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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 December 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

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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) 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 [  ]

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 January 31, 2007, 71,177,712
shares of the registrants common stock, par value $.01 per share, were outstanding.

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PALATIN TECHNOLOGIES, INC.Table of Contents

|                                    |                                                                                                          |     
|----------------------------------- | -------------------------------------------------------------------------------------------------------- | ----
|                                    |                                                                                                          | Page
|PART I  FINANCIAL
     INFORMATION
|Item 1.                             | Financial Statements (Unaudited)                                                                         |     
|                                    | Consolidated Balance Sheets
     as of December 31, 2006 and June 30, 2006                               | 2   
|                                    | Consolidated Statements of Operations
     for the Three and Six Months Ended December 31, 2006 and 2005 | 3   
|                                    | Consolidated Statements of Cash Flows
     for the Six Months Ended December 31, 2006 and 2005           | 4   
|                                    | Notes to Consolidated Financial
     Statements                                                          | 5   
|Item 2.                             | Management's Discussion and Analysis of
     Financial Conditionand Results of Operations                | 10  
|Item 3.                             | Quantitative and Qualitative
     Disclosures About Market Risk                                          | 15  
|Item 4.                             | Controls and Procedures                                                                                  | 15  

PART II - OTHER
INFORMATION

|         |                                                                  |   
|-------- | ---------------------------------------------------------------- | --
|Item 1.  | Legal Proceedings                                                | 16
|Item 1A. | Risk Factors                                                     | 16
|Item 2.  | Unregistered Sales of Equity Securities and
     Use of Proceeds | 16
|Item 3.  | Defaults Upon Senior Securities                                  | 16
|Item 4.  | Submission of Matters to a Vote of Security
     Holders         | 17
|Item 5.  | Other Information                                                | 17
|Item 6.  | Exhibits                                                         | 17

SIGNATURES

1

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Table of Contents

PART I  FINANCIAL
INFORMATION

Item 1. Financial Statements

PALATIN TECHNOLOGIES,
INC.Consolidated Balance Sheets(unaudited)

|                                                                    |                  |                  |   |                   |  
|------------------------------------------------------------------- | ---------------- | ---------------- | - | ----------------- | -
|                                                                    | December 31,2006 | June 30,2006    
|                                                                    |                  |                  |   |                  
|ASSETS                                                              |                 
|Current assets:                                                     |                 
|Cash and cash equivalents                                           |                  | $   13,673,924   |   | $   28,333,211    |  
|Available-for-sale investments                                      |                  | 2,333,377        |   | 2,330,834         |  
|Accounts receivable                                                 |                  | 148,269          |   | 69,591            |  
|Prepaid expenses and other current assets                           |                  | 878,708          |   | 1,453,650         |  
|                                                                    |                  |                  |   |                  
|Total current assets                                                |                  | 17,034,278       |   | 32,187,286        |  
|Property and equipment, net                                         |                  | 6,288,412        |   | 6,347,705         |  
|Restricted cash                                                     |                  | 475,000          |   | 475,000           |  
|Other assets                                                        |                  | 871,702          |   | 1,037,296         |  
|                                                                    |                  |                  |   |                  
|Total assets                                                        |                  | $   24,669,392   |   | $   40,047,287    |  
|                                                                    |                  |                  |   |                  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                |                 
|Current liabilities:                                                |                 
|Capital lease obligations and notes payable, current portion        |                  | $        194,913 |   | $          86,564 |  
|Accounts payable                                                    |                  | 2,455,068        |   | 3,092,962         |  
|Accrued expenses                                                    |                  | 5,921,788        |   | 4,466,428         |  
|Accrued compensation                                                |                  | 262,500          |   | 803,900           |  
|Deferred revenue, current portion                                   |                  | 3,500,712        |   | 3,995,575         |  
|                                                                    |                  |                  |   |                  
|Total current liabilities                                           |                  | 12,334,981       |   | 12,445,429        |  
|Capital lease obligations and notes payable, net of current portion |                  | 285,711          |   | 229,585           |  
|Deferred rent, net of current portion                               |                  | 2,132,140        |   | 2,358,550         |  
|Deferred revenue, net of current portion                            |                  | 5,134,195        |   | 6,713,942         |  
|                                                                    |                  |                  |   |                  
|Total liabilities                                                   |                  | 19,887,027       |   | 21,747,506        |  
|                                                                    |                  |                  |   |                  
|Commitments and contingencies                                       |                 
|Stockholders' equity:                                               |                 
|Preferred stock, $0.01 par value, 10,000,000 shares authorized:     |                 
|Series A Convertible; 9,997 shares issued and outstanding as of     |                 
|December 31, 2006 and June 30, 2006                                 |                  | 100              |   | 100               |  
|Common stock, $0.01 par value, 150,000,000 shares authorized,       |                 
|71,177,712 and 70,878,521 shares issued and outstanding as of       |                 
|December 31, 2006 and June 30, 2006, respectively                   |                  | 711,777          |   | 708,785           |  
|Additional paid-in capital                                          |                  | 179,492,108      |   | 178,089,176       |  
|Accumulated other comprehensive loss                                |                  | (52,193          | ) | (54,736           | )
|Accumulated deficit                                                 |                  | (175,369,427     | ) | (160,443,544      | )
|                                                                    |                  |                  |   |                  
|Total stockholders' equity                                          |                  | 4,782,365        |   | 18,299,781        |  
|                                                                    |                  |                  |   |                  
|Total liabilities and stockholders' equity                          |                  | $   24,669,392   |   | $   40,047,287    |  
|                                                                    |                  |                  |   |                  

