            
            0.0%Expected
                volatility (2)
            
            
            **79.83%**
            
            
            
            —
            
            
            **80.21%**
            
            
            75.77%Risk
                free interest rate (3)
            
            
            **4.62%**
            
            
            
            —
            
            
            **4.08%**
            
            
            3.60%Expected
                lives (in years) (2)
            
            
            **5**
            
            
            
            —
            
            
            **5**
            
            
            5





(1)
            We
                have not paid cash dividends on our common stock since 1981, and
                we
                currently do not have any plans to pay or declare any cash dividends.
                Consequently, we used an expected dividend rate of zero for the
                valuations.


(2)
            Estimated
                based on our historical experience. Volatility was based on historical
                experience over a period equivalent to the expected life in
                years.


(3)
            Based
                on the U.S. Treasury constant maturity interest rate with a term
                consistent with the expected life of the options
                granted.




Page
          9




For
      options granted during the three and nine months ended April 30, 2006, as
      required by FAS 123R, we estimated the impact of forfeitures based on our
      historical experience with previously granted stock options, and considered
      the
      impact of the forfeitures when determining the amount of expense to record
      for
      the stock options granted. For stock options issued prior to the adoption of
      FAS
      123R, forfeitures are recognized when the stock option is actually forfeited.
      During the three months ended April 30, 2006 the weighted average fair value
      of
      each stock option granted was $2.86. There were no stock options granted during
      the three months ended April 30, 2005. During the nine months ended April 30,
      2006 and 2005, the weighted average fair value of each stock option granted
      was
      $3.32 and $3.30, respectively. These amounts were estimated on the grant date
      using the Black-Scholes option-pricing model with the assumptions listed above.
      We generally issue new shares of common stock to satisfy stock option
      exercises.




A
      summary
      of stock option activity for all our plans during the current fiscal
      year-to-date is presented below:





**Stock
                Options**
            
            **Shares**
            
            **Weighted
                Average Exercise**
              **Price**
            
            **Weighted
                Average Remaining Contractual Term**
              **(Years)**
            
            **Aggregate
                Intrinsic**
              **Value**Outstanding
                at August 1, 2005
            
            
            740,223
            
            $
            5.76Granted
            
            
            192,500
            
            
            5.34Exercised
            
            
            (750
            )
            
            3.72Outstanding
                at October 31, 2005
            
            
            931,973
            
            
            5.68
            
            
            7.2
            
            $
            692,077Granted
            
            
            61,000
            
            
            4.10Exercised
            
            
            (500
            )
            
            1.95Expired
            
            
            (25,000
            )
            
            8.79Outstanding
                at January 31, 2006
            
            
            967,473
            
            
            5.50
            
            
            7.3
            
            $
            218,575Granted
            
            
            25,500
            
            
            4.26**Outstanding
                at April 30, 2006**
            
            
            **992,973**
            
            **$**
            **5.46**
            
            
            **6.8**
            
            **$**
            **225,285****Exercisable
                at April 30, 2006**
            
            
            **606,973**
            
            **$**
            **6.05**
            
            
            **5.3**
            
            **$**
            **166,403**





The
      stock
      options granted during the three and nine months ended April 30, 2006, were
      outstanding only a portion of the period, and thus the compensation expense
      recognized was only for the period that they were outstanding. As of April
      30,
      2006, there was $632,104 of total unrecognized compensation cost related to
      outstanding non-vested stock options granted under the 1997 Plan. This cost
      is
      expected to be recognized over a weighted average period of 1.5
      years.




Page
          10


The
      following activity occurred relating to exercises under our stock option plans
      during the periods indicated:




Three
                Months Ended April 30,
            
            Nine
                Months Ended April 30,**2006**
            
            2005
            
            **2006**
            
            2005Total
                intrinsic value of stock options exercised
            
            **$**
            **-**
            
            $
            783,431
            
            **$**
            **2,135**
            
            $
            1,387,921




At
      April
      30, 2006, 1,563,047 shares of common stock were reserved for issuance under
      all
      our stock based compensation plans, including our stock option plans and our
      defined benefit contribution plan, and 585,524 shares were available for future
      grants.




Prior
      to
      the adoption of FAS 123R, we accounted for our share-based compensation plans
      under the provisions of Accounting Principles Board Opinion No. 25, “Accounting
      for Stock Issued to Employees”, and related interpretations. Since the exercise
      price of stock options granted pursuant to our stock option plans to employees
      and directors was at least equal to the market value of the underlying common
      stock on the grant date, we did not record any compensation expense for stock
      options granted in prior years. However, during the three and nine months ended
      April 30, 2005, we did record $170,350 of stock option compensation expense
      related to modifications made to certain existing vested option awards to extend
      the exercise term of awards previously granted to a former employee and a former
      director. The expense relating to the former director, $72,600, was incurred
      in
      the quarter ended January 31, 2005, but not recorded until the quarter ended
      April 30, 2005.




If
      compensation cost for our stock-based compensation plans had been determined
      based on the fair value method (estimated using the Black-Scholes option pricing
      model) at the grant dates in accordance with Financial Accounting Standards
      Board Statement No. 123, “Accounting for Stock-Based Compensation”, our pro
      forma net income and earnings per share for the three and nine months ended
      April 30, 2005, would have been as follows:




Three
                months ended
                April
                  30, 2005
            
            Nine
                months ended
                April
                  30, 2005Net
                income, as reported
            
            $
            359,902
            
            $
            5,285,070Add
                back/Deduct: Pro forma stock option compensation income (expense)
                for
                stock options granted using a fair value method (1)
            
            
            82,991
            
            
            (341,172
            )Pro
                forma net income
            
            $
            442,893
            
            $
            4,943,898Basic
                net income per common share:As
                reported
            
            $
            0.05
            
            $
            0.80Pro
                forma
            
            $
            0.06
            
            $
            0.75Diluted
                net income per common share:As
                reported
            
            $
            0.05
            
            $
            0.73Pro
                forma
            
            $
            0.06
            
            $
            0.68





(1)
            Compensation
                expense was reduced for forfeitures as they actually
                occurred.


Page
          11




The
      pro
      forma income shown for the three months ended April 30, 2005, was due to the
      difference between the intrinsic value method, which we used to determine
      expense to be recorded, and the fair value method, which we were required to
      use
      for disclosure purposes, for the options that were modified.





3. Retained
      Royalties





*Abbott
      Laboratories, Inc.*




In
      December 2004, we granted Abbott Laboratories, Inc. (“Abbott”) a license to sell
      tests used to measure homocysteine levels. The term of the license is through
      July 2007, the expiration date of the patent, with certain limited exceptions.
      Pursuant to the license, Abbott paid us a one-time, non-refundable and
      non-creditable (against future royalties) upfront license fee, and agreed to
      pay
      certain “Milestone Fees” (as defined in the license), and per test royalties on
      homocysteine assay sales in the United States after January 1, 2006. No per
      test
      royalties were due from Abbott in calendar year 2005. We recorded in retained
      royalties our share of the upfront license fee, which was $5,200,000, during
      the
      three months ended January 31, 2005, and began to accrue over calendar 2005
      the
      present value of the Milestone Fees. The difference between the present value
      and the gross amount of the Milestone Fees was recorded in interest income.
      Our
      share of the Milestone Fees aggregated to $1,600,000, of which we were paid
      $800,000 in February 2006, with the remaining $800,000 due to be paid to us
      on
      January 31, 2007, as long as our patent is valid and enforceable. As of April
      30, 2006, we had accrued a gross total of $1,948,103 of Milestone Fees in
      receivables.




*Diagnostic
      Products Corporation*




Effective
      November 1, 2004, we granted Diagnostic Products Corporation (“DPC”) a license
      to sell tests used to measure homocysteine levels. Pursuant to this license,
      DPC
      paid us a one-time, non-refundable and non-creditable (against future royalties)
      upfront license fee and per test royalties on homocysteine assay sales in the
      United States after November 1, 2004. We recorded in retained royalties our
      share of the upfront license fee, which was $550,000, during the three months
      ended January 31, 2005. The term of the license is through July 2007, the
      expiration date of the patent, with certain limited exceptions.




*Other*




Licenses
      granted in fiscal 2006 and 2005 relating to homocysteine testing generally
      provide for an upfront license fee and a royalty to be paid to us based on
      a
      fixed fee per test. The amounts of the fees are determined based on estimated
      volume. The magnitude of the upfront fee varies by license, sometimes
      significantly, and thus retained royalties may vary significantly from period
      to
      period.





4. Royalty
          Legal Awards





On
      August
      5, 2004, the U.S. Court of Appeals for the Federal Circuit (“CAFC”) denied the
      petition of Laboratory Corporation of America Holdings d/b/a LabCorp
      (“LabCorp”), for a rehearing or a rehearing en banc (rehearing by the full CAFC)
      of a June 8, 2004 decision affirming a November 2002 court decision in favor
      of
      Metabolite Laboratories, Inc. and us (collectively, the “Plaintiffs”). As a
      result of this decision, on August 16, 2004, the Plaintiffs received
      approximately $6.7 million. Our share of the $6.7 million payment was $920,552,
      and we recorded $815,492 in royalty legal awards and $105,060 in interest income
      during the six months ended January 31, 2005. The payment did not include
      attorneys’ fees or court costs previously awarded to the Plaintiffs that were
      under appeal with the court. On January 24, 2005, the CAFC dismissed LabCorp’s
      appeal of the court’s award of attorneys’ fees and court costs from the original
      case, and, on April 15, 2005, we announced that we had received payment from
      LabCorp for the attorneys’ fees and court costs. Our share of the payment was
      $231,056, and we recorded $221,121 in royalty legal awards and $9,935 in
      interest income during the quarter ended April 30, 2005. Our claim for
      additional attorneys’ fees and court costs related to the appeals process is
      still pending, and we do not expect it to be finalized until after the U.S.
      Supreme Court issues a final ruling on LabCorp’s appeal (see
      below).




