---

Table of Contents

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 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 March 31, 2006

or

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

For the transition period from ___________ to __________

Commission file number 001-15543

---

PALATIN TECHNOLOGIES, INC.(Exact name of registrant as specified in its charter)

|Delaware                                                            | 95-4078884                          
|------------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of
     incorporation or organization) | (I.R.S. Employer Identification No.)
|                                                                    |                                     
|4C Cedar Brook Drive                                                |                                     
|Cranbury, New Jersey                                                | 08512                               
|(Address of principal executive
     offices)                       | (Zip Code)                          

(609) 495-2200(Registrant's telephone number,
including area code)

Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [  ]

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. (Check one):

|                             |                       |                           
|---------------------------- | --------------------- | --------------------------
|Large accelerated filer [  ] | Accelerated filer [X] | Non-accelerated filer [  ]

Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of April 28, 2006, 70,878,521
shares of the registrants common stock, par value $.01 per share, were outstanding.

---

PALATIN TECHNOLOGIES, INC.Table of Contents

|                                    |                                                                                                        |     
|----------------------------------- | ------------------------------------------------------------------------------------------------------ | ----
|                                    |                                                                                                        | Page
|PART I  FINANCIAL
     INFORMATION
|Item 1.                             | Financial Statements (Unaudited)                                                                       |     
|                                    | Consolidated Balance Sheets
     as of March 31, 2006 and June 30, 2005                                | 2   
|                                    | Consolidated Statements of Operations
     for the Three and Nine Months ended March 31, 2006 and 2005 | 3   
|                                    | Consolidated Statements of Cash Flows
     for the Three and Nine Months ended March 31, 2006 and 2005 | 4   
|                                    | Notes to Consolidated Financial
     Statements                                                        | 5   
|Item 2.                             | Management's Discussion and Analysis of
     Financial Condition and Results of Operations             | 12  
|Item 3.                             | Quantitative and Qualitative
     Disclosures About Market Risk                                        | 19  
|Item 4.                             | Controls and Procedures                                                                                | 19  

PART II - OTHER
INFORMATION

|        |                                                                  |   
|------- | ---------------------------------------------------------------- | --
|Item 1. | Legal Proceedings                                                | 20
|Item 2. | Unregistered Sales of Equity Securities and
     Use of Proceeds | 20
|Item 3. | Defaults Upon Senior Securities                                  | 20
|Item 4. | Submission of Matters to a Vote of Security
     Holders         | 20
|Item 5. | Other Information                                                | 20
|Item 6. | Exhibits                                                         | 20

SIGNATURES

1

---



Table of Contents

PART I  FINANCIAL
INFORMATION

Item 1. Financial Statements

PALATIN TECHNOLOGIES,
INC.Consolidated Balance Sheets(unaudited)

March 31,         June 30,
                                                                              2006              2005
                                                                        ---------------   ---------------
ASSETS
Current assets:
  Cash and cash equivalents                                              $ 13,948,468      $  15,720,364
  Available-for-sale investments                                            2,341,877          2,385,570
  Accounts receivable                                                          53,032          5,441,425
  Inventories                                                                       -          1,382,160
  Prepaid expenses and other current assets                                 1,829,200          1,889,269
                                                                        ---------------   ---------------
      Total current assets                                                 18,172,577         26,818,788

Property and equipment, net                                                 6,433,157          6,464,324
Restricted cash                                                               475,000            475,000
Other assets                                                                1,131,726          1,408,158
                                                                        ---------------   ---------------
      Total assets                                                       $ 26,212,460      $  35,166,270
                                                                        ===============   ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Capital lease obligations, current portion                              $    84,759       $     11,269
  Accounts payable                                                          4,288,778          4,773,297
  Accrued expenses                                                          6,113,641          4,471,276
  Deferred revenue, current portion                                         4,124,649          3,790,828
                                                                        ---------------   ---------------
      Total current liabilities                                            14,611,827         13,046,670

Capital lease obligations, net of current portion                             251,914             18,934
Deferred rent, net of current portion                                       2,828,967          3,001,980
Deferred revenue, net of current portion                                    7,503,816          9,873,438
                                                                        ---------------   ---------------
      Total liabilities                                                    25,196,524         25,941,022
                                                                        ---------------   ---------------

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $.01 par value, 10,000,000 shares authorized:
    Series A Convertible; 9,997 and 11,447 shares issued and outstanding
    as of March 31, 2006 and June 30, 2005, respectively                          100                114
  Common stock, $.01 par value, 150,000,000 shares authorized,
    59,899,844 and 54,236,544 shares issued and outstanding as of
    March 31, 2006 and June 30, 2005, respectively                            599,000            542,365
  Additional paid-in capital                                              153,026,525        140,167,431
  Accumulated other comprehensive loss                                        (43,693)                 -
  Accumulated deficit                                                    (152,565,996)     (131,484,662)
                                                                        ---------------   ---------------
      Total stockholders' equity                                            1,015,936          9,225,248
                                                                        ---------------   ---------------
      Total liabilities and stockholders' equity                         $ 26,212,460      $  35,166,270
                                                                        ===============   ===============


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

2

---



Table of Contents

PALATIN TECHNOLOGIES,
INC.Consolidated Statements of Operations(unaudited)

PALATIN TECHNOLOGIES, INC.
                                                 Consolidated Statements of Operations
                                                              (unaudited)

                                        Three Months Ended March 31,               Nine Months Ended March 31,
                                     ----------------------------------    -----------------------------------
                                         2006              2005                 2006               2005
                                     ----------------    ---------------    ----------------    ---------------
REVENUES:
     Royalties                        $          -        $    465,974        $  1,508,862        $ 1,007,647
     Product sales                               -                   -                   -          1,707,825
     Licenses, grants and
      contracts                          5,045,025           2,340,869          13,267,079          9,396,719
                                     ----------------    ---------------    ----------------    ---------------
          Total revenues                 5,045,025           2,806,843          14,775,941         12,112,191
                                     ----------------    ---------------    ----------------    ---------------

OPERATING EXPENSES:
     Cost of product sales                       -               5,924           2,041,175            226,765
     Royalties                                   -              85,282             299,995            244,676
     Research and development           10,954,466           4,854,417          29,639,751         16,619,541
     General and administrative          1,838,967           1,958,738           5,022,069          5,297,633
                                     ----------------    ---------------    ----------------    ---------------
          Total operating
           expenses                     12,793,433           6,904,361          37,002,990         22,388,615
                                     ----------------    ---------------    ----------------    ---------------

Loss from operations                    (7,748,408)         (4,097,518)        (22,227,049)       (10,276,424)
                                     ----------------    ---------------    ----------------    ---------------

OTHER INCOME (EXPENSE):
     Investment income                     155,677             161,169             496,917            440,803
     Interest expense                       (9,375)             (3,907)            (17,477)           (10,946)
                                     ----------------    ---------------    ----------------    ---------------
          Total other income, net          146,302             157,262             479,440            429,857
                                     ----------------    ---------------    ----------------    ---------------

Loss before income taxes                (7,602,106)         (3,940,256)        (21,747,609)        (9,846,567)
Income tax benefit                               -                   -             666,275            580,275
                                     ----------------    ---------------    ----------------    ---------------

NET LOSS                              $ (7,602,106)       $ (3,940,256)      $ (21,081,334)      $ (9,266,292)
                                     ================    ===============    ================    ===============

Basic and diluted net loss per
      common share                    $      (0.13)       $      (0.07)      $       (0.37)      $      (0.17)
                                     ===============     ===============    ================    ===============