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

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

|                               |  |                                 |   |                               |   |                      |   |                  |  
|------------------------------ |  | ------------------------------- | - | ----------------------------- | - | -------------------- | - | ---------------- | -
|                               |  | Three Months Ended December 31, |   | Six Months Ended December 31, |  
|                               |  |                                 |   |                               |  
|                               |  | 2006                            |   | 2005                          |   | 2006                 |   | 2005             |  
|                               |  |                                 |   |                               |   |                      |   |                 
|REVENUES:                      | 
|Royalties                      |  | $                  -            |   | $       593,347               |   | $                  - |   | $    1,508,862   |  
|Licenses, grants and           | 
|contracts                      |  | 3,743,109                       |   | 3,993,791                     |   | 8,678,211            |   | 8,222,054        |  
|                               |  |                                 |   |                               |   |                      |   |                 
|Total revenues                 |  | 3,743,109                       |   | 4,587,138                     |   | 8,678,211            |   | 9,730,916        |  
|                               |  |                                 |   |                               |   |                      |   |                 
|OPERATING EXPENSES:            | 
|Cost of product sales          |  | -                               |   | 2,041,175                     |   | -                    |   | 2,041,175        |  
|Royalties                      |  | -                               |   | 116,666                       |   | -                    |   | 299,995          |  
|Research and development       |  | 9,569,483                       |   | 9,319,917                     |   | 21,693,180           |   | 18,685,285       |  
|General and administrative     |  | 1,654,932                       |   | 1,430,569                     |   | 3,217,408            |   | 3,183,102        |  
|                               |  |                                 |   |                               |   |                      |   |                 
|Total operating                |  | 11,224,415                      |   | 12,908,327                    |   | 24,910,588           |   | 24,209,557       |  
|expenses                       | 
|                               |  |                                 |   |                               |   |                      |   |                 
|Loss from operations           |  | (7,481,306                      | ) | (8,321,189                    | ) | (16,232,377          | ) | (14,478,641      | )
|                               |  |                                 |   |                               |   |                      |   |                 
|OTHER INCOME (EXPENSE):        | 
|Investment income              |  | 227,140                         |   | 217,018                       |   | 551,374              |   | 341,240          |  
|Interest expense               |  | (13,122                         | ) | (5,676                        | ) | (23,188              | ) | (8,102           | )
|                               |  |                                 |   |                               |   |                      |   |                 
|Total other income, net        |  | 214,018                         |   | 211,342                       |   | 528,186              |   | 333,138          |  
|                               |  |                                 |   |                               |   |                      |   |                 
|Loss before income taxes       |  | (7,267,288                      | ) | (8,109,847                    | ) | (15,704,191          | ) | (14,145,503      | )
|Income tax benefit             |  | 778,308                         |   | 666,275                       |   | 778,308              |   | 666,275          |  
|                               |  |                                 |   |                               |   |                      |   |                 
|NET LOSS                       |  | $ (6,488,980                    | ) | $ (7,443,572                  | ) | $ (14,925,883        | ) | $ (13,479,228    | )
|                               |  |                                 |   |                               |   |                      |   |                 
|Basic and diluted net loss per | 
|common share                   |  | $          (0.09                | ) | $          (0.13              | ) | $          (0.21     | ) | $          (0.24 | )
|                               |  |                                 |   |                               |   |                      |   |                 
|Weighted average number of     | 
|common shares outstanding      | 
|used in computing basic        | 
|and diluted net loss per       | 
|common share                   |  | 71,055,893                      |   | 58,869,492                    |   | 70,967,207           |   | 56,605,144       |  
|                               |  |                                 |   |                               |   |                      |   |                 