Page
          12




On
      November 3, 2004, LabCorp filed a petition for a writ of certiorari with the
      U.S. Supreme Court (the “Court”) relating to the November 2002 decision. (A writ
      of certiorari is a petition requesting the Court to hear an appeal.) On February
      28, 2005, we announced that the Court had invited the Solicitor General of
      the
      United States (the “SG”) to file a brief in this case expressing the SG’s views
      on the single question of the patentability of method patents of this type.
      On
      August 26, 2005, the SG issued its brief, recommending that the Court deny
      LabCorp’s petition. However, in November 2005, the Court granted LabCorp’s writ
      of certiorari and agreed to hear their appeal. Oral arguments in front of the
      Court related to the case were heard on March 21, 2006. If the present schedule
      is maintained, we expect a final ruling from the Court in June 2006. If the
      Court ultimately rules against LabCorp’s appeal, then the case will be over
      except for our claim for additional attorneys’ fees and court costs related to
      the appeals process. Depending on how the Court rules, the case may be remanded
      back to the District Court. If this occurs we do not know how long it will
      take
      for the case to reach a final resolution.




If
      the
      Court rules in favor of LabCorp, and if the Court remands the case back to
      the
      District Court to review its original decision, and then if the original
      judgment subsequently is reversed, then LabCorp may attempt to recover amounts
      paid to the Plaintiffs, including royalties paid to us as part of a January
      2003
      stipulated court order (the “Stipulated Order”). Pursuant to the Stipulated
      Order, the court had stayed execution of a monetary judgment and a permanent
      injunction that prevented LabCorp from performing homocysteine assays, and
      LabCorp had agreed to pay us a percentage of their homocysteine assay sales
      during their appeals process. In April 2005, the appeals process was considered
      to have ended, and the Stipulated Order expired. LabCorp’s ability to recover
      any amounts paid to the Plaintiffs would depend on the extent and reason for
      any
      reversal of the original judgment. From January 2003 through April 30, 2005,
      LabCorp paid us an aggregate of $1,930,355 under the Stipulated Order, which
      includes our retained portion and amounts paid to our clients. Since April
      30,
      2005, LabCorp has not paid us any royalties directly. If the Court does not
      rule
      in LabCorp’s favor, and if LabCorp has performed tests since April 2005, then
      they may owe us royalties for the period from April 30, 2005.




If
      the
      Court invalidates our patent, then there will be a material, adverse impact
      on
      our business, results of operations and cash flows.





5. Dividends
          Received





In
      October 2004, our investee, Melanotan Corporation (“MelanoTan”), paid its
      shareholders a dividend in the form of shares of common stock of its investee,
      Clinuvel Pharmaceuticals Limited (“Clinuvel”), an Australian company (formerly
      EpiTan Limited). As a result, we received 1,252,346 shares of Clinuvel common
      stock. Clinuvel common stock is traded on the Australian Stock Exchange under
      the symbol CUV (quoted in Australian dollars). As a condition to receiving
      the
      dividend, we had agreed not to sell, transfer or otherwise dispose of the shares
      before October 21, 2005. This restriction has lapsed and we now are free to
      sell, transfer and dispose of the shares.




Page
          13


We
      estimated the fair value of the Clinuvel common stock received in the prior
      year
      using the closing price of the shares ($0.93 per share, Australian dollars)
      and
      the exchange rate for converting Australian dollars to U.S. dollars ($0.7289
      Australian dollars to $1.00 U.S. dollar) on the date that MelanoTan’s board of
      directors approved the dividend. We then discounted the value of the shares
      using a 20% discount factor to recognize the estimated impact of the sale
      restriction and the risk associated with an investment in Clinuvel stock, since
      Clinuvel had minimal revenues and had incurred substantial accumulated net
      losses. We recorded the estimated value of the shares, $679,149, as dividend
      income during the first quarter of the prior fiscal year. MelanoTan also paid
      a
      special cash dividend which we accrued during the quarter ended April 30, 2005.
      Our share of that dividend was $104,360. Thus for the nine months ended April
      30, 2005, we recorded a total of $783,509 in dividends. In June 2005 we received
      an additional dividend of 660,686 shares of Clinuvel stock. In total we own
      1,913,032 shares of Clinuvel common stock.





6. Net
      Income (Loss) Per Common Share





The
      following sets forth our computations of basic and diluted net income (loss)
      per
      common share.





Three
                months ended
              April
                30,
            
            Nine
                months ended
              April
                30,**2006**
            
            2005
            
            **2006**
            
            2005Denominator
                for basic net income (loss) per common share, weighted average common
                shares outstanding
            
            
            **7,710,134**
            
            
            6,867,774
            
            
            **7,565,254**
            
            
            6,631,269Dilutive
                effect of employees’ and directors’ common stock options
            
            
            —
            
            
            817,259
            
            
            —
            
            
            610,337Denominator
                for diluted net income (loss) per common share
            
            
            **7,710,134**
            
            
            7,685,033
            
            
            **7,565,254**
            
            
            7,241,606





At
      April
      30, 2006, all 992,973 outstanding common stock options were excluded from the
      computation of diluted net
      income (loss) per common share, because
      they were anti-dilutive. At April 30, 2005, all 1,175,223 outstanding common
      stock options and warrants were included in the computation of fully diluted
      earnings per common share.




Page
          14





7. Comprehensive
      Income (Loss) and Accumulated Other Comprehensive Loss





Comprehensive
      income (loss) loss consists of the following:




Three
                    months endedApril
                    30,
              
              Nine
                  months ended April 30,**2006**
              
              2005
              
              **2006**
              
              2005Net
                  income (loss)
              
              **$**
              **(1,054,040**
              **)**
              $
              359,902
              
              **$**
              **(2,028,198**
              **)**
              $
              5,285,070Net
                    unrealized holding gain (loss) on securities held
              
              
              **111,670**
              
              
              (234,800
              )
              
              **(99,444**
              **)**
              
              (273,933
              )Unrealized
                    foreign currency translation gain
              
              
              **6,305**
              
              
              6,524
              
              
              **6,906**
              
              
              48,730Unrealized
                    gain from reversal of sale restriction discount
              
              
              **-**
              
              
              -
              
              
              **232,124**
              
              
              -Comprehensive
                  income (loss)
              
              **$**
              **(936,065**
              **)**
              $
              131,626
              
              **$**
              **(1,888,612**
              **)**
              $
              5,059,867




Accumulated
        other comprehensive loss consists of the following:
  **April
                      30, 2006**
                
                July31, 2005Accumulated
                    net unrealized holding loss on equity securities
                
                **$**
                **(297,258**
                **)**
                $
                (294,438
                )Accumulated
                    unrealized foreign currency translation gain (loss)
                
                
                **(62,663**
                **)**
                
                27,055Accumulated
                    unrealized gain from reversal of sale restriction discount
                
                
                **232,124**
                
                
                -Accumulated
                    other comprehensive loss
                
                **$**
                **(127,797**
                **)**
                $
                (267,383
                )




8. Receivables
 
 Receivables
        consist of the following:
  **April
                  30, 2006**
              
              July
                  31, 2005Royalties
              
              **$**
              **3,300,485**
              
              $
              3,836,857Receivables
                  from insurance carrier
              
              
              **635,832**
              
              
              191,568Other
              
              
              **117,788**
              
              
              57,816Receivables
              
              **$**
              **4,054,105**
              
              $
              4,086,241
 
 The
        increase in royalties and receivables from insurance carrier is due principally
        to timing differences in billing receivables and the receipt of
        cash.
  Page
            15




9. Available-for-Sale
        Securities
 
 We
        hold
        common stock of Palatin Technologies, Inc. (“Palatin”) and Clinuvel that are
        categorized as available-for-sale and carried at fair value.
  The
        Palatin shares consist of the following:
  **April
                  30, 2006**
              
              July
                  31, 2005170,000
                  shares of Palatin –fair
                  value
              
              **$**
              **368,220**
              
              $
              —Original
                  basis
              
              **$**
              **295,596**
              
              $
              —
 
 At
        July
        31, 2005, the Palatin shares we received contained a legend indicating that
        they
        were restricted and not registered for resale, and therefore the value of
        the
        shares was included in receivables, as Palatin had agreed to give us
        unrestricted shares (see Note 12). Subsequent to July 31, 2005, Palatin filed
        a
        registration statement with the Securities and Exchange Commission to register
        the shares for sale, and during the quarter ended January 31, 2006, we
        determined that we could trade the shares even though the legend was still
        in
        place, and therefore reclassified them as a current asset in equity securities.
        We hold the shares of Palatin on our behalf and on behalf of our client.
        Temporary changes in the fair value of the shares are included in other
        comprehensive income (loss), except that we do not recognize changes in the
        fair
        value of the portion of the shares that we hold on behalf of our client.
        There
        were no losses realized relating to the Palatin shares during the three and
        nine
        months ended April 30, 2006.
  The
        Clinuvel shares consist of the following:
  **April
                  30, 2006**
              
              July
                  31, 20051,913,032
                  shares of Clinuvel – fair value
              
              **$**
              **625,261**
              
              $
              558,299Original
                  basis
              
              **$**
              **825,682**
              
              $
              825,682
 
 The
        Clinuvel shares are classified as a noncurrent asset in equity securities
        since
        our current intention is to hold the shares as a long term investment. Temporary
        changes in the fair value of the shares are included in other comprehensive
        income (loss). There were no losses realized relating to the Clinuvel shares
        during the three and nine months ended April 30, 2006.
  Page
            16
  10. Accrued
        Expenses and Other Liabilities
 
 Accrued
        expenses and other liabilities consist of the following:
  **April
                  30, 2006**
              
              July
                  31, 2005Accrued
                  royalties payable
              
              **$**
              **2,967,262**
              
              $
              2,793,083Accrued
                  compensation
              
              
              **442,286**
              
              
              1,616,522Accrued
                  professional fees
              
              
              **172,004**
              
              
              177,605Accrued
                  other
              
              
              **105,406**
              
              
              103,134Accrued
                  expenses and other liabilities
              
              **$**
              **3,686,958**
              
              $
              4,690,344
 
 The
        decrease in accrued compensation is due principally to the payment during
        the
        current year of accrued fiscal 2005 bonus and commissions.
 