Weighted average number of
      common shares outstanding
      used in computing basic
      and diluted net loss per
      common share                     59,339,220           54,021,372          57,503,198         53,796,392
                                     ===============     ===============    ================    ===============


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

3

---



Table of Contents

PALATIN TECHNOLOGIES,
INC.Consolidated Statements of Cash Flows(unaudited)

Nine Months Ended March 31,
                                                                  ----------------------------------
                                                                     2006                2005
                                                                  ---------------    ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                         $(21,081,334)      $ (9,266,292)
  Adjustments to reconcile net loss to net cash
    (used in) provided by operating activities:
      Depreciation and amortization                                     947,275             806,689
      Stock-based compensation                                          863,795              (2,301)
      Inventory write-off                                             2,041,175                   -
      Changes in certain operating assets and liabilities:
        Accounts receivable                                           5,388,393          (1,489,170)
        Inventories                                                    (659,015)           (855,617)
        Prepaid expenses and other                                      335,666          (1,095,573)
        Accounts payable                                               (484,519)          3,005,152
        Accrued expenses and other                                    1,469,352          (1,118,591)
        Deferred revenues                                            (2,035,801)         13,822,807
                                                                  ---------------    ---------------
            Net cash (used in) provided by operating activities     (13,215,013)          3,807,104
                                                                  ---------------    ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Sale or maturity of short-term investments                              -             50,005
      Purchases of property and equipment                              (589,059)          (474,127)
                                                                  ---------------    ---------------
            Net cash used in investing activities                      (589,059)          (424,122)
                                                                  ---------------    ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Payments on capital lease obligations                             (19,744)           (31,710)
      Proceeds from issuances of common stock and
       warrants, net                                                 12,051,920          3,728,502
                                                                  ---------------    ---------------
            Net cash provided by financing activities                12,032,176          3,696,792
                                                                  ---------------    ---------------

NET (DECREASE) INCREASE IN CASH
  AND CASH EQUIVALENTS                                              (1,771,896)          7,079,774

CASH AND CASH EQUIVALENTS, beginning
   of period                                                         15,720,364         17,947,076
                                                                  ---------------    ---------------

CASH AND CASH EQUIVALENTS, end of period                           $ 13,948,468       $ 25,026,850
                                                                  ===============    ===============

SUPPLEMENTAL CASH FLOW INFORMATION:
    Assets acquired by capital lease                               $    326,364       $          -
                                                                  ===============    ===============


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

4

---



Table of Contents

PALATIN TECHNOLOGIES, INC.Notes to
Consolidated Financial Statements (unaudited)

(1)   ORGANIZATION:

Nature
of Business  Palatin Technologies, Inc. (Palatin or the
Company) is a biopharmaceutical company primarily focused on discovering and
developing melanocortin (MC)-based therapeutics, which the Company believes is
one of the fastest growing areas of pharmaceutical research and development. Targeting the
MC family of receptors provides therapeutic opportunities to treat a variety of conditions
and diseases, including sexual dysfunction, obesity, cachexia (extreme wasting, generally
secondary to a chronic disease) and inflammation. The Companys objective is to
become a worldwide leader in MC-based therapeutics by commercializing its products under
development and identifying new product targets using its patented drug discovery
platform.

Bremelanotide,
formerly known as PT-141, an MC receptor agonist and the Companys lead therapeutic
drug candidate, is a patented, nasally-administered peptide that is in clinical
development for the treatment of both male and female sexual dysfunction, under a
collaborative development and marketing agreement with King Pharmaceuticals, Inc.
(King), a specialty pharmaceutical company.

The
Company is in the process of identifying a clinical candidate MC therapeutic small
molecule for the treatment of obesity, and also has a program for the treatment of
cachexia. The Company is also in the process of identifying a clinical candidate
natriuretic compound for the treatment of congestive heart failure. These programs utilize
MIDAS, the Companys proprietary platform technology to design and synthesize
compounds that mimic the activity of peptides, but which the Company believes offer
significant advantages to conventional protein or peptide-based drugs.

NeutroSpec®
is the Companys proprietary radiolabeled monoclonal antibody product for imaging and
diagnosing infection and is the subject of a strategic collaboration agreement with Tyco
Healthcare Mallinckrodt (Mallinckrodt). In December 2005, the Company and
Mallinckrodt voluntarily suspended the sales, marketing and distribution of NeutroSpec and
recalled all existing customer inventories. In July 2004, the Company had received
approval from the U.S. Food and Drug Administration (FDA) to market NeutroSpec
for imaging and diagnosing equivocal appendicitis. In 2005, the Company and Mallinckrodt
reported to the FDA the occurrence of several serious adverse events, including two
deaths, involving patients who received NeutroSpec. All ongoing clinical trials and
regulatory approvals of NeutroSpec have been suspended. The Company and Mallinckrodt are
reviewing data and assessing approaches for understanding the relationship between
NeutroSpec use and the observed serious adverse events. No final
decisions concerning future activities involving NeutroSpec have been made.

Key
elements of the Companys business strategy include: entering into alliances and
partnerships with pharmaceutical companies to facilitate the development, manufacture,
marketing, sale and distribution of the Companys product candidates under
development, expansion of the Companys pipeline through the utilization of its MC
expertise and patented drug discovery platform, opportunistic acquisition of synergistic
products and technologies and partial funding of the Companys development and
discovery programs with the cash flow from collaboration agreements.

Business
Risk and Liquidity  The Company has incurred negative cash flows from operations
since its inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts. As shown in the
accompanying consolidated financial statements, the Company has an accumulated deficit as
of March 31, 2006 and incurred a net loss in the nine months ended March 31, 2006. The
Company anticipates incurring additional losses in the future as a result of spending on
its development programs. To achieve profitability, the Company, alone or with others,
must successfully develop and commercialize its technologies and proposed products,
conduct successful pre-clinical studies and clinical trials, obtain required regulatory
approvals and successfully manufacture and market such technologies and proposed products.
The time required to reach profitability is highly uncertain, and there can be no
assurance that the Company will be able to achieve profitability on a sustained basis, if
at all.

The
Company expects that its cash, cash equivalents and available-for-sale investments as of
March 31, 2006, together with the proceeds of its April 2006 offering discussed in note 8,
will be adequate to fund the Companys operations for at least the next twelve
months. Management plans to continue to refine its operations, control expenses, evaluate
alternative methods to conduct its business, and seek available and attractive sources of
financing and sharing of development costs through strategic collaboration agreements or
other resources. Should appropriate sources of financing not be available, management
would delay certain clinical trials and research activities until such time as appropriate
financing was available. There can be no assurance that the Companys

5

---



Table of Contents

financing
efforts will be successful. If adequate funds are not available, the Companys
financial condition will be materially and adversely affected.

Concentrations
 Concentrations in the Companys assets and operations subject it to certain
related risks. Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of cash and cash equivalents,
available-for-sale investments and accounts receivable. The Companys cash and cash
equivalents are primarily invested in one money market fund sponsored by a large financial
institution. The Companys periodic accounts receivable balances primarily consist of
amounts due from its collaboration partners, King and Mallinckrodt.