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

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

|                                                        |                               |                 |      |                 |  
|------------------------------------------------------- | ----------------------------- | --------------- | ---- | --------------- | -
|                                                        | Six Months Ended December 31, |                
|                                                        |                               |                 |     
|                                                        | 2006                          |                 | 2005 |                
|                                                        |                               |                 |      |                
|CASH FLOWS FROM OPERATING ACTIVITIES:                   |                              
|Net loss                                                |                               | $ (14,925,883   | )    | $ (13,479,228   | )
|Adjustments to reconcile net loss to net cash           |                              
|used in operating activities:                           |                              
|Depreciation and amortization                           |                               | 707,600         |      | 609,349         |  
|Stock-based compensation                                |                               | 713,958         |      | 612,608         |  
|Changes in operating assets and liabilities:            |                              
|Accounts receivable                                     |                               | (78,678         | )    | 4,044,511       |  
|Inventories                                             |                               | -               |      | 1,382,160       |  
|Prepaid expenses and other                              |                               | 772,700         |      | 56,744          |  
|Accounts payable                                        |                               | (637,894        | )    | (1,656,351      | )
|Accrued expenses and other                              |                               | 695,225         |      | 464,569         |  
|Deferred revenues                                       |                               | (2,074,610      | )    | (1,059,951      | )
|                                                        |                               |                 |      |                
|Net cash used in operating activities                   |                               | (14,827,582     | )    | (9,025,589      | )
|                                                        |                               |                 |      |                
|CASH FLOWS FROM INVESTING ACTIVITIES:                   |                              
|Purchases of property and equipment                     |                               | (434,903        | )    | (384,111        | )
|                                                        |                               |                 |      |                
|Net cash used in investing activities                   |                               | (434,903        | )    | (384,111        | )
|                                                        |                               |                 |      |                
|CASH FLOWS FROM FINANCING ACTIVITIES:                   |                              
|Payments on capital lease obligations and notes payable |                               | (88,768         | )    | (5,507          | )
|Proceeds from issuances of common stock and warrants    |                               | 691,966         |      | 10,458,264      |  
|                                                        |                               |                 |      |                
|Net cash provided by financing activities               |                               | 603,198         |      | 10,452,757      |  
|                                                        |                               |                 |      |                
|NET (DECREASE) INCREASE IN CASH                         |                              
|AND CASH EQUIVALENTS                                    |                               | (14,659,287     | )    | 1,043,057       |  
|CASH AND CASH EQUIVALENTS, beginning                    |                              
|of period                                               |                               | 28,333,211      |      | 15,720,364      |  
|                                                        |                               |                 |      |                
|CASH AND CASH EQUIVALENTS, end of period                |                               | $  13,673,924   |      | $  16,763,421   |  
|                                                        |                               |                 |      |                
|SUPPLEMENTAL CASH FLOW INFORMATION:                     |                              
|Equipment acquired under financing agreements           |                               | $       212,848 |      | $       326,364 |  
|                                                        |                               |                 |      |                

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

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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 targeted,
receptor-specific small molecule and peptide therapeutics, including melanocortin (MC)-based
therapeutics. Therapeutics affecting the activity of the MC family of receptors may have
the potential to treat a variety of conditions and diseases, including sexual
dysfunction, obesity and related disorders, cachexia (extreme wasting, generally
secondary to a chronic disease), skin pigmentation and inflammation. The Company is
exploring other receptor-specific therapeutics, including congestive heart failure
therapeutics, using its patented drug discovery platform.

Bremelanotide,
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 also has preclinical development programs for the treatment of obesity and congestive
heart failure resulting from its MIDAS technology, the Companys proprietary
platform technology to design and synthesize compounds that mimic the activity of
peptides.

NeutroSpec,
a radiolabeled monoclonal antibody product for imaging and diagnosing infection, 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. All ongoing clinical trials
and regulatory approvals of NeutroSpec have been suspended. The Company and Mallinckrodt
are evaluating future development and marketing activities involving NeutroSpec.