 11. Common
        Stock Sales Pursuant to Equity Financing
 
 Pursuant
        to our February 2004 equity financing agreement with Fusion Capital Fund
        II
        (“Fusion Capital”), we sold and issued the following shares to Fusion Capital
        during the three and nine months ended April 30, 2006:
  **Cash**
                **Received**
              
              Shares
                Sold
              
              Commitment
                Shares
                  Issued
              
              **Total**
                **Shares**Three
                  months ended October 31, 2005
              
              **$**
              **782,456**
              
              
              149,908
              
              
              5,543
              
              
              **155,451**Three
                  months ended January 31, 2006
              
              
              **617,496**
              
              
              148,053
              
              
              4,387
              
              
              **152,440**Three
                  months ended April 30, 2006
              
              
              **397,490**
              
              
              115,513
              
              
              2,823
              
              
              **118,336**Nine
                  months ended April 30, 2006
              
              **$**
              **1,797,442**
              
              
              413,474
              
              
              12,753
              
              
              **426,227**
 
 We
        use
        the proceeds for general working capital needs. The
        aggregate proceeds received from Fusion Capital pursuant to the equity financing
        agreement from the date of inception through April 30, 2006, were $4,514,983.
        Costs previously incurred related to the financing were capitalized and
        amortized against capital in excess of par value on a pro-rata basis based
        upon
        the ratio of the proceeds received compared to our estimate of the total
        proceeds to be received over the life of the equity financing agreement.
        As of
        the end of our first quarter, October 31, 2005, we had sold a total of
        $3,499,998 of common stock to Fusion Capital pursuant to the equity financing
        agreement, and had estimated that we would not sell any more shares to Fusion
        Capital. Accordingly, we
        amortized the remaining $96,227 of deferred equity financing costs against
        capital in excess of par value during the three months ended October 31,
        2005,
        which fully amortized the deferred equity financing costs. Subsequent to
        October
        31, 2005, we began selling more common stock to Fusion Capital, and now estimate
        that we will sell the full $5.0 million of common stock to Fusion Capital.
        No
        further amortization of the deferred financing costs has or will occur since
        the
        costs have been fully amortized.
  Page
            17
  12. Contingencies
  *Fujitsu*
  On
        May 1,
        2006, the Court of Appeals for the Federal Circuit (the “CAFC”) heard the
        University of Illinois’ appeal of a previous summary judgment by a lower court
        in favor of Fujitsu. The decision of the CAFC is pending, and the timing
        of any
        decision is uncertain.
  *Employment
        matters*
  On August
        10, 2005, we received notice that John B. Nano, our former President and
        Chief Executive Officer, had filed a complaint in the Superior Court in the Judicial
        District of Stamford, Connecticut seeking the pre-judgment remedy of attachment.
        In his complaint Mr. Nano seeks to attach our bank accounts in the amount
        of
        $1.4 million to preserve his ability to collect should he succeed on his
        claims
        that CTT allegedly breached his employment contract because it denied him
        certain severance benefits when it terminated him on June 14, 2005. Mr. Nano
        also claims, in the alternative, that CTT violated a proposed but unexecuted
        and
        undelivered separation agreement and general release which it sought to
        negotiate with him at the time of his departure. Mr. Nano claims in his
        complaint that CTT withdrew the proposed agreement after he communicated
        his
        acceptance to the Chairman of our Board of Directors. CTT has opposed Mr.
        Nano’s
        application for a prejudgment remedy, has denied and is vigorously defending
        the
        allegations in the suit, and has filed a complaint against Mr. Nano (see
        below).
        Hearings on the motion were held in November 2005. Further action on this
        motion
        is pending.
  On
        December 7, 2005, we filed a complaint in the Superior Court in the Judicial
        District of Stamford, Connecticut against Mr. Nano for monetary and punitive
        damages, alleging breach of contract, breach of fiduciary duty, statutory
        theft
        of confidential information, and other claims, including a request for an
        injunction preventing Mr. Nano from competing with CTT with products and
        business contacts originally coming to Mr. Nano’s attention through his
        employment at CTT. Further action on this matter is pending.
  On
        March
        2, 2006, Mr. Nano notified the Occupational Safety and Health Administration
        (“OSHA”) that he was withdrawing the complaint he filed with OSHA on September
        14, 2005, alleging that CTT had violated Section 806 of the Corporate
        and Criminal Fraud Accountability Act of 2002, 18 U.S.C. 1514A (also
        known as the “Sarbanes-Oxley Act”), in connection with the termination of his
        employment.
  On
        May
        26, 2006, Mr. Nano filed a complaint in the United States District Court
        of
        Connecticut in New Haven, Connecticut, alleging that CTT violated Section
        806 of the Sarbanes-Oxley
        Act in connection with the termination of his employment. In his complaint
        Mr.
        Nano seeks monetary damages, punitive damages, attorneys’ fees, and costs and
        other remuneration at the option of the court. We believe that the complaint
        is
        totally without merit, and intend to defend it vigorously.
  *Palatin
        Technologies, Inc.*
  On
        June
        6, 2006, we notified Palatin that we were demanding arbitration, in accordance
        with the terms of the license between us for their exclusive use of our
        technology in developing their experimental therapeutic treatment for male
        and
        female sexual dysfunction, to settle disputes we have with Palatin regarding
        Palatin’s alleged breaches of their license agreement, as well as for tortious
        acts alleged to have been committed by Palatin. Pursuant to the demand for
        arbitration, we are seeking monetary and punitive damages, interest, costs
        and
        attorneys’ fees. Palatin has not yet responded to our arbitration
        demand.
  Page
            18
  On
        September 14, 2005, we filed a complaint alleging breach of contract against
        Palatin in the Superior Court, Judicial District of Fairfield at Bridgeport,
        Connecticut, seeking monetary damages, interest, attorneys’ fees, court costs,
        punitive damages, and other remuneration at the option of the court. On November
        22, 2005, Palatin filed a motion for summary judgment seeking a dismissal
        of our
        complaint and monetary damages, including reimbursement of their legal fees,
        as
        sanctions against us for filing the original complaint. We opposed Palatin’s
        motion for summary judgment, and further, on February 3, 2006, we filed a
        motion
        to enlarge the scope of our original complaint, alleging fraudulent behavior
        by
        Palatin in their actions in negotiating a mediated settlement of a prior
        dispute
        (described below). Further action in this case is pending.
  The
        alleged breach of contract relates to a mediated settlement agreement with
        Palatin signed on June 17, 2005. Pursuant to the settlement, Palatin paid
        us
        $1,700,000, and further agreed promptly to issue to us 170,000 shares of
        its
        unrestricted common stock. Palatin actually issued restricted shares to us
        that
        were not registered for resale and thus we were restricted from selling,
        transferring or otherwise disposing of the shares, which was not in accordance
        with the settlement. As a result of Palatin’s failure to honor all the terms of
        the June 17, 2005 settlement, we filed the complaint to obtain unrestricted
        shares, damages, and to recover our enforcement costs. Subsequently, we expanded
        our original complaint to allege that Palatin was aware that they were unable
        to
        issue unrestricted shares at the time that they agreed to do so as part of
        the
        mediated settlement.
  The
        settlement was the result of a mediation of a prior dispute whereby on October
        27, 2004, we had demanded arbitration due to our belief that Palatin was
        in
        material breach of their license agreement with us since, pursuant to the
        terms
        of the license, we are entitled to receive 20% of any sublicense fee that
        Palatin receives. On August 13, 2004, Palatin announced that they had granted
        a
        co-exclusive license to King Pharmaceuticals, Inc. (“King”), included in a
        Collaborative Development and Marketing Agreement between Palatin and King
        for
        up to $100 million. On August 18, 2004, Palatin announced that they had received
        an initial $20 million from King, but did not submit any funds to us, which
        caused us to notify Palatin that they were in breach.
  We
        believe that the mediated settlement entered into by CTT and Palatin referred
        only to the disposition of this specific $20 million sublicensing fee received
        by Palatin from King, and did not pertain to any future milestone payments,
        or
        to any other future payments to be made by King to Palatin. However, Palatin
        has
        made statements in their public filings that the June 17, 2005 mediated
        settlement agreement released them from any other obligations to us relating
        to
        any other future payments received from King. We disagree with their statements,
        and reserve our rights under the original license granted to Palatin. In
        addition, Palatin has made other public filings in which they stated that
        they
        did not believe that any license from us was needed to commercialize their
        sexual dysfunction therapeutic product. We disagree with these and any other
        similar such statements.
  *Other*
  We
        also
        may be a party to other legal actions and proceedings for which we cannot
        predict the final outcomes. Since we are unable to estimate the legal expenses
        or the loss we may incur, or the possible damages we may recover in these
        actions, if any, we have not accrued any potential gain or loss in our financial
        statements. We record expenses in connection with these actions as they are
        incurred.
  We
        believe that we carry adequate liability insurance, directors’ and officers’
insurance, casualty insurance (for owned or leased tangible assets), and
        other
        insurance as needed to cover us against potential and actual claims and lawsuits
        that occur in the ordinary course of our business. However, an unfavorable
        resolution of any or all matters, and/or our incurrence of significant legal
        fees and other costs to defend or prosecute any of these actions and proceedings
        may, depending on the amount and timing, have a material adverse effect on
        our
        consolidated financial position, results of operations and cash flows in
        a
        particular period.
  Page
            19
 