Revenues
from King and Mallinckrodt as a percentage of total revenues were as follows:

|             |  |                              |     |                             |  |      |  |      |     |  |  |    
|------------ |  | ---------------------------- | --- | --------------------------- |  | ---- |  | ---- | --- |  |  | ---
|             |  | Three Months Ended March 31, |     | Nine Months Ended March 31,
|             |  | 2006                         |     | 2005                        |  | 2006 |  | 2005
|King         |  |                              | 99% |                             |  | 83%  |  |      | 88% |  |  | 61%
|             |  |                              |     |                             |  |      |  |      |     |  |  |    
|Mallinckrodt |  |                              | 1%  |                             |  | 17%  |  |      | 12% |  |  | 39%

(2)   BASIS OF PRESENTATION:

The
accompanying unaudited consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnote disclosures required to be presented for complete financial
statements. In the opinion of management, these consolidated financial statements contain
all adjustments (consisting of normal recurring adjustments) considered necessary to
present fairly the Companys financial position as of March 31, 2006, its results of
operations for the three and nine months ended March 31, 2006 and 2005 and its cash flows
for the nine months ended March 31, 2006 and 2005. The results of operations for the three
and nine month periods ended March 31, 2006 may not necessarily be indicative of the
results of operations expected for the full year, except that the Company expects to incur
a significant loss for the fiscal year ending June 30, 2006.

The
accompanying consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the Companys
annual report on Form 10-K, filed with the Securities and Exchange Commission
(SEC), which includes consolidated financial statements as of June 30, 2005
and 2004 and for each of the fiscal years in the three-year period ended June 30, 2005.

(3)  
          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles
of Consolidation  The consolidated financial statements include the accounts of
Palatin and its wholly owned inactive subsidiary. All significant intercompany accounts
and transactions have been eliminated in consolidation.

Use
of Estimates  The preparation of consolidated financial statements in conformity
with U.S. generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Cash
and Statements of Cash Flows  Cash and cash equivalents include cash on hand, cash
in banks and all highly liquid investments with a purchased maturity of less than three
months. Restricted cash secures letters of credit for security deposits on leases.

Investments
 The Company classifies its investments as available-for-sale investments and all
such investments are recorded at fair value. Unrealized holding gains and losses, net of
the related tax effect, if any, are excluded from earnings and are reported in accumulated
other comprehensive loss until realized. Interest and dividends on securities classified
as available-for-sale are included in investment income. Gains and losses are recorded in
the statement of operations when realized or when unrealized holding losses are determined
to be other than temporary, on a specific-identification basis.

Fair
Value of Financial Instruments  The Companys financial instruments consist
primarily of cash and cash equivalents, available-for-sale investments, accounts
receivable, accounts payable and capital lease obligations. Management believes that the
carrying value of these assets and liabilities are representative of their respective fair
values.

6

---



Table of Contents

Inventories
 The Companys inventories, which all relate to NeutroSpec, are valued at the lower of
cost or market using the first-in, first-out method and exclude certain costs incurred
prior to the FDA approval of NeutroSpec in July 2004, which were charged directly to
research and development expense. Inventory costs consist primarily of costs to
third-party vendors for work-in-progress materials and do not include general and
administrative costs. As of December 31, 2005, the Company wrote off existing inventories
upon suspension of NeutroSpec sales and marketing activities with a charge of $2,041,175
to cost of product revenues.

Property
and Equipment  Property and equipment consists of office and laboratory equipment,
office furniture and leasehold improvements and includes assets acquired under capital
leases. Property and equipment are recorded at cost. Depreciation is recognized using the
straight-line method over the estimated useful lives of the related assets, generally five
years for laboratory equipment, seven years for office furniture and equipment and the
lesser of the term of the lease or the useful life for leasehold improvements.
Amortization of assets acquired under capital leases is included in depreciation.
Maintenance and repairs are expensed as incurred while expenditures that extend the useful
life of an asset are capitalized.

Impairment of Long-Lived
Assets  The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully recoverable. To determine recoverability of a long-lived asset, management
evaluates whether the estimated future undiscounted net cash flows from the asset, without interest charges, are less than its
carrying amount. If impairment is indicated, the long-lived asset would be written down to fair value. Fair value is determined by
an evaluation of available price information at which assets could be bought or sold including quoted market prices, if available,
or the present value of the estimated future discounted cash flows based on reasonable and supportable assumptions.

Other
Assets  Other assets and other current assets include certain payments the Company
made to licensors in cash and stock as their share of up-front payments received from
collaboration partners in connection with the Companys collaboration agreements. The
Company has treated these payments as incremental direct costs of the up-front payments,
to be charged over the same period as the related deferred revenue, in accordance with
guidance contained in the SECs Staff Accounting Bulletin No. 104 and, by analogy, to
paragraph 4 of FASB Technical Bulletin 90-1.

Deferred
Rent  The Companys operating leases provide for rent increases over the terms
of the leases. Deferred rent consists of the difference between periodic rent payments and
the amount recognized as rent expense on a straight-line basis for the buildings the
Company occupies, as well as the value of tenant allowances for leasehold improvements. Rent expense is being
recognized ratably over the life of the leases.

Revenue
Recognition  Product sales represent the sale of NeutroSpec by the Company to
Mallinckrodt, pursuant to the collaboration agreement. Product sales are billed upon
shipment of product to Mallinckrodt. Revenue is recognized upon acceptance of the product
by Mallinckrodt based on conformance with product specifications. Upon acceptance of the
product, Mallinckrodt does not have the right of return or right to cancel or terminate
the sale.

Royalty
revenues represent amounts due from Mallinckrodt and are earned based on a contractual
percentage of Mallinckrodts net sales to customers. Revenue is recognized by the
Company in the period in which Mallinckrodts net sales occur, as reported by
Mallinckrodt to the Company on a quarterly basis.

Revenue
from corporate collaborations and licensing agreements consists of up-front fees, research
and development funding, and milestone payments. Non-refundable up-front fees are deferred
and amortized to revenue over the related performance period. The Company estimates the
performance period as the period in which it performs certain development activities under
the applicable agreement. Estimated reimbursements for research and development activities
and government grants are recorded in the period that the Company performs the related
activities under the terms of the applicable agreements. Revenue resulting from the
achievement of milestone events stipulated in the applicable agreements is recognized when
the milestone is achieved. Milestones are based on the occurrence of a substantive element
specified in the contract or as a measure of substantive progress towards completion under
the contract. Grant and other contract revenues are recognized as the Company provides the
services stipulated in the underlying grants and/or contracts based on the time and
materials incurred.

Research
and Development Costs  The costs of research and development activities are charged
to expense as incurred, including the cost of equipment for which there is no alternative
future use.

Stock
Options  Effective July 1, 2005, the Company adopted Statement of Financial
Accounting Standards (SFAS) 123(R), Share-Based Payment. SFAS
123(R) establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services and requires that the compensation
cost relating to share-based payment transactions be recognized in financial statements,
measured by the fair value of the equity or liability instruments issued, adjusted for
estimated forfeitures.

7

---



Table of Contents

Prior
to the adoption of SFAS 123(R), the Company applied the intrinsic-value-based method of
accounting prescribed by Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees, and related interpretations, to
account for its fixed-plan stock options to employees. Under this method, compensation
cost was recorded only if the market price of the underlying stock on the date of grant
exceeded the exercise price. SFAS 123, Accounting for Stock-Based
Compensation, established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation plans. As
permitted by SFAS 123, the Company elected to continue to apply the intrinsic-value-based
method of accounting described above, and adopted only the disclosure requirements of SFAS
123. The fair-value-based method used to determine historical pro forma amounts under SFAS
123 was similar in most respects to the method used to determine stock-based compensation
expense under SFAS 123(R). However, in its pro forma disclosures, the Company accounted
for option forfeitures as they occurred, rather than based on estimates of future
forfeitures.