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 December 31, 2006 and incurred a net loss for the three and six months ended December
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 believes that its cash, cash equivalents and available-for-sale investments as of
December 31, 2006, together with expected receipts from collaboration and license
agreements and other income, are adequate to fund operations for at least the next twelve
months. The nature and timing of the Companys development activities are highly
dependent on its financing activities. 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 financing efforts will be successful. If adequate funds
are not available, the Companys financial condition will be materially and adversely
affected due to the Companys expected negative cash flow from operations.

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 accounts receivable balance as of December 31, 2006,
represented amounts due from Mallinckrodt.

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

|             |                                 |     |                               |     |      |     |      |     | 
|------------ | ------------------------------- | --- | ----------------------------- | --- | ---- | --- | ---- | --- | 
|             | Three Months Ended December 31, |     | Six Months Ended December 31, |    
|             | 2006                            |     | 2005                          |     | 2006 |     | 2005 |    
|King         |                                 | 98% |                               | 85% |      | 98% |      | 82% | 
|Mallinckrodt |                                 | 2%  |                               | 15% |      | 2%  |      | 18% | 

(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 December 31, 2006, its results
of operations for the three and six months ended December 31, 2006 and 2005, and its cash
flows for the six months ended December 31, 2006 and 2005. The results of operations for
the three- and six-month periods ended December 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, 2007.

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 for the fiscal year ended June 30, 2006, filed with the
Securities and Exchange Commission (SEC), which includes consolidated
financial statements as of June 30, 2006 and 2005 and for each of the fiscal years in the
three-year period ended June 30, 2006.

(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, notes payable and capital lease obligations. Management
believes that the carrying value of these assets and liabilities are representative of
their respective fair values.

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

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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 is recognized, 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 tenant allowances for leasehold improvements.
Rent expense is being recognized ratably over the life of the leases.

Revenue
Recognition  Royalty revenues represent amounts earned from Mallinckrodt based on a
contractual percentage of Mallinckrodts net sales of NeutroSpec to customers prior
to the suspension of sales and marketing activities. Revenue was recognized by the Company
in the period in which Mallinckrodts net sales occurred, 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, provided that such milestone is substantive in nature. 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  The Company accounts for options granted to consultants in accordance with
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 the
financial statements, measured by the fair value of the equity or liability instruments
issued, adjusted for estimated forfeitures.

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 share-based 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 and carryforwards 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 consideration of tax laws that
may limit the Companys ability to utilize its net operating loss and tax credit
carryforwards.

During
the three months ended December 31, 2006 and 2005, the Company sold New Jersey state net
operating loss carryforwards and research and development credit carryforwards, which resulted in the
recognition of $778,308 and $666,275, respectively, in tax benefits.

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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. As of December 31, 2006
and 2005, common shares issuable upon conversion of outstanding Series A Convertible
Preferred Stock and the exercise of outstanding options, warrants and restricted stock
units amounted to an aggregate of 16,962,992 and 13,975,601, respectively, and were not
included in the computation of Diluted EPS because to do so would have been anti-dilutive
for the periods presented.

(4)    OTHER COMPREHENSIVE LOSS

Other
comprehensive loss consists of the following:

|                                      |                                 |               |                               |               |      |                |      |                | 
|------------------------------------- | ------------------------------- | ------------- | ----------------------------- | ------------- | ---- | -------------- | ---- | -------------- | 
|                                      | Three Months Ended December 31, |               | Six Months Ended December 31, |              
|                                      | 2006                            |               | 2005                          |               | 2006 |                | 2005 |               
|Net loss                              |                                 | $ (6,488,980) |                               | $ (7,443,572) |      | $ (14,925,883) |      | $ (13,479,228) | 
|Unrealized gain (loss) on investments |                                 | (5,010)       |                               | (12,051)      |      | 2,543          |      | (31,640)       | 
|Comprehensive loss                    |                                 | $ (6,493,990) |                               | $ (7,455,623) |      | $ (14,923,340) |      | $ (13,510,868) | 

(5)    INVESTMENTS

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

|                               |                  |             |              |             |  
|------------------------------ | ---------------- | ----------- | ------------ | ----------- | -
|                               | December 31,2006 |             | June 30,2006 |            
|Cost                           |                  | $ 2,385,570 |              | $ 2,385,570 |  
|Unrealized loss on investments |                  | (52,193     | )            | (54,736     | )
|Fair value                     |                  | $ 2,333,377 |              | $ 2,330,834 |  