 **Item
        2.**  **Management's
        Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 Forward-Looking
        Statements
 
 Certain
        statements about our future expectations, including development and regulatory
        plans, and all other statements in this Quarterly Report on Form 10-Q, other
        than historical facts, are “forward-looking statements” within the meaning of
        applicable Federal Securities Laws, and are not guarantees of future
        performance. If and when used in this Form 10-Q, the words “may,” “will,”
“should,” “anticipate,” “believe,” “intend,” “plan,” “expect,” “estimate,”
“approximate,” and similar expressions, as they relate to us or our business or
        management, are intended to identify such forward-looking statements. These
        statements involve risks and uncertainties related to market acceptance of
        and
        competition for our licensed technologies, growth strategies, operating
        performance, industry trends, and other risks and uncertainties inherent
        in our
        business, including those set forth in Item 7 under the caption “Risk Factors,”
in our most recent Annual Report on Form 10-K for the year ended July 31,
        2005,
        filed with the Securities and Exchange Commission (“SEC”) on October 13, 2005,
        and other factors that may be described in our other filings with the SEC,
        and
        are subject to change at any time. Our actual results could differ materially
        from these forward-looking statements. We undertake no obligation to update
        publicly any forward-looking statement.
 
 Overview
 
 We
        provide technology transfer, sales and licensing services of intellectual
        property. We develop relationships with universities, companies, inventors
        and
        patent or intellectual property holders to obtain a license to or the right
        to
        represent their intellectual property rights, principally patents and inventions
        (collectively, “Technology”), and they become our clients, for whom we find
        markets to sell or further develop their Technology. We also develop
        relationships with those who have a need or use for Technologies, and they
        become our customers, usually through a license or sublicense. We match
        commercially viable technology solutions to the technology needs of our
        customers, bridging the gap between market demand and raw innovation. Our
        goal
        is to maximize the value of intellectual assets for the benefit of our clients,
        customers and shareholders.
  We
        earn
        revenues primarily from licensing Technologies to our customers (licensees).
        Our
        customers pay us royalties based on their use of each Technology, and we
        share
        the fees with our clients. We determine the amount of royalty revenue to
        record
        when we can estimate the amount of royalties we have earned for a period,
        which
        usually occurs when we receive periodic royalty reports from our customers
        listing their sales of licensed products and the royalties we earned in the
        period. We receive these reports monthly, quarterly, or semi-annually. Since
        reports are not received on the same frequency, revenues will fluctuate from
        one
        quarter to another, sometimes significantly. In addition, revenues will
        fluctuate from quarter to quarter due to normal fluctuations in revenues
        of our
        customers, the receipt of differing magnitudes of revenues from upfront license
        fees, the granting of new licenses and the expiration of existing licenses,
        as
        in the normal course of our business patents expire, and revenues generated
        one
        year may not recur in the following year.
  Page
            20
  Reliance
        on one revenue source
 
 For
        both
        the three and nine months ended April 30, 2006 and 2005, we had a significant
        concentration of revenues derived from our homocysteine assay Technology.
        We
        believe that we have licenses with the most significant distributors and
        laboratories in the United States that sell and/or perform tests used to
        measure
        homocysteine levels. The patent for this Technology expires in early July
        2007,
        and we will not receive any revenues from this Technology for sales made
        after
        that date. In addition, the validity of this patent has been appealed to
        the
        U.S. Supreme Court. If the Supreme Court rules in our favor, then the case
        is
        over and our patent will continue to be valid and enforceable. If the Supreme
        Court invalidates our patent, there will be a material adverse impact on
        our
        business, results of operations and cash flows. If the Supreme Court remands
        the
        case back to the district court to review its decision, and then if the original
        decision subsequently is reversed, then the petitioner may, in certain
        circumstances, try to recover royalties paid to us while the case was under
        appeal. For further information see Part II, Item 1., “Legal
        Proceedings”.
  Excluding
        upfront license fees received in the prior year from new homocysteine licenses,
        our year-to-date revenues from this Technology are higher this year compared
        to
        last year. However, we did expect our revenues from this Technology to be
        higher
        than they are currently, as the actual number of tests and related royalty
        revenues from our existing homocysteine licensees trended downward over the
        last
        few quarters. This is not unusual in the last year or two prior to the
        expiration of a patent, although there may be other reasons for the decrease.
        For example, we believe that part of the decrease may be due to suspected
        infringers who are selling tests without a license. We filed a patent
        infringement complaint against one party but we believe that any progress
        on
        this and any other new cases we might file may be subject to delaying tactics
        by
        the defendant until the Supreme Court appeal is finalized. In addition, we
        believe that market forces on and business plans of our licensees, over which
        we
        have no control, may have changed, resulting in less tests and revenue than
        we
        expected. We accelerated our normal audit program of our licensees to make
        sure
        we are capturing available revenues, and are researching the homocysteine
        testing market to better understand the total size of the market, and what
        we
        could expect our revenues to be. The results of our research so far have
        been
        inconclusive, in part because our licensees generally do not share what they
        consider to be confidential business plans and strategies with us, including
        their market research. All of these factors will continue to affect our
        financial results.
  New
        accounting pronouncement
 
 Effective
        August 1, 2005 (the beginning of our current fiscal year), we adopted Financial
        Accounting Standards Board Statement No. 123(R), “Share-Based Payment” (“FAS
        123R”), which establishes the accounting required for share-based compensation. FAS 123R
        requires us to measure the fair value at the grant date, as defined in FAS
        123R,
        of all share-based awards and recognize such value as compensation expense
        in
        our statements of operations over the requisite service (vesting) period.
        We
        elected to adopt FAS 123R using a modified prospective application, whereby
        the
        provisions of the statement were applied going forward only from the date
        of
        adoption to new (issued subsequent to July 31, 2005) stock option awards,
        and
        for the portion of any previously issued and outstanding stock option award
        which vests after the date of adoption. Thus, we recognize as expense the
        fair
        value of stock options issued prior to August 1, 2005, but vesting after
        August
        1, 2005, over the remaining vesting period. In addition, compensation expense
        must be recognized for any awards modified, repurchased, or cancelled after
        the
        date of adoption. Under the modified prospective application, no restatement
        of
        previously issued results was required. We use the Black-Scholes option-pricing
        model to measure fair value, which is the same method we used in prior years
        for
        disclosure purposes.
  The
        adoption of this pronouncement has resulted in our recognizing expense related
        to stock options granted to employees, the expense of which is included in
        personnel and other direct expenses related to revenues, and stock options
        granted to our directors, the expense of which is included in general
        and administrative expenses.
  Page
            21
  Presentation
 
 We
        rounded all amounts in Item 2 to the nearest thousand dollars, so certain
        amounts may not total precisely. In addition, all periods discussed in Item
        2
        relate to our fiscal year ending July 31 (first, second, third and fourth
        quarters ending October 31, January 31, April 30 and July 31,
        respectively).
 
 Results
        of Operations – Three months ended April 30, 2006 (third quarter 2006) vs. three
        months ended April 30, 2005 (third quarter 2005 )
 
 Summary
        of Results
 
 We
        incurred a net loss for the third quarter 2006 of $1,054,000, or $0.14 per
        diluted share, compared to net income of $360,000 or $0.05 per diluted share,
        for the third quarter 2005, a decrease of $1,414,000 or $0.19 per diluted
        share.
        As explained in detail below, the decrease in net income principally is due
        to a
        decrease in revenues, as prior year revenues included a one-time settlement
        of
        back royalties as a result of a royalty audit, and upfront license fees received
        on new homocysteine licenses granted in the third quarter 2005, and a general
        decrease in royalty revenues in the current year from our homocysteine
        assay.
 