The
previously-disclosed pro forma impact on earnings of using the fair-value-based method of
accounting for stock-based compensation under SFAS 123 for the three and nine months
ended March 31, 2005 is as follows:

|                                                                                                            |  |                                        |  |                                      
|----------------------------------------------------------------------------------------------------------- |  | -------------------------------------- |  | -------------------------------------
|                                                                                                            |  | Three
     months ended March 31, 2005 |  | Nine months
     ended March 31, 2005
|Net loss attributable to common stockholders:                                                               |  |                                        |  |                                      
|As reported                                                                                                 |  | $ (3,940,256)                          |  | $ (9,266,292)                        
|Stock-based employee compensation expense    
     included in the determination of net loss as    reported |  | -                                      |  | 68,333                               
|Impact of total stock-based compensation
     expense    determined under fair-value-based method           |  | (223,705)                              |  | (808,908)                            
|Pro forma                                                                                                   |  | $ (4,163,961)                          |  | $ (10,006,867)                       
|Basic and diluted net loss per common share:                                                                |  |                                        |  |                                      
|As reported                                                                                                 |  | $
             (0.07)                  |  | $
              (0.17)               
|Pro forma                                                                                                   |  | $
             (0.08)                  |  | $
              (0.19)               

The
Company accounts for options granted to consultants in accordance with Emerging Issues
Task Force Issue 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The
Company determines the value of stock options utilizing the Black-Scholes option-pricing
model.

Compensation
costs for fixed awards with pro rata vesting are allocated to periods on the straight-line
basis.

Income
Taxes  The Company and its subsidiary file consolidated federal and separate-company
state income tax returns. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment
date.

In
accordance with SFAS 109 Accounting for Income Taxes, the Company has recorded
a valuation allowance against its deferred tax assets. The valuation allowance is based on
managements estimates and analysis, which includes provisions of tax laws that may limit the
Companys ability to utilize its net operating loss carryforwards.

Net
Loss per Common Share  Basic earnings per share (EPS) is computed by
dividing net loss by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options and warrants. For the three and nine
months ended March 31, 2006 and 2005, there were no dilutive effects of stock options or
warrants as the Company incurred a net loss in each period. Common shares issuable upon
conversion of Series A Convertible Preferred Stock and the exercise of outstanding options
and warrants amounted to an aggregate of 13,062,291 and 13,039,115 as of March 31, 2006
and 2005, respectively.

8

---



Table of Contents

(4)   OTHER COMPREHENSIVE LOSS

Other
comprehensive loss consists of the following:

|                               |  |                              |  |                            |  |                 |  |               
|------------------------------ |  | ---------------------------- |  | -------------------------- |  | --------------- |  | --------------
|                               |  | Three Months Ended March 31, |  | Six Months Ended March 31,
|                               |  | 2006                         |  | 2005                       |  | 2006            |  | 2005          
|Net Loss                       |  | $  (7,602,106)               |  | $  (3,940,256)             |  | $  (21,081,334) |  | $  (9,266,292)
|Unrealized loss on investments |  | (12,053)                     |  | (14,083)                   |  | (43,693)        |  | (29,279)      
|Comprehensive loss             |  | $  (7,614,159)               |  | $  (3,954,339)             |  | $  (21,125,027) |  | $  (9,295,571)

(5)   INVESTMENTS

The
following is a summary of available-for-sale investments:

|             |  |                |  |                        |  |                         |  |             
|------------ |  | -------------- |  | ---------------------- |  | ----------------------- |  | ------------
|             |  | March 31, 2006
|             |  | Cost           |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value  
|Mutual funds |  | $  2,385,570   |  | $                  -   |  | $      (43,693)         |  | $  2,341,877
|Total        |  | $  2,385,570   |  | $                  -   |  | $      (43,693)         |  | $  2,341,877

|             |  |               |  |                        |  |                         |  |             
|------------ |  | ------------- |  | ---------------------- |  | ----------------------- |  | ------------
|             |  | June 30, 2005
|             |  | Cost          |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value  
|Mutual funds |  | $  2,385,570  |  | $                  -   |  | $                  -    |  | $  2,385,570
|Total        |  | $  2,385,570  |  | $                  -   |  | $                  -    |  | $  2,385,570

(6)  
          STOCKHOLDERS EQUITY

Common
Stock Transactions  In September 2005, the Company sold 4,499,336 shares of its
common stock and warrants to purchase 719,894 shares of its common stock in a private
placement to King for a total purchase price of $10,000,000. The warrants are exercisable
for a three-year period commencing September 26, 2005, at an exercise price of $2.22 per
share. The sale of the stock and warrants was made pursuant to the Companys
collaborative development and marketing agreement with King. Under the agreement, King may
pay future milestone payments to the Company totaling up to $90,000,000 for achieving
certain male erectile dysfunction (ED) and female sexual dysfunction
(FSD) development and regulatory approval targets. After regulatory approval
and commercialization of bremelanotide, King may also pay milestone payments to the
Company totaling up to an additional $130,000,000 upon achieving specified annual North
American net sales thresholds. A portion of the above milestones may be received in the
form of equity contributions.

During the nine months ended
March 31, 2006, we issued 1,087,079 shares of common stock for aggregate cash proceeds of $2,062,224 upon the exercise of
warrants.

Stock
Option Plan  The Companys 2005 Stock Plan was approved by the Companys
stockholders in June 2005 and provides for incentive and nonqualified stock option grants
for up to 5,000,000 shares of common stock to employees, non-employee directors and
consultants. The 2005 Stock Plan is administered under the direction of the Board of
Directors, which may specify grant terms and recipients. Options granted by the Company
under the 2005 Stock Plan generally expire ten years from the date of grant and generally
vest over three to four years. As of March 31, 2006, 3,814,246 shares were available for
grant under the 2005 Stock Plan.

As
of March 31, 2006, there were 155,760 options available for grant under the 1996 Stock
Option Plan, which expires in August 2006. The 1996 Stock Option Plan is administered
under the direction of the Board of Directors, which may specify grant terms and
recipients. Options granted by the Company under the 1996 Stock Option Plan generally
expire ten years from the date of grant and generally vest over three to four years.

9

---



Table of Contents

The
Company also has outstanding options that were granted under previous option plans. The
Company expects to settle option exercises under any of its plans with authorized but
currently unissued shares.

The
following table summarizes option activity for the nine months ended March 31, 2006:

|                                   |  |                        |  |                                          |  |                                          |  |                                  
|---------------------------------- |  | ---------------------- |  | ---------------------------------------- |  | ---------------------------------------- |  | ---------------------------------
|                                   |  | Number
     of  Shares |  | Weighted  
     Average  Exercise  Price |  | Weighted  
     Average  Remaining  Term |  | Aggregate  
     Intrinsic  Value
|Outstanding at beginning of period |  | 4,688,152              |  | $3.41                                    |  |                                          |  |                                  
|Granted                            |  | 1,232,597              |  | 2.08                                     |  |                                          |  |                                  
|Forfeited                          |  | (124,060)              |  | 2.34                                     |  |                                          |  |                                  
|Exercised                          |  | (21,162)               |  | 1.64                                     |  |                                          |  |                                  
|Cancelled                          |  | (115,638)              |  | 4.09                                     |  |                                          |  |                                  
|Outstanding at end of period       |  | 5,659,889              |  | 3.13                                     |  | 6.2                                      |  | $2,002,430                       
|Exercisable at end of period       |  | 4,158,641              |  | 3.45                                     |  | 5.2                                      |  | 1,027,589                        
|Unvested options expected to vest  |  | 1,237,139              |  | 2.30                                     |  | 9.1                                      |  | 783,479                          

The intrinsic value of
options exercised in the nine months ended March 31, 2006 and 2005 was $21,368 and $32,384 respectively.