(6)    STOCKHOLDERS EQUITY

Restricted
Stock Units

In
October 2006, the Company made grants of restricted stock units to three executives for an
aggregate of 975,000 shares of common stock. Of the total shares, 325,000 will vest if the
quoted market price of Palatins common stock is $4.00 or more for twenty consecutive
trading days, an additional 325,000 will vest if the quoted market price of Palatins
common stock is $6.00 or more for twenty consecutive trading days and the remaining
325,000 will vest if the quoted market price of Palatins common stock is $8.00 or
more for twenty consecutive trading days. The restricted stock units can only vest while
the executives are employed by the Company and unvested units expire four years from the
date of grant. The restricted stock units also require that each grantee retain ownership
of at least 33% of any vested stock for the duration of the executives employment
with the Company.

The
fair value of the restricted stock units was estimated at the grant date using a
lattice-type model. The Companys assumptions for expected volatility, dividends and
risk-free rate were 80%, 0% and 4.56%, respectively. The expected volatility is based
primarily on the Companys historical volatility and the risk-free rate is based on
U.S. Treasury yields for securities with terms approximating the contractual term of the
units. The aggregate estimated fair value of the grants at the date of grant was
$1,846,000, which is expected to be recognized over a weighted-average period of
approximately three years. In the quarter ended December 31, 2006, the Company recognized
$167,781 of share-based compensation expense related to the grants. The amount and timing
of such compensation expense to be recorded in future periods may be affected by grantee
terminations and certain changes in the Companys share price.

(7)    COMMITMENTS AND CONTINGENCIES

Contingencies

Competitive
Technologies, Inc. (CTI) initiated litigation against the Company by filing a
suit in Connecticut Superior Court for breach of a settlement agreement of an earlier
arbitration between CTI and the Company. The Company filed an answer denying all material
allegations asserted by CTI, and asserting counterclaims against CTI for fraud,
fraudulent inducement, unfair trade practices, breach of the settlement agreement and
declaratory judgment that under the settlement it was released from any further
obligations to CTI relating to payments it may receive in the future from King concerning
bremelanotide, that CTI should be compelled to comply with the settlement agreement and
withdraw its earlier arbitration request, or alternatively that the settlement agreement
of the earlier arbitration should be set aside. CTI has not filed a response to the
Companys counterclaims nor has CTI requested an extension of time within which to
answer. The Company has also filed a reply and counterclaims in the arbitration
proceeding before the American Arbitration Association (AAA) which

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was initiated by CTI, and
subsequently CTI filed a response generally denying the Companys counterclaims and
asserting defenses. The party-appointed arbitrators have agreed upon a chairperson for
the arbitration panel, to which both parties have consented. However, the chairperson has
not yet been confirmed by the AAA. Discovery has not been initiated in the arbitration,
and no decisions relating to the merits of the arbitration have been made. The Company
cannot reasonably predict the outcome of the disputes or reasonably estimate the range of
potential loss, if any. However, the Company does not believe that the resolution of this
matter will have a material adverse effect on its financial position, results of
operations or liquidity.

(8)    SUBSEQUENT EVENT

On
January 30, 2007, the Company entered into an exclusive global licensing and research
collaboration agreement with AstraZeneca AB to discover, develop and commercialize small
molecule compounds that target MC receptors for treatment of obesity, diabetes
and related metabolic syndrome. The collaboration is based on the Companys
MC receptor obesity program and includes access to compound libraries, core
technologies and expertise in MC receptor drug discovery and development.

Under
the terms of the agreement, the Company will receive an upfront payment of $10,000,000
from AstraZeneca and is eligible for milestone payments totaling up to $300,000,000,
with up to $180,000,000 contingent upon development and regulatory milestones and the
balance on achievement of sales targets, together with the payment of royalties on sales
of approved products. AstraZeneca will assume responsibility for product
commercialization, product discovery and development costs, with both companies
contributing scientific expertise in the research collaboration.

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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, 2006 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 such 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, 2006. 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, 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. As of
December 31, 2006, a one-year increase in the estimated period of performance would
result in a decrease in the amount of deferred revenue recognized per quarter of
approximately $0.2 million.

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 if we
underestimate or overestimate the value of services performed as of a given date, reported
expenses will be understated or overstated.

Stock-Based Compensation

The
fair value of stock options granted has been calculated using the Black-Scholes model,
which requires us to make estimates of 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
related to an option grant is not adjusted for subsequent changes in these estimates or
for actual experience. The amount of our recorded compensation is also dependent on our
estimates of future option forfeitures and the probability of achievement of performance
conditions. If we initially over-estimate future

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forfeitures, our reported expenses
will be understated. Changes in estimated forfeitures will affect our reported expenses
in future periods.