 Revenues
 
 In
        the
        third quarter 2006, total revenues were $1,199,000, compared to $2,533,000
        for
        the third quarter 2005, a decrease of $1,334,000, or 53%.
  *Retained
        royalties* for the
        third quarter 2006 were $1,043,000, which was $1,035,000, or 50% less than
        the
        $2,078,000 of retained royalties reported in the third quarter 2005. The
        following compares retained royalty revenues by Technology in the third quarter
        2006 with the third quarter 2005.
  For
                    the three months ended April 30,**2006**
                
                2005
                
                Increase(Decrease)
                
                %
                      Increase(Decrease)Homocysteine
                    assay
                
                **$**
                **637,470**
                
                $
                943,854
                
                $
                (306,384
                )
                
                (32
                )%Gallium
                    arsenide
                
                
                **3,808**
                
                
                584,018
                
                
                (580,210
                )
                
                (99
                )%Ethyol
                
                
                **272,208**
                
                
                469,968
                
                
                (197,760
                )
                
                (42
                )%All
                    other Technologies
                
                
                **129,626**
                
                
                80,173
                
                
                49,453
                
                
                62
                %**Total
                    retained royalties**
                
                **$**
                **1,043,112**
                
                $
                2,078,013
                
                $
                (1,034,901
                )
                
                (50
                )%




Of
        the
        $944,000 of revenues received in the third quarter 2005 from our homocysteine
        assay, $214,000 was from upfront fees received upon grants of new licenses
        in
        the third quarter 2005. While the receipt of upfront licensee fees is common,
        the magnitude of such fees has and will fluctuate, sometimes significantly
        from
        period to period. In the third quarter 2006 we did not grant any new
        homocysteine licenses and did not record any upfront license fees. Excluding
        the
        upfront license fees from last years revenues, revenues for this Technology
        for
        the third quarter 2005 were $730,000, compared to $637,000 in the current
        year
        quarter, which is a $93,000, or 13% decrease. The decrease is due to fewer
        tests
        performed by one of our larger licensees as a result of a change in that
        licensee’s market focus.
  Page
            22
  Prior
        year revenues from gallium arsenide included a settlement, our share of which
        was $575,000, for back royalties as a result of a royalty audit of an expired
        license. We had filed a lawsuit to collect the back royalties. The amount
        we
        recorded was net of fees paid to a royalty auditing firm. This settlement
        accounted for nearly all of the revenue in the third quarter 2005 for this
        Technology, and without this settlement, royalties essentially would have
        been
        flat year-over-year. The patents on this Technology expire later this year
        so we
        do not expect significant future revenues for this Technology. We
        are in
        negotiations with our client in an attempt to recover a larger portion of
        the
        fees we incurred in pursuit of the back royalties, but we have not recorded
        any
        potential recovery of such costs.
  The
        decrease in revenues from Ethyol was due solely to timing. Royalties from
        Ethyol
        sales are limited to $500,000 per calendar year, and generally are recorded
        over
        the third and fourth quarters, though the spread between the quarters varies
        from year to year. We expect to reach the 2006 maximum in the fourth
        quarter.
  Approximately
        61% of our retained royalties for the third quarter 2006 was from the
        homocysteine assay Technology. As explained above, the patent on this Technology
        expires in early July 2007, and we will not receive any revenues from this
        Technology for sales made after that date. In addition, as described above,
        the
        validity of this patent has been challenged to the U.S. Supreme Court. We
        continue to seek licenses to new Technologies to mitigate this concentration
        of
        revenues, to replace revenues from expiring licenses, and to provide future
        revenues.
  The *Royalty
        legal award* of
        $221,000 in the third quarter 2005 was from our receipt of an award of attorneys’
        fees and court costs previously awarded
        to us by the court related to our successful homocysteine patent infringement
        case brought against Laboratory
        Corporation of America Holdings d/b/a LabCorp (“LabCorp”). On January 24, 2005,
        the U.S. Court of Appeals for the Federal Circuit (“CAFC”) dismissed LabCorp’s
        appeal of the court’s award of attorneys’ fees and court costs from the original
        case, and, on April 15, 2005, we announced that we had received payment from
        LabCorp for the attorneys’ fees and court costs. Our share of the payment was
        $231,000, and we recorded $221,000 in royalty legal award and $10,000 in
        interest income. We
        also
        have sought to be awarded legal fees related to LabCorp’s appeals of this case,
        and this request is still pending before the court. As described above, LabCorp
        appealed the original decision to the U.S. Supreme Court, which heard the
        appeal
        in March 2006 but has not yet rendered a decision. There
        were no legal awards in the third quarter 2006.
  The *Dividend
        received* of
        $104,000 in the third quarter 2005 was from the
        accrual of a special cash dividend from our investee, Melanotan Corporation
        (“MelanoTan”). The dividend was declared and accrued during
        the third quarter 2005, and received in May 2005. There
        were no dividends in the third quarter 2006 .
  *Investment
        income* includes
        dividends and interest earned on our invested cash. Investment income was
        $155,000 in the third quarter 2006, which was an increase of $63,000, or
        67%
        over the $93,000 reported for the third quarter 2005. The increase was due
        to
        significantly higher rates of return earned on the invested cash in the current
        period compared to the same period of the prior year.
  The *Other
        income* of
        $36,000 in the third quarter 2005 was principally from consulting services
        provided by us in the prior year to a foreign client. This contract was
        terminated at the end of fiscal year 2005. There was no other income in the
        third quarter 2006.
  Page
            23
  Expenses


For
                  the three months ended April 30,**2006**
              
              2005
              
              Increase(Decrease)
              
              %
                    Increase(Decrease)Personnel
                  and other direct expenses relating
                  to revenues
              
              **$**
              **1,353,549**
              
              $
              1,169,779
              
              $
              183,770
              
              
              16
              %General
                  and administrative expenses
              
              
              **623,875**
              
              
              1,029,759
              
              
              (405,884
              )
              
              (39
              )%Patent
                    enforcement expenses, net of
                    reimbursements
              
              
              **275,218**
              
              
              7,131
              
              
              268,087
              
              
              3759
              %**Total
                  expenses**
              
              **$**
              **2,252,642**
              
              $
              2,206,669
              
              $
              45,973
              
              
              2
              %




*Personnel
        and other direct expenses relating to revenues* increased a net $184,000 in the third quarter 2006, compared to the third
        quarter 2005, due to a combination of several factors. Personnel expenses
        increased a net $120,000 in the third quarter 2006, compared to the prior
        year,
        principally due to recruiting costs to add new business development and business
        development support employees, and severance costs. Part of our strategic
        plan
        to increase recurring revenues requires that we greatly increase the number
        of
        Technologies reviewed and accepted into our portfolio, and we believe that
        the
        additional personnel will allow us to accomplish that goal. The additional
        staff
        has allowed us to significantly increase our business development activities,
        including thoroughly evaluating the revenue generating potential of new
        Technologies prior to acceptance. We believe that this ability will result
        in
        better Technologies being added to our portfolio and greater future recurring
        revenues. There was no such related expense in the prior year. As a result
        of
        hiring new employees, we have curtailed our use of paid consultants
        significantly, and currently we are retaining consultants generally on a
        success
        fee basis only. There was no increase in expense in the third quarter 2006,
        compared to the third quarter 2005, from stock options granted since in the
        prior year certain stock options were modified, resulting in the recognition
        of
        compensation expense of approximately the same amount as in the current year.
        Other direct expenses relating to revenues increased a net $64,000 as costs
        to
        audit our homocysteine licensees were partially offset by decreases in direct
        costs related to certain Technologies. Our homocysteine licensee audit program
        is progressing. We have not found significant deficiencies to date.
  *General
        and administrative expenses* decreased a net $406,000 in the third quarter 2006, compared to the third
        quarter 2005, principally due to a decrease of $321,000 in legal costs incurred
        in the prior year in defense of a whistleblower claim filed against us by
        a
        former employee that subsequently was dismissed (though the dismissal is
        being
        appealed), combined with a $106,000 decrease in costs incurred compared to
        the
        prior year to comply with the internal control documentation, testing and
        audit
        requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”).
        Fiscal year 2005 SOX 404 related costs were high since it was the first time
        that we were subject to SOX 404, and the initial documentation had to be
        created
        and the testing had to be designed and audited. In the current year we only
        have
        to update existing internal control documentation and testing, which is less
        time consuming and costly. In addition, as a result of new SEC regulations
        granting relief this year to smaller capitalization companies, we will not
        be
        required to have our independent auditors test management’s assertions about the
        effectiveness of our internal controls for fiscal year 2006, which further
        reduced our current year costs since we did not have to accrue external audit
        fees for this purpose. We still have compliance costs and such costs will
        be
        ongoing, since we have decided that we will maintain our internal control
        documentation and test our controls internally, even if not explicitly required
        by the SEC. In future years the SEC may again require our independent auditors
        to test management’s assertions about the effectiveness of our internal
        controls. If this occurs our compliance costs will increase to reflect the
        additional costs of the audit.
  Page
            24


*Patent
      enforcement expenses, net of reimbursements* ,
      increased a net $268,000 in the third quarter 2006, compared to the third
      quarter 2005, as we incurred substantial net costs to defend our homocysteine
      patent at the U.S. Supreme Court, and the cost of increased activity in the
      current year quarter related to a separate homocysteine patent infringement
      lawsuit initiated at the beginning of the current fiscal year. The level of
      patent enforcement expenses relates to our legal strategies and varies depending
      on the stage and activity relating to the litigation.




Provision
      for income taxes





We
      did
      not record a provision in the third quarter 2006 due to the loss incurred during
      the period. The benefit recorded in the third quarter 2005 was due to a change
      in estimate of the fiscal year 2005 federal alternative minimum tax (“AMT”)
      liability. In prior years, we generated significant federal and state income
      and
      AMT losses, and these net operating losses (“NOLs”) were carried forward for
      income tax purposes. Thus, in the last fiscal year we were able to utilize
      a
      portion of our NOLs against our regular federal and state taxable income,
      effectively eliminating our regular income tax liabilities. However, we still
      were subject to the AMT, where we are limited to using 90% of our NOL against
      taxable income. As a result of a review of our AMT status, we expect to be
      eligible for a one-time refund of AMT paid in the prior fiscal year. This will
      result in a credit of $35,000, and we expect to record the credit in the quarter
      ending July 31, 2006. We will remain subject to the AMT in future
      years.