The weighted average fair
value of options granted during the nine months ended March 31, 2006 and 2005 was $1.36 and $2.55, respectively. The fair value of
option grants is estimated at the date of grant using the Black-Scholes model. For grants during the nine months ended March 31,
2006, the Companys weighted average assumptions for expected volatility, dividends, term and risk-free rate were 85%, 0%, 6.6
years and 4.0%, respectively. Expected volatilities are based primarily on the Companys historical volatility. The expected term
of options is estimated based on the Companys historical exercise and employment termination experience determined separately for
certain employee groups. The risk-free rate is based on U.S. Treasury yields for securities with terms approximating the expected
term of the option. For grants during the nine months ended March 31, 2005, the Companys weighted average assumptions for
expected volatility, dividends, term and risk-free rate were 89%, 0%, 7.0 years and 3.7%, respectively.

In the nine months ended
March 31, 2006, the Company recorded share-based compensation of $863,795 representing approximately $0.02 per share, net of an
allowance for estimated forfeitures of $117,413, which is included in the Companys net loss for the period. The Company did
not record a tax benefit related to share-based compensation expense. As of March 31, 2006, there was $1,417,629 of total
unrecognized compensation cost related to unvested options, which is expected to be recognized over a weighted-average period of
1.2 years.

(7)  
          COMMITMENTS AND CONTINGENCIES

Commitments

In
the nine months ended March 31, 2006, the Company acquired $383,958 of equipment under a
capital lease with a term of 48 months. The Company made an initial down payment of
$57,594. Scheduled lease payments under this obligation are as follows:

| |                                      |  |            | 
| | ------------------------------------ |  | ---------- | 
| | Year Ending June 30,                 |  |            | 
| | 2006                                 |  | $   40,113 | 
| | 2007                                 |  | 96,270     | 
| | 2008                                 |  | 96,270     | 
| | 2009                                 |  | 96,270     | 
| | 2010                                 |  | 56,158     | 
| | Total                                |  | 385,081    | 
| | Amount representing imputed interest |  | (58,717)   | 
| | Net                                  |  | $326,364   | 

10

---



Table of Contents

Contingencies

The
Company is subject to an inherent risk of product liability claims as a result of testing
and marketing its products. The Company accounts for litigation losses in accordance with
SFAS 5, Accounting for Contingencies. Under SFAS 5, loss contingency
provisions are recorded for probable losses when management is able to reasonably estimate
the loss. Any outcome upon settlement that deviates from the Companys best estimate
may result in additional expense or in reduction in expense in a future accounting period.
As of March 31, 2006, the Company is not aware of any claims for which a loss is probable
and, accordingly, has not accrued any loss provisions. In December 2005, as a result of
safety concerns raised in connection with the use of NeutroSpec, the Company and
Mallinckrodt suspended NeutroSpec sales and marketing activities. If any claim is asserted
based on the use of NeutroSpec, the Company may incur future expenses or losses in
connection with related litigation.

(8)   SUBSEQUENT EVENT

In
April 2006, the Company sold 10,978,677 units, each consisting of one share of its common
stock and warrants to purchase 0.30 shares of its common stock, in a registered direct
offering for a total purchase price of $26,800,000. Net proceeds to the Company, after
offering costs, amounted to approximately $24,900,000. The warrants are exercisable
beginning in October 2006, at an exercise price of $2.88 per share, and expire in April
2011.

11

---



Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

The
following discussion and analysis should be read in conjunction with the consolidated
financial statements and notes to the consolidated financial statements filed as part of
this report.

Statements
in this quarterly report on Form 10-Q, as well as oral statements that may be made by us
or by our officers, directors, or employees acting on our behalf, that are not historical
facts constitute forward-looking statements, which are made pursuant to the
safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 (the
Exchange Act). The forward-looking statements in this quarterly report on Form
10-Q do not constitute guarantees of future performance. Investors are cautioned that
statements that are not strictly historical statements contained in this quarterly report
on Form 10-Q including, without limitation, current or future financial performance,
managements plans and objectives for future operations, clinical trials and results,
product plans and performance, managements assessment of market factors, as well as
statements regarding our strategy and plans and our strategic partners, constitute
forward-looking statements. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that could cause our actual results to be
materially different from historical results or from any results expressed or implied by
such forward-looking statements. Our future operating results are subject to risks and
uncertainties and are dependent upon many factors, including, without limitation, the
risks identified in this report, in our annual report on Form 10-K for the year ended June
30, 2005 and in our other Securities and Exchange Commission (SEC) filings.

We
expect to incur losses in the future as a result of spending on our planned development
programs and losses may fluctuate significantly from quarter to quarter.

Critical Accounting
Policies and Estimates

Our
significant accounting policies are described in the notes to our consolidated financial
statements included in this report and in our annual report on Form 10-K for the year
ended June 30, 2005. We believe that our accounting policies and estimates relating to
revenue recognition, accrued expenses and stock-based compensation are the most critical.

Revenue Recognition

Revenue
from corporate collaborations and licensing agreements consists of up-front fees, research
and development funding, and milestone payments. Non-refundable up-front fees are deferred
and amortized to revenue over the related performance period. Due to the uncertainty
inherent in our development programs, including the possibility that a program is
terminated prior to completion without a repayment obligation on our part, we recognize such
revenue on a straight-line basis, as we believe that no other basis is more reflective of
the pattern over which such revenue is earned. We consider our performance period under
the King Pharmaceuticals, Inc. (King) collaboration to be the period in which we perform development activities during
the initial research term, which is currently estimated to be five years from the
inception of the agreement. Specific performance periods are not stated in the agreement
and are estimated by management based on detailed development programs agreed upon by the
parties. Management monitors the progress and results of these development activities and
adjusts its estimated performance period accordingly. The actual performance period may
vary based on the results of the related development activities, changes in development
plans agreed to by the parties, regulatory requirements and other factors. Increases in
the estimated performance period would result in increases in the period over which such
deferred revenue is to be recognized and corresponding decreases in the amount of revenue
recognized each period.

Accrued Expenses

A
significant portion of our development activities are performed by third-parties. We
review the activities performed under significant contracts each quarter and accrue
expenses and the amount of any reimbursement to be received from our collaborators based
upon the estimated amount of work completed. Estimating the value or stage of completion
of certain services requires judgment based on available information. If we do not
identify services performed for us but not billed by the service-provider, or we
underestimate or overestimate the value of services performed as of a given date, reported
expenses will be understated or overstated.

We
have estimated and accrued certain costs associated with the suspension of sales of
NeutroSpec and the related recall of inventories, including our share of costs incurred by
others, as determined in accordance with existing agreements. If we have underestimated
the actual amount of these costs and credits, we will record additional expenses in future
periods. In addition, if any claim is asserted based on the use of NeutroSpec, the Company
may incur future expenses or losses in connection with related litigation.

12

---



Table of Contents

Stock-based Compensation

The
fair value of stock options granted has been calculated using the Black-Scholes method,
which requires us to make estimates of future interest rates, volatility and expected
option lives. We estimate these factors at the time of grant based on our own prior
experience, public sources of information and information for comparable companies. The
amount of recorded compensation or pro forma disclosure related to an option grant is not
adjusted for subsequent changes in these estimates or for actual experience. Effective
with the adoption of SFAS 123(R) in July 2005, the amount of our recorded compensation is
also dependent on our estimates of future option forfeitures. If we initially
over-estimate future forfeitures, our reported expenses will be understated. Changes in
estimated forfeitures will affect our reported expenses in the period of the change.

Certain
options are subject to periodic re-measurement over the vesting period as services are
rendered, based on changes in the fair value of our common stock. In addition, the vesting
of certain options is dependent on future events. As a result, stock-based compensation
charges may vary significantly from period to period.