Results
      of Operations – Nine months
      ended
      April 30, 2006 (nine months of 2006) vs. nine months ended April 30, 2005 (nine
      months of 2005 )





Summary
      of Results





We
      incurred a net loss for the nine months of 2006 of $2,028,000, or $0.27 per
      diluted share, compared to net income of $5,285,000, or $0.73 per diluted share,
      for the nine months of 2005, a decrease of $7,313,000, or $1.00 per diluted
      share. As explained in detail below, the decrease in net income was due to
      a
      decrease in revenues, as revenues for nine months of 2005 included significant
      upfront license fees received on new homocysteine licenses granted during the
      period. In addition, during the nine months of 2005, we received royalty legal
      awards related to a patent infringement case, special dividends, and revenues
      from a consulting contract that has since been terminated. These items either
      did not recur in the same magnitude during the nine months of 2006, or did
      not
      recur at all in the current year. Offsetting the decrease in revenues, expenses
      decreased principally due to less incentive compensation accrued in the current
      year compared to the prior year.





Revenues





In
      the
      nine months of 2006, total revenues were $3,836,000, compared to $11,747,000
      for
      the nine months of 2005, a decrease of $7,911,000, or 67%.




Page
          25


*Retained
      royalties* for the
      nine months of 2006 were $3,433,000, which was $6,087,000, or 64% lower than
      the
      $9,520,000 of retained royalties reported in the nine months of 2005. The
      following compares retained royalty revenues by Technology for the nine months
      of 2006 compared to the nine months of 2005.


For
                  the nine months ended April 30,**2006**
              
              2005
              
              Increase(Decrease)
              
              %
                    Increase(Decrease)Homocysteine
                  assay
              
              **$**
              **2,619,808**
              
              $
              7,978,660
              
              $
              (5,358,852
              )
              
              (67
              )%Gallium
                  arsenide
              
              
              **102,643**
              
              
              721,579
              
              
              (618,936
              )
              
              (86
              )%Ethyol
              
              
              **272,208**
              
              
              469,968
              
              
              (197,760
              )
              
              (42
              )%All
                  other Technologies
              
              
              **438,522**
              
              
              350,163
              
              
              88,359
              
              
              25
              %**Total
                  retained royalties**
              
              **$**
              **3,433,181**
              
              $
              9,520,370
              
              $
              (6,087,189
              )
              
              (64
              )%




During
        the nine months of 2006 we received $386,000 of upfront license fees from
        grants
        of new homocysteine licenses. During the nine months of 2005 we received
        $6,164,000 of upfront license fees received from grants of new homocysteine
        licenses. While the receipt of upfront licensee fees is common, the magnitude
        of
        such fees will fluctuate, sometimes significantly from period to period.
        Excluding upfront license fees from both years’ revenues, revenues from this
        Technology for the nine months of 2006 and 2005 were $2,234,000 and $1,815,000,
        respectively, for an increase of $419,000, or 23%. The increase is due to
        the
        inclusion in 2006 of a full nine months of revenues from several licenses
        granted during the prior year, compared to 2005 revenues received for a partial
        year only, offset by less tests performed in 2006 by one of our larger licensees
        as a result of a change in market focus.
  The
        decrease in revenues from gallium arsenide occurred principally because prior
        year revenues included a one-time settlement, our share of which was $575,000,
        for back royalties as a result of a royalty audit of an expired license.
        We had
        filed a lawsuit to collect the back royalties. The amount we recorded was
        net of
        fees paid to a royalty auditing firm. We
        are in
        negotiations with our client in an attempt to recover a larger portion of
        the
        fees we incurred in pursuit of the back royalties, but we have not recorded
        any
        potential recovery of such costs. Excluding this settlement, royalties decreased for the nine months of 2006,
        compared to the prior year, due to expiring licenses. The patents on this
        Technology expire later this year so we do not expect significant future
        revenues for this Technology.
  The
        decrease in revenues from Ethyol was due solely to timing. Royalties from
        Ethyol
        sales are limited to $500,000 per calendar year, and generally are recorded
        over
        the third and fourth quarters, though the spread between the quarters varies
        from year to year. We expect to reach the 2006 maximum in the fourth
        quarter.
  Approximately
        76% of our retained royalties for the nine months of 2006 was from the
        homocysteine assay Technology. As explained above, the patent on this Technology
        expires in early July 2007, and we will not receive any revenues from this
        Technology for sales made after that date. In addition, as described above,
        the
        validity of this patent has been challenged to the U.S. Supreme Court. We
        continue to seek licenses to new Technologies to mitigate this concentration
        of
        revenues, to replace revenues from expiring licenses and to provide future
        revenues.
  *Royalty
        legal awards* of
        $1,037,000 in the nine months of 2005 were from our share of awards received
        from LabCorp
        as a result of our successful homocysteine patent infringement case we brought
        against LabCorp. During the first quarter of the prior year, we received
        an
        award aggregating approximately $6.7 million from LabCorp from the original
        case. Our share of the $6.7 million payment was $921,000, and we recorded
        $816,000 in royalty legal awards and $105,000 in interest income. The payment
        did not include attorneys’ fees or court costs previously awarded that were
        under appeal with the court. After the CAFC dismissed LabCorp’s appeal of the
        court’s award of attorneys’ fees and court costs from the original case, we
        announced that we had received payment from LabCorp for the attorneys’ fees and
        court costs. Our share of the payment was $231,000, and we recorded $221,000
        in
        royalty legal awards and $10,000 in interest income during the third quarter
        of
        2005. The total for the nine months of 2005 was $1,037,000 recorded in royalty
        legal awards and $115,000 in interest. We
        also
        have sought to be awarded legal fees related to LabCorp’s appeals of this case,
        and this request is still pending before the court. As described above, LabCorp
        appealed the original decision to the U.S. Supreme Court, which heard the
        appeal
        in March 2006 but has not yet rendered a decision. There were no legal awards
        received in the nine months of 2006.
  Page
            26
  *Dividends
        received* of
        $784,000 for the nine
        months of 2005
        were
        from our receipt of two dividends from MelanoTan. In October 2004, MelanoTan
        paid its shareholders a dividend in the form of shares of common stock of
        its
        investee, Clinuvel Pharmaceuticals Limited (“Clinuvel”), an Australian company
        (formerly EpiTan Limited). As a result, we received 1,252,346 shares of Clinuvel
        common stock. Previously, we licensed our rights to a sunless tanning Technology
        to MelanoTan and MelanoTan sublicensed the rights to Clinuvel. MelanoTan
        also
        had received shares of common stock of Clinuvel, which is traded on the
        Australian Stock Exchange under the symbol CUV (quoted in Australian dollars).
        We estimated the value of the shares received to be $679,000. (Unrealized
        market
        price and foreign exchange gains and losses relating to the shares are included
        in accumulated other comprehensive loss included in shareholders’ interest.) In
        addition, in April 2005 MelanoTan declared a special cash dividend, and we
        accrued $104,000 as a result of this dividend, bringing the total dividends
        received to $784,000 for the nine months of 2005. There were no dividends
        received in the nine
        months of 2006.
  *Investment
        income* increased $85,000, or 28%, in the nine months of 2006, compared to the nine
        months of 2005. Investment income for the nine months of 2005 included $115,000
        in interest income from the legal awards received from LabCorp. Excluding
        this
        interest income, investment income for the nine months of 2005 was $191,000,
        compared to $391,000 in the nine months of 2006, or an increase of $200,000,
        or
        105%. The increase, excluding the LabCorp legal awards, is due to significantly
        higher rates of return earned on the invested cash in the current period
        compared to the same period of the prior year, as well as significantly higher
        average cash balances during the nine months of 2006, compared to the nine
        months of 2005.
  *Other
        income* in the
        nine months of 2005 was principally from consulting services provided by
        us to a
        foreign client. This contract was terminated at the end of fiscal year
        2005.
  Expenses
 For
                    the nine months ended April 30,Increase
                
                %
                    Increase**2006**
                
                2005
                
                (Decrease)
                
                (Decrease)Personnel
                      and other direct expenses relating to revenues
                
                **$**
                **3,347,758**
                
                $
                4,288,985
                
                $
                (941,227
                )
                
                (22
                )%General
                    and administrative expenses
                
                
                **2,154,874**
                
                
                1,844,630
                
                
                310,244
                
                
                17
                %Patent
                      enforcement expenses, net of reimbursements
                
                
                **373,812**
                
                
                291,555
                
                
                82,257
                
                
                28
                %**Total
                    expenses**
                
                **$**
                **5,876,444**
                
                $
                6,425,170
                
                $
                (548,726
                )
                