Overview

We
are primarily focused on discovering and developing melanocortin (MC)-based
therapeutics, which we believe is one of the fastest growing areas of pharmaceutical
research and development. Targeting the MC family of receptors provides therapeutic
opportunities to treat a variety of conditions and diseases, including sexual dysfunction,
obesity, cachexia (extreme wasting, generally secondary to a chronic disease), and
inflammation. Our objective is to become a worldwide leader in MC-based therapeutics by
commercializing our products under development and identifying new product targets using
our patented drug discovery platform.

Bremelanotide,
our lead therapeutic drug candidate, is a nasally administered peptide that is in clinical
development for the treatment of both male and female sexual dysfunction under a
collaborative development and marketing agreement with King. It is an MC receptor-based therapeutic. Pursuant to the terms of the
collaboration agreement, Palatin and King will share all collaboration development and
marketing costs and all collaboration net profits derived from net sales of bremelanotide
in North America based on an agreed upon percentage. Palatin and King currently plan to
seek a partner for bremelanotide for territories outside of North America and will jointly
share in collaboration development and marketing costs and all collaboration revenues
generated from those territories. We have the option to create, with King, a urology
specialty sales force to co-promote the product in the United States if the product is
successfully developed and commercialized.

We
are in the process of identifying a clinical candidate MC therapeutic small molecule for
the treatment of obesity, and also have a program for the treatment of cachexia. We are
also in the process of identifying a clinical candidate natriuretic compound for the
treatment of congestive heart failure. These programs utilize our MIDAS proprietary
platform technology that allows us to design and synthesize novel pharmaceuticals that
mimic the activity of peptides.

NeutroSpec®
is our proprietary radiolabeled monoclonal antibody product for imaging and diagnosing
infection and is the subject of a strategic collaboration agreement with Tyco Healthcare
Mallinckrodt (Mallinckrodt). In December 2005, we, along with Mallinckrodt,
voluntarily suspended the sales, marketing and distribution of NeutroSpec and recalled all
existing customer inventories. In July 2004, we had received approval from the U.S. Food
and Drug Administration (FDA) to market NeutroSpec for imaging and diagnosing
equivocal appendicitis. In 2005, we had reported to the FDA the occurrence of several
serious adverse events, including two deaths, involving patients with severe underlying
cardiopulmonary compromise who received NeutroSpec for off-label uses. In December 2005,
the FDA informed us and Mallinckrodt that it had reconsidered the risk/benefit assessment
of NeutroSpec and determined that the product should not be administered to patients until
a further understanding and review of the relationship between NeutroSpec and reported
serious adverse events is completed. All ongoing clinical trials and regulatory approvals
of NeutroSpec have been suspended.

We,
along with Mallinckrodt, are reviewing data and assessing approaches for understanding the
relationship between NeutroSpec use and the observed serious adverse events. No final
decision concerning future activities involving NeutroSpec has been made.

Key
elements of our business strategy include: entering into alliances and partnerships with
pharmaceutical companies to facilitate the development, manufacture, marketing, sale and
distribution of our product candidates under development; expansion of our pipeline
through the utilization of our MC expertise and patented drug discovery platform;
opportunistic acquisition of synergistic products and technologies and partial funding of
our development and discovery programs with the cash flow from our bremelanotide
collaboration agreement and, if we resume sales of NeutroSpec, our NeutroSpec
collaboration agreement.

13

---



Table of Contents

We
incorporated in Delaware in 1986 and commenced operations in the biopharmaceutical area in
1996. Our executive offices and research facility are located at 4C Cedar Brook Drive,
Cranbury, New Jersey 08512 and our telephone number is (609) 495-2200. We maintain an
Internet site at http://www.palatin.com, where among other things, we make available free
of charge on and through this website our Forms 3, 4 and 5, annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) and Section 16 of the
Exchange Act as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC. Our website and the
information contained therein or connected thereto shall not be deemed to be incorporated
into this report.

Results of Operations

Three and Nine Months Ended March 31,
2006 Compared to the Three and Nine Months Ended March 31, 2005.

Royalties
 For the three and nine months ended March 31, 2006, we recognized royalty revenues
of $0 and $1.5 million, respectively, compared to $0.5 million and $1.0 million,
respectively, in the three and nine months ended March 31, 2005. Royalty revenues
represent amounts due from Mallinckrodt pursuant to our collaboration agreement and are
earned based on a contractual percentage of Mallinckrodts net sales of NeutroSpec to
customers. NeutroSpec was approved by the FDA in July 2004. The increase in royalty
revenue for the nine-month period primarily reflects higher unit sales by Mallinckrodt
prior to the suspension of sales in December 2005. We will not earn future royalty
revenues from NeutroSpec unless and until NeutroSpec sales resume.

Product
Sales  We recorded no product sales for the three and nine months ended March 31,
2006, compared to $0 and $1.7 million, respectively, in the three and nine
months ended March 31, 2005. Product sales represent revenue from our sale of NeutroSpec
units to Mallinckrodt, pursuant to our collaboration agreement. Under our agreement, each
Mallinckrodt purchase from us is subject to certain minimum quantities, which resulted in
a limited number of product shipments by us over the course of a year. Accordingly, our
periodic revenue from product sales was highly dependent on the timing of orders and
shipments and varied significantly. During the three and nine months ended March 31, 2006,
there were no such shipments of NeutroSpec to Mallinckrodt. We will not earn future
revenue from sales of NeutroSpec to Mallinckrodt unless and until NeutroSpec commercial
sales resume.

Licenses,
Grants and Contracts  For the three and nine months ended March 31, 2006, we
recognized $5.0 million and $13.3 million, respectively, in licenses, grants and contracts
revenue consisting primarily of (i) $5.0 million and $13.0 million, respectively, related
to bremelanotide pursuant to our collaboration agreement with King, and (ii) $0
and $0.3 million related to NeutroSpec pursuant to our collaboration agreement with
Mallinckrodt. For the three and nine months ended March 31, 2005, we recognized $2.3
million and $9.4 million, respectively, in licenses, grants and contracts revenue
consisting primarily of (i) $2.3 million and $7.4 million, respectively, related to
bremelanotide pursuant to our collaboration agreement with King, and (ii) $0 and
$2.0 million related to NeutroSpec pursuant to our collaboration agreement with
Mallinckrodt. The increase in revenue from King primarily reflects increased
reimbursements related to increased bremelanotide costs and, with respect to the
nine-month period, the existence of the collaboration agreement for the full nine-month
period. The agreement with King was completed in August 2004. License and contract revenue
from Mallinckrodt in the nine months ended March 31, 2006 reflects Mallinckrodts
share of the costs incurred in certain NeutroSpec development activities. The $2.0 million
received from Mallinckrodt in the nine months ended March 31, 2005 represented a milestone
payment received upon FDA approval of NeutroSpec in July 2004. We expect to continue to
earn contract revenue from King as the development of bremelanotide continues, in the form
of reimbursement of shared development costs and the recognition of deferred license fees.
Future cost reimbursements from Mallinckrodt are dependent upon decisions we make together
with Mallinckrodt concerning future NeutroSpec development activities. We may also earn
contract revenue from Mallinckrodt, subject to decisions concerning future NeutroSpec
activities, and King based on the attainment of certain development milestones.

Cost
of Product Sales and Royalties  For the three and nine months ended March 31, 2006,
we recognized $0 and $2.0 million, respectively, in cost of product sales
related to NeutroSpec. As noted above, there were no sales of NeutroSpec to Mallinckrodt
in the three and nine months ended March 31, 2006. In the nine months ended March 31,
2006, cost of product sales represents our inventory write-off related to the suspension
of sales of NeutroSpec. For the three and nine months ended March 31, 2005, we recognized
$0.0 million and $0.2 million, respectively, in cost of product revenues related to
product sales of NeutroSpec to Mallinckrodt. Prior to the FDA approval of NeutroSpec in
July 2004, all costs associated with the manufacturing of NeutroSpec were included in research
and development expenses when incurred, including costs of usable
raw materials and finished goods in inventory at the date of approval. As we used and sold this inventory, the
cost of product sales we recognized excluded amounts previously expensed. On the date of approval, we had sufficient active drug
substance to produce all of the product units sold during the period. Cost of sales for these units primarily consisted of
packaging and other materials.

14

---



Table of Contents

Royalty expense amounted to
$0 and $0.3 million, respectively, for the three and nine months ended March 31, 2006, compared to $0.1 million and $0.2 million
for the three and nine months ended March 31, 2005. The increase in royalty expense in the nine-month period ended March 31, 2006
was primarily as a result of our increased royalty revenue from sales of NeutroSpec. We will not incur future royalty expenses on
NeutroSpec unless and until commercial sales of NeutroSpec resume.

Research
and Development  Research and development expenses increased to $11.0 million and
$29.6 million for the three and nine months ended March 31, 2006, respectively, compared
to $4.9 million and $16.6 million for the three and nine months ended March 31, 2005,
respectively.

Research
and development expenses related to bremelanotide increased from $3.3 million to $9.3
million and from $11.8 million to $24.1 million for the three and nine months ended March
31, 2006, respectively, compared to the three and nine months ended March 31, 2005,
primarily due to increased clinical development activities, including the initiation in
July 2005 of two Phase 2 studies, an at-home efficacy study in ED patients and
an at-home efficacy study in ED patients with diabetes mellitus. In addition,
in the three months ended March 31, 2006, the Company initiated patient enrollment in a
Phase 2B at home clinical trial in female patients with FSD. Associated costs
include fees to clinicians, costs of drug supplies and study monitoring and management. We
expect to spend approximately $20 million to $25 million of direct costs (excluding
allocated general expenses) on bremelanotide to conduct these and other clinical studies
for ED and FSD and continue related process and development activities prior to initiating
Phase 3 clinical trials. A majority of the additional direct costs will be reimbursed by
our collaboration partner, King.

In
the three months ended March 31, 2006, research and development spending on NeutroSpec
decreased from $0.6 million to $0.2 million compared to the three months ended March 31, 2005 as
a result of lower costs related to manufacturing and product development activities. In
the nine months ended March 31, 2006, research expenses for NeutroSpec were comparable to
the nine months ended March 31, 2005, as higher product development spending was largely
offset by lower costs of clinical studies. We have suspended ongoing clinical trials and
plans for future trials, including studies to evaluate NeutroSpecs market potential
as an imaging agent for other indications such as osteomyelitis (infection deep inside a
bone), fever of unknown origin, post surgical infection, inflammatory bowel disease and
pulmonary imaging. We expect to spend approximately $0.5 million to $1.0 million of direct
costs on NeutroSpec during the remainder of calendar 2006 to perform certain FDA-required
post-marketing studies, review the safety of NeutroSpec and explore other indications, a
significant portion of which will be reimbursed by our collaboration partner,
Mallinckrodt. The amount of such spending and the nature of future development activities
are dependent on a number of factors, including primarily the review of NeutroSpec safety
and discussions with both the FDA and Mallinckrodt.

Our
license agreements related to NeutroSpec require royalty payments on commercial net sales
and payments of up to $2.25 million contingent on the achievement of specified cumulative
net margins on sales by Mallinckrodt. No contingent amounts will be payable related to
NeutroSpec unless we recommence sales and marketing of NeutroSpec. We do not reasonably
expect to make any such contingent payments during the next twelve months.

Research and development
expenses related to our MIDAS program increased from $1.0 million to $1.5 million and from $2.9 million to $3.7 million for the
three and nine-month periods ended March 31, 2006 compared to the three and nine-month periods ended March 31, 2005, respectively,
primarily as a result of additional contract services for assistance with the optimization of lead compounds. We expect to spend
approximately $3 million to $4 million of additional direct costs during the remainder of calendar 2006 to continue laboratory
research on various compounds in preparation for filing an Investigational New Drug Application and commencing clinical trials.
The amount of such spending and the nature of future development activities are dependent on a number of factors, including
primarily the success of our discovery programs, preclinical studies, our ability to progress a compound into human clinical
trials and discussions with potential development partners.

We
have a license agreement for patent rights related to certain compounds and methods of
treatment for sexual dysfunction. The license agreement requires contingent payments based
on certain upfront fees we receive as a result of a sublicense. We do not reasonably
expect to sublicense such rights or make any material contingent payments during the next
twelve months.

The
historical amounts of project spending above include an allocated portion of general
research and development spending, which increased $1.0 million and $2.8 million in the
three and nine months ended March 31, 2006, respectively, primarily due to increased personnel costs and
the expansion of facilities.

Cumulative
spending from inception to March 31, 2006 on our bremelanotide, NeutroSpec and MIDAS
programs amounts to approximately $76.2 million, $53.7 million and $20.5 million,
respectively. Due to risk factors described in our periodic filings with the SEC,
including the difficulty in currently estimating the costs and timing of future Phase 1
clinical trials and large-scale Phase 2 and Phase 3 clinical trials for any product under

15

---



Table of Contents

development, we cannot predict with reasonable certainty when, if ever, a program will
advance to the next stage of development or be successfully completed, or when, if ever,
significant related net cash inflows will be generated.

General
and Administrative  General and administrative expenses in the three and nine months
ended March 31, 2006 were comparable to the corresponding periods of the prior year. In
the three months ended March 31, 2006, lower legal and recruiting fees were largely offset
by higher personnel costs. In the nine months ended March 31, 2006, lower legal fees were
primarily offset by increased personnel costs, including stock compensation charges.

Income
Taxes  Income tax benefits of $0.7 million in the nine months ended March 31, 2006
and $0.6 million in the nine months ended March 31, 2005 relate to the sale of New Jersey
State net operating loss carryforwards. The amount of
such losses that we are able to sell depends on annual pools and
allocations established by the State of New Jersey.

Stock Options 
Effective July 1, 2005, we adopted SFAS 123(R), which establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services and requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements, measured by the fair value of the equity or liability instruments
issued, adjusted for estimated forfeitures. Prior to the adoption of SFAS 123(R), we applied the intrinsic-value-based method of
accounting prescribed by Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations, to account for our fixed-plan stock options to employees. Under this method, compensation cost was recorded only
if the market price of the underlying stock on the date of grant exceeded the exercise price. In the three and nine months ended
March 31, 2006, respectively, we recorded approximately $0.3 million and $0.9 million of compensation expense related to stock
options.

Liquidity and Capital
Resources

Since
inception, we have incurred net operating losses, primarily related to spending on our
research and development programs. We have financed our net operating losses primarily
through equity financings and revenue received under collaborative agreements.