                (9
                )%




Page
            27
  *Personnel
        and other direct expenses relating to revenues* decreased a net $941,000 in the nine months of 2006, compared to the nine
        months
        of 2005, due to a combination of several factors. Personnel expenses decreased
        a
        net $818,000 in the nine months of 2006, compared to the prior year, due
        to a
        $1,219,000 decrease in commission and bonus expense, as a result of the decrease
        in our financial results. Partially offsetting the decrease in commission
        and
        bonus expense, other personnel costs increased over the prior year an aggregate
        of $338,000 for recruiting expenses incurred to add business development
        and
        business development support staff, and noncash charges related to stock
        options. As previously explained for the third quarter 2006, we added the
        business development staff to increase our business development activities,
        which we believe will, in turn, result in more Technologies being added to
        our
        portfolio and ultimately more signed licenses generating future recurring
        revenues. There was no such expense in the prior year. The stock option
        compensation expense was for stock options vesting during the nine months
        of
        2006, pursuant to our adoption of FAS
        123R .
        Other
        direct expenses relating to revenues decreased $123,000, principally as a
        result
        of less costs incurred in the nine months of 2006, compared to the prior
        year,
        for our review of the feasibility of certain Technologies.
  *General
        and administrative expenses* increased a net $310,000 in the nine months of 2006, compared to the nine
        months
        of 2005, due to a combination of several factors. Legal expenses increased
        $314,000 in the nine months of 2006, compared to the nine months of 2005,
        related to our defense of two complaints filed against CTT by our former
        President and Chief Executive Officer, and the complaint we filed against
        him
        seeking monetary and punitive damages for alleged breach of contract, breach
        of
        fiduciary duty, statutory theft of confidential information, and other claims
        (see Part II, Item 1., “Legal Proceedings”). Legal expenses also increased
        because in the prior year we recorded a $168,000 credit to the expense for
        a
        reimbursement from our director’s and officer’s liability insurance carrier for
        legal costs incurred and expensed in prior years. The costs were incurred
        in
        connection with an investigation by the SEC. There was no such credit in
        the
        nine months of 2006. Directors’ fees and expenses increased an aggregate of
        $186,000 as a result of an increase in the annual premium for our directors’ and
        officers’ liability insurance, and a net increase in expense for the difference
        between the expense recognized in 2006 pursuant to FAS 123R for stock options
        issued to our directors, compared to the expense recorded in 2005 relating
        to a
        modification of previously issued stock options. Partially offsetting these
        increases, other legal costs decreased $262,000 from the prior year for defense
        costs related to a whistleblower claim filed against us by a former employee
        that subsequently was dismissed (though the dismissal is being appealed),
        combined with an $86,000 decrease in costs incurred compared to the prior
        year
        to comply with the internal control documentation, testing and audit
        requirements of SOX 404, for the reasons described above for the third quarter
        2006.
  *Patent
        enforcement expenses, net of reimbursements* ,
        increased a net $82,000 in the nine months of 2006, compared to the nine
        months
        of 2005, as we incurred substantial costs to defend our homocysteine patent
        at
        the U.S. Supreme Court, partially offset by less overall activity in the
        nine
        months of 2006, compared to the nine months of 2005 related to other
        homocysteine patent infringement lawsuits. The level of patent enforcement
        expenses relates to our legal strategies and varies depending on the stage
        and
        activity relating to the litigation.
  Provision
        for income taxes
 
 The
        income tax benefit recorded for the nine months of 2006 was due to a true
        up
        during the quarter ended January 31, 2006, of our fiscal 2005 estimated tax
        liability to the final tax return as filed. During the last fiscal year,
        we were
        able to utilize a portion of our NOLs against our regular federal and state
        taxable income, effectively eliminating our regular income tax liabilities
        for
        fiscal 2005. However, we still were subject to the AMT, and the income tax
        provision recorded for the nine months of 2005 consisted solely of our estimated
        AMT liability. If we generate taxable income in fiscal 2006 we will be able
        to
        utilize our NOLs against any regular income tax liabilities that we may incur
        for fiscal 2006, but we still will be liable for the AMT. As a result of
        a
        review of our AMT status, we expect to be eligible for a one-time refund
        of AMT
        paid in the prior fiscal year. This will result in a credit of $35,000, and
        we
        expect to record the credit in the quarter ending July 31, 2006. We will
        remain
        subject to the AMT in future years.
  Page
            28
 
 Financial
        Condition and Liquidity
 
 Our
        liquidity requirements arise principally from our working capital needs,
        including funds needed to find, obtain and license new Technologies, to protect
        and enforce our intellectual property rights, if necessary, and to execute
        our
        strategic plan to grow our business. We fund our liquidity requirements
        principally from our cash on hand, and also cash flows from operations, if
        any.
        In addition, we fund our liquidity requirements through sales of common stock
        pursuant to an equity financing arrangement (see below). At April 30, 2006,
        we
        had no outstanding debt or credit facility.
  Cash
        and
        cash equivalents consist of demand deposits and highly liquid, interest earning
        investments with maturities when purchased of three months or less, including
        overnight bank deposits and money market funds. We carry cash equivalents
        at
        cost, which approximates fair value.
  At
        April
        30, 2006, cash and cash equivalents were $14,460,000, compared to $14,280,000
        at
        July 31, 2005. Cash used in operating activities during the nine months of
        2006
        was $1,584,000, compared to cash provided by operations of $8,299,000 during
        the
        nine months of 2005. The decrease in cash from operating activities in the
        current period from the prior year period was due principally to the net
        loss
        experienced in the current year compared to large net income in the same
        period
        of the prior year, and also due to the payment of fiscal 2005 commission
        and
        bonus awards during the nine months of 2006 that had been accrued at the
        end of
        fiscal 2005, partially offset by an increase in noncurrent royalties payable,
        due to timing, and noncash charges related to stock compensation. Cash used
        in
        investing activities during the nine months of 2006 was $49,000, compared
        to
        cash provided by investing activities of $496,000 during the nine months
        of
        2005. In the prior year the cash was provided by the partial collection of
        an
        outstanding receivable balance. Cash provided by financing activities during
        the
        nine months of 2006 was $1,814,000, compared to $3,450,000 of cash provided
        during the nine months of 2005. The decrease was due to less stock option
        exercises (we receive cash equivalent to the exercise price of each stock
        option
        exercised), and less sales of our common stock pursuant to our equity financing
        arrangement (see below), during the nine months of 2006, compared to the
        nine
        months of 2005.
  Changes
        in royalties receivable and payable reflect our normal cycle of royalty
        collections and payments, and fluctuate depending on income received and
        the
        date when royalty receipts and payments are due to be paid out under our
        agreements with clients and customers.
  *Funding
        and capital requirements*
 
 Equity
        Financing
 
 In
        February 2004, we entered into an equity financing agreement with Fusion
        Capital
        Fund II, LLC (“Fusion Capital”), pursuant to which we could sell, at our option,
        up to $5.0 million of our common stock to Fusion Capital. During the nine
        months
        of 2006, we sold $1,797,000 of our common stock to Fusion Capital. We use
        the
        proceeds for general working capital needs. The aggregate proceeds from sales
        to
        Fusion Capital pursuant to the equity financing agreement were approximately
        $4,515,000 from inception through April 30, 2006. We estimate that we will
        complete the entire $5.0 million of the equity financing agreement during
        the
        quarter ended July 31, 2006; however, we may change our estimate at any time.
        We
        have the option of entering into another equity financing agreement with
        Fusion
        Capital for an additional $5.0 million within a specified time after the
        termination of the current agreement. We have not determined whether we will
        exercise our option at this time.
  Page
            29
 
 Capital
        requirements
 
 We
        are
        investing funds to find new Technologies and new sources of Technologies,
        and
        license the Technologies, specifically by adding more personnel to our business
        development team and adding personnel to support our expanding global business
        development activities. We also are researching potential acquisition
        candidates. We are making these investments in order to grow our business
        profitably, increase shareholder value, and accomplish our strategic goals.
        We
        expect this trend to continue.
  Our
        current lease for office space expires in December 2006 and we have signed
        a
        lease for new space. The new office space is larger than our current office
        in
        order to accommodate the additional staff and provide for more efficient
        operations, as all staff will be consolidated onto one floor of the new
        building, compared to two floors currently. Since the landlord is renovating
        the
new office at his expense, we do not expect to expend significant funds to
        renovate the new office. We expect the space to be ready for occupation sometime
        in the summer of 2006, at which time rent payments will commence. We do not
        expect significant disruption or impact to our operations as a result of
        the
        move to the new office. The lease has an initial term of seven (7) years,
        but at
        our option may be terminated after five (5) years upon meeting certain
        conditions. Prior to end of the initial term, we can renew the lease for
        an
        additional five-year period, and we have an option to acquire additional
        space
        under certain conditions. The base rent is $22.50 per square foot, or
        approximately $250,000 per year, escalating $1.00 per square foot per year
        over
        the life of the lease to $28.50 per square foot in the seventh and final
        year of
        the lease. We will be responsible to pay our own utility costs and a pro-rata
        share of any increase in building common costs above the initial year.
        Principally because the new space is larger than our current space, our new
        facilities cost, including rent, will be approximately $125,000 more per
        year
        than we currently incur.
 