Our
product candidates are at various stages of research and development and some may never be
successfully developed or commercialized. We will need regulatory approval to market and
sell bremelanotide and MIDAS products. In addition, in December 2005, we voluntarily
suspended the sales, marketing and distribution of NeutroSpec® and recalled all
existing customer inventories. Our product candidates under development will
require significant further research, development and testing. We may experience
uncertainties, delays, difficulties and expenses commonly experienced by early stage
biopharmaceutical companies, which may include unanticipated problems and additional costs
relating to:

| |   |                                                               
| | - | --------------------------------------------------------------
| |  | the development and testing of products in animals and humans;
| |   |                                                               
| |  | product approval or clearance;                                
| |   |                                                               
| |  | regulatory compliance;                                        
| |   |                                                               
| |  | good manufacturing practices;                                 
| |   |                                                               
| |  | intellectual property rights;                                 
| |   |                                                               
| |  | product introduction; and                                     
| |   |                                                               
| |  | marketing, sales and competition.                             

Failure
to obtain timely regulatory approval for our other product candidates and indications
would impact our ability to increase revenues and could make it more difficult to attract
investment capital for funding our operations. Any of these possibilities could materially
and adversely affect our operations.

During
the nine months ended March 31, 2006, we used $13.2 million of cash for our operating
activities. In the nine months ended March 31, 2005, operating activities provided $3.8
million of cash primarily as a result of amounts received from King under our
collaboration agreement, which was completed in August 2004. In the nine months ended
March 31, 2006, our accounts receivable balance decreased $5.4 million due primarily to
the timing of the receipt of reimbursements from King for bremelanotide costs. Our
periodic accounts receivable balances will continue to be highly dependent on the timing
of such receipts.

During
the nine months ended March 31, 2006 and 2005, net cash provided by financing activities
was $12.0 million and $3.7 million, respectively, due primarily to proceeds from the
issuance of common stock and warrants to King and the exercise of options and other
warrants.

16

---



Table of Contents

As
of March 31, 2006, our cash and cash equivalents were $13.9 million and our short-term
investments were $2.3 million. In addition, our April 2006 offering of common stock and
warrants resulted in net proceeds to the Company of $24.9 million. We have incurred
cumulative negative cash flows from operations since our inception, and have expended, and
expect to continue to expend in the future, substantial funds to complete our planned
product development efforts. We expect that our capital resources, including the net
proceeds of our April offering, will be adequate to fund our projected operations through
at least the next twelve months, based on current and projected expenditure levels, which
include receiving certain milestone payments from collaborative partners. No assurance can
be given that we will earn future milestone payments that are contingent on specified
events or that we will not consume a significant amount of our available resources before
that time. We intend to continually monitor the progress of our development programs and
the timing and amount of related expenditures and potential milestone receipts and may
seek additional financing. We plan to continue to refine our operations, control expenses,
evaluate alternative methods to conduct our business and seek available and attractive
sources of financing and sharing of development costs through strategic collaboration
agreements or other resources.

We
are, and expect to continue, actively searching for certain products and technologies to
license or acquire, now or in the future. If we are successful in identifying a product or
technology for acquisition, we may require substantial funds for such an acquisition and
subsequent development or commercialization. We do not know whether any acquisition will
be consummated in the future or whether we will be able to obtain additional funding if
such an acquisition is located.

We
anticipate incurring additional losses over at least the next few years. To achieve
profitability, we, alone or with others, must successfully develop and commercialize our
technologies and proposed products, conduct pre-clinical studies and clinical trials,
obtain required regulatory approvals and successfully manufacture and market such
technologies and proposed products. The time required to reach profitability is highly
uncertain, and we do not know whether we will be able to achieve profitability on a
sustained basis, if at all.

17

---



Table of Contents

Risk Factors

In
our annual report on Form 10-K for the year ended June 30, 2005 and in our other
SEC filings, we have described risks to be considered when
evaluating our business and future prospects. The following provides an updated discussion
of certain of those risks to reflect developments in the business during the current
fiscal year.

If after all the data is reviewed,
the FDA does not agree that it is safe to recommence the marketing of NeutroSpec, or if we
are unable to achieve market acceptance if and when NeutroSpec is allowed back on the
market, our business may suffer.

We
do not know whether the safety concerns that may be related to the use of NeutroSpec can
be successfully resolved. We do not know whether, or with what limitations, the FDA will allow sales
and marketing of NeutroSpec to recommence. We also do not know what additional studies, if
any, may be required by the FDA or the length of time necessary to successfully complete
the studies, if at all, or the cost of any such studies.

We
voluntarily suspended sales, marketing and distribution of NeutroSpec after discussions
with the FDA, and we recalled all existing customer inventories of the product. Even if we
are permitted to recommence sales and marketing of NeutroSpec in the United States, the
medical community may be reluctant to use NeutroSpec because of the recall and the safety
concerns that were previously raised. Failure to reintroduce NeutroSpec to the market, or
to achieve adequate market acceptance, may adversely affect our business, financial
condition and results of operations.

18

---



Table of Contents

Item 3. Quantitative and
Qualitative Disclosures About Market Risk.

Interest
Rate Risk. Our exposure to market risk due to changes in interest rates relates primarily
to our investment portfolio. We invest in instruments that meet high credit quality
standards and we limit the amount of credit exposure as to any one issue, issuer and type
of investments.

As
of March 31, 2006, our cash and cash equivalents were $13.9 million and our short-term
investments, which consisted of mutual funds, were $2.3 million. Due to the average
maturity and conservative nature of our investment portfolio, we do not believe that short
term fluctuations in interest rates would materially affect the value of our securities.

Item 4. Controls and Procedures.

Our
management, with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures, as
defined in Exchange Act Rule 13a-15(e) and 15d-15(e), as of the end of the period covered
by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective for timely
gathering, analyzing and disclosing the information required by this report. There were no
changes in our internal control over financial reporting that occurred during our most
recent fiscal quarter that materially affected, or that are reasonably likely to
materially affect, our internal control over financial reporting.

19

---



Table of Contents

PART II  OTHER
INFORMATION

Item 1.   Legal Proceedings.

| | None.
| | -----

Item 2.   Unregistered
Sales of Equity Securities and Use of Proceeds.

| | None.
| | -----

Item 3.   Defaults Upon
Senior Securities.

| | None.
| | -----

Item 4.   Submission of Matters to a Vote of Security Holders.

| | None.
| | -----

Item 5.   Other Information.

| | None.
| | -----

Item 6.   Exhibits.

| | Exhibits filed with this report:
| | --------------------------------

| |      |                                                                                                                                             
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 | Certification of Chief Executive Officer.                                                                                                   
| |      |                                                                                                                                             
| | 31.2 | Certification of Chief Financial Officer.                                                                                                   
| |      |                                                                                                                                             
| | 32.1 | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
     1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002.
| |      |                                                                                                                                             
| | 32.2 | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
     1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002.

20

---



Table of Contents

Signatures

In
accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

|                  |  |                                                                                                                                         
|----------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|                  |  | Palatin Technologies, Inc.(Registrant)                                                                                                  
|                  |  |                                                                                                                                         
|                  |  |                                                                                                                                         
|Date: May 9, 2006 |  | /s/ CARL SPANACarl
     Spana, Ph.D.President andChief Executive Officer                                                                
|                  |  |                                                                                                                                         
|                  |  |                                                                                                                                         
|Date: May 9, 2006 |  | /s/ STEPHEN T. WILLSStephen T. WillsExecutive Vice President andChief Financial Officer
     (PrincipalFinancial and Accounting Officer)

21

---



Table of Contents

EXHIBIT INDEX

| |      |                                                                                                                                             
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 | Certification of Chief Executive Officer.                                                                                                   
| |      |                                                                                                                                             
| | 31.2 | Certification of Chief Financial Officer.                                                                                                   
| |      |                                                                                                                                             
| | 32.1 | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
     1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002.
| |      |                                                                                                                                             
| | 32.2 | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
     1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002.