 As
        a
        result of the investments in our future described above, our operating costs
        have increased significantly, and we expect them to continue to increase
        over
        the next fiscal year.
 Income
          taxes
 
 We
          currently have the benefit of using a portion of our accumulated NOLs to
          eliminate any regular federal and state income tax liabilities that we
          may incur
          for fiscal 2006. If we have taxable income for this and future years, we
          expect
          that we will be liable to pay only the federal AMT until we exhaust all
          of our
          NOLs (federal and state). The rate that we would pay for the AMT liability
          is
          much less than if we had to pay income taxes at statutory income tax rates.
          However, we cannot determine when and if we will have sufficient income
          to
          utilize the benefit of the remainder of our NOLs.
 General
 
 The
        amounts and timing of our future cash requirements will depend on many factors,
        including the results of our operations and marketing efforts, the results
        and
        costs of legal proceedings, and our equity financing. To achieve and sustain
        profitability, we must license Technologies with sufficient current and
        long-term revenue streams, and continually add new licenses. However, obtaining
        rights to new Technologies, granting rights to licensees, enforcing intellectual
        property rights, and collecting royalty revenues are subject to many factors,
        some of which are beyond our control and/or that we cannot currently anticipate.
        Although there can be no assurance that we will be successful in our efforts,
        we
        believe that the combination of our cash on hand and the ability to raise
        funds
        from sales of our common stock to Fusion Capital will be sufficient to meet
        our
        current and anticipated operating cash requirements for at least the next
        fiscal
        year.
  Page
            30
 
 *Contingencies*
 
 We
        are a
        party to several legal actions and proceedings, both as a plaintiff and as
        a
        defendant, for which we cannot predict the final outcomes. These matters
        have
        been detailed herein and in prior filings with the SEC. Depending upon the
        amount and timing, an unfavorable resolution of any or all matters where
        we are
        a defendant, and/or our incurrence of significant legal fees and other costs
        to
        defend or prosecute any of these actions and proceedings, may have a material
        adverse effect on our consolidated financial position, results of operations
        and
        cash flows in a particular period.
 
 Other
        matters
 
 We
        believe that we carry adequate liability insurance, directors’ and officers’
insurance, casualty insurance (for owned or leased tangible assets), and
        other
        insurance to cover us against potential claims that occur in the normal course
        of our business.
 
 Critical
        Accounting Estimates
 
 We
        account for stock-based compensation in accordance with FAS 123(R). Pursuant
        to
        the fair value recognition provisions of FAS 123R, share-based compensation
        cost
        is measured at the grant date based on the value of the award and is recognized
        as expense over the service (vesting) period. Determining the fair value
        of
        share-based awards at the grant date requires judgment, including estimating
        the
        expected life of the stock option, volatility, and the amount of share-based
        awards that can be expected to be forfeited. Our estimates were based on
        our
        historical experience with stock option awards. If actual results differ
        significantly from these estimates, stock-based compensation expense and
        our
        results of operations could be materially impacted.
  There
        have been no other significant changes in our accounting estimates described
        under the caption “Critical Accounting Estimates,” included in Item 7,
“Management's Discussion and Analysis of Financial Condition and Results of
        Operations,” in our Annual Report on Form 10-K for the year ended July 31,
        2005.
 
 **Item
        3.**  **Quantitative
        and Qualitative Disclosures About Market Risk**
 
 We
        do not
        have significant market risk to the valuation of our assets other than risks
        related to our common stock holdings of Palatin Technologies, Inc. (“Palatin”),
        and Clinuvel. The value of the Palatin stock is included in current
        assets in equity securities, while
        the value of the Clinuvel shares is included in noncurrent
        assets in equity securities ,
        since
        our current intention is to hold the Clinuvel shares as a long term investment.
        The value of both stocks is subject to market fluctuations in the per share
        price of the stock as well as foreign currency fluctuations relating to the
        Clinuvel shares, since Clinuvel common stock is traded on the Australian
        Stock
        Exchange and the price per share of the stock is quoted in Australian dollars.
        We currently consider market fluctuations to be temporary. During the three
        and
        nine months ended April 30, 2006, the market value of the Clinuvel shares
        increased (decreased) by $159,950 and $(146,364), respectively, while the
        exchange rate fluctuations resulted in a foreign currency translation increase
        of $6,305 and $6,906, respectively. In addition, during the nine months ended
        April 30, 2006, we reversed the discount originally recorded upon receipt
        of the
        Clinuvel shares due to the lapse of the sales restriction, resulting in an
        unrealized gain of $206,420. The net aggregate unrealized gain on the Clinuvel
        shares for the three and nine months ended April 30, 2006, was $166,255 and
        $66,962, respectively. During the three and nine months ended April 30, 2006,
        the market value of the Palatin shares increased (decreased) $(48,280) and
        $46,920, respectively. In addition, during the nine months ended April 30,
        2006,
        we reversed the discount originally recorded upon the receipt of the Palatin
        shares due to our conclusion that the shares could be resold, resulting in
        an
        unrealized gain of $25,704. The net aggregate unrealized gain (loss) on the
        Palatin shares for the three and nine months ended April 30, 2006 was $(48,280)
        and $72,624, respectively. The total combined net unrealized gain for the
        three
        and nine months ended April 30, 2006, was $117,975 and $139,586,
        respectively.
  Page
            31
 
 **Item
        4.**  **Controls
        and Procedures**
 
 (a)  Evaluation
        of Disclosure Controls and Procedures
 
 Our
        management, including our Chief Executive Officer and Chief Financial Officer,
        evaluated the effectiveness of the design and operation of our disclosure
        controls and procedures (as defined in the Securities Exchange Act of 1934
        (the
“Exchange Act”), Rules 13a-15(e) and 15d-15(e)) as of April 30, 2006 .
        Our
        disclosure controls and procedures are designed to ensure that information
        required to be disclosed by us in reports filed under the Exchange Act is
        recorded, processed, summarized, and reported as specified in the SEC’s rules
        and forms. Based on this evaluation, our Chief Executive Officer and Chief
        Financial Officer concluded that our disclosure controls and procedures were
        effective as of April 30 ,
        2006 .
 
 (b)  Changes
        in Internal Control over Financial Reporting
 
 There
        were no significant changes in our internal control over financial reporting
        during the quarter ended April 30 ,
        2006 ,
        that
        have materially affected, or are reasonably likely to materially affect,
        our
        internal control over financial reporting.
 
 **PART
        II - OTHER INFORMATION**
 
 **Item
        1.**  **Legal
        Proceedings**
 
 See
        Notes
        4 and 12 to the accompanying unaudited condensed consolidated financial
        statements in Part I of this Quarterly Report on Form 10-Q.
  Page
            32
  **Item
        2.**  **Unregistered
        Sales of Equity Securities and Use of Proceeds**
 
 The
        following table lists sales and issuances of our common stock to Fusion Capital
        during the three months ended April
        30,
        2006 , pursuant
        to the $5 million equity financing arrangement with Fusion Capital, as described
        in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition
        and Results of Operations.” We issued all of these securities without
        registration in reliance upon an exemption under Section 4(2) of the Securities
        Act of 1933 because we made the offers and sales in private
        placements. The
        proceeds from these sales were used for general working capital
        purposes.
  Month
              
              Number
                  of
                shares
                  sold
                and
                  issued
              
              Total
                  cash
                ReceivedFebruary
                  2006
              
              
              25,702
              
              $
              102,502March
                  2006
              
              
              21,845
              
              
              82,498April
                  2006
              
              
              70,789
              
              
              212,490118,336
              
              $
              397,490
 
 **Item
        4.**  **Submission
        of Matters to a Vote of Security Holders**
 
 None
 
 **Item
        6.**  **Exhibits**
  10.27
              
              Lease agreement dated April 28, 2006,
                between
                1375 Kings Highway/777 Commerce Drive Associates, LLC, and 14 Mamaroneck
                Avenue Reinvestment Associates, LLC, and Competitive Technologies,
                Inc.31.1
              
              Certification by the Principal Executive
                Officer of Competitive Technologies, Inc. pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule
                15d-14(a)).31.2
              
              Certification by the Principal Financial
                Officer of Competitive Technologies, Inc. pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule
                15d-14(a)).32.1
              
              Certification by the Principal Executive
                Officer of Competitive Technologies, Inc. pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (furnished
                herewith).32.2
              
              Certification by the Principal Financial
                Officer of Competitive Technologies, Inc. pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (furnished
                herewith).
  Page
            33
 
 **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned, thereunto
        duly authorized.
  **COMPETITIVE
                  TECHNOLOGIES, INC.**
                (the registrant)Date: June
                9,
                2006
              By:
              /s/ 
D.J.
                Freed, Ph.D.Donald
                  J. Freed
                President,
                  Chief ExecutiveOfficer
                and
                  Authorized Signer
  **COMPETITIVE
                  TECHNOLOGIES, INC.**
                **(**the
                  registrant)Date: June
                9, 2006
              By:
              /s/ Michael
                D. DavidsonMichael
                  D. Davidson
                Vice
                  President, Chief Financial Officer,
                Chief
                  Accounting Officer
                and
                  Authorized Signer
  Page
            34
 
 INDEX
        TO
        EXHIBITS
  **Exhibit
                No.**
              ****
              **Description**10.27
              
              Lease agreement dated April 28, 2006,
                between
                1375 Kings Highway/777 Commerce Drive Associates, LLC, and 14 Mamaroneck
                Avenue Reinvestment Associates, LLC, and Competitive Technologies,
                Inc.31.1
              
              Certification by the Principal Executive
                Officer of Competitive Technologies, Inc. pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule
                15d-14(a)).31.2
              
              Certification by the Principal Financial
                Officer of Competitive Technologies, Inc. pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule
                15d-14(a)).32.1
              
              Certification by the Principal Executive
                Officer of Competitive Technologies, Inc. pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (furnished
                herewith).32.2
              
              Certification by the Principal Financial
                Officer of Competitive Technologies, Inc. pursuant to Section 906
                of the
                Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (furnished
                herewith).
             
  Page
            35