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. The vesting of
certain other options is dependent on future events. In addition, the amount and timing of
compensation expense to be recorded in future periods related to grants of restricted
stock units may be affected by grantee terminations and certain changes in the
Companys share price. As a result, share-based compensation charges may vary
significantly from period to period.

Overview

We
are a biopharmaceutical company focused on discovering and developing targeted,
receptor-specific small molecule and peptide therapeutics. Our proprietary drug
development pipeline is based primarily on melanocortin (MC)-based
therapeutics, and we believe we are a leader in this fast growing area of pharmaceutical
research and development. Therapeutics affecting the activity of the MC family of
receptors may have the potential to treat a variety of conditions and diseases, including
sexual dysfunction, obesity and related disorders, cachexia (extreme wasting, generally
secondary to a chronic disease), skin pigmentation and inflammation.

In
August 2004, we entered into a collaborative development and marketing agreement with
King, a specialty pharmaceutical company, to jointly develop and commercialize
bremelanotide (formerly known as PT-141), our nasally administered MC-based peptide
presently in Phase 2 clinical development for two distinct indications, treatment of male
erectile dysfunction (ED) and treatment of female sexual dysfunction (FSD).
Pursuant to the terms of the agreement, we and King share all collaboration
development costs, marketing costs and net profits derived from net sales of
bremelanotide in North America based on an agreed percentage. We and King currently
plan to seek a commercialization partner for bremelanotide for territories outside of
North America. 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 clinical candidate MC therapeutic small molecules for
treatment of obesity and related disorders, with programs for both oral and non-oral drug
delivery. We are also in the process of identifying natriuretic peptide receptor clinical
candidate compounds for the treatment of chronic congestive heart failure
(CHF) and acutely decompensated CHF.

In
December 2005, we voluntarily suspended the sales, marketing and distribution of
NeutroSpec®, our proprietary radiolabeled monoclonal antibody product for imaging and
diagnosing equivocal appendicitis, and recalled all existing customer inventories.
NeutroSpec, which was approved for marketing by the United States Food and Drug
Administration (the FDA) in July 2004, was marketed and distributed by our
strategic collaboration partner, Tyco Healthcare Mallinckrodt (Mallinckrodt).
We and Mallinckrodt are evaluating future development and marketing activities involving
NeutroSpec.

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 product candidates we are investigating; expanding our pipeline through
the utilization of our MC expertise and patented drug discovery platform; acquiring
synergistic products and technologies; and partially funding our development and discovery
programs with the cash flow from our NeutroSpec and bremelanotide collaboration
agreements.

We
incorporated in Delaware in 1986 and commenced operations in the biopharmaceutical area in
1996. Our corporate offices and research and development 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 quarterly
report on Form 10-Q.

Results of Operations

Three and Six Months Ended December
31, 2006 Compared to the Three and Six Months Ended December 31, 2005.

Royalties
Revenue - For the three and six months ended December 31, 2006, we recognized no royalty
revenues.  Royalty revenues in the three and six months ended December 31, 2005 of $0.6
million and $1.5 million, respectively, represent amounts earned from Mallinckrodt
pursuant to our collaboration agreement, based on a contractual percentage of Mallinckrodts
net sales of NeutroSpec to customers in the period. Sales and marketing activities
related to NeutroSpec were suspended in December 2005. We will not earn future royalty
revenues related to NeutroSpec unless and until NeutroSpec sales resume.

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Licenses,
Grants and Contracts  For the three and six months ended December 31, 2006, we
recognized $3.7 million and $8.7 million, respectively, in licenses, grants and contracts
revenue consisting of (i) $3.6 million and $8.5 million, respectively, related to
bremelanotide pursuant to our collaboration agreement with King, and (ii) $0.1 million and
$0.2 million related to NeutroSpec pursuant to our collaboration agreement with
Mallinckrodt. For the three and six months ended December 31, 2005, we recognized $4.0
million and $8.2 million, respectively, in licenses, grants and contracts revenue
consisting of (i) $3.9 million and $8.0 million, respectively, related to bremelanotide
pursuant to our collaboration agreement with King, and (ii) $0.1 million and $0.2 million
related to NeutroSpec pursuant to our collaboration agreement with Mallinckrodt. The $0.3
million decrease in revenue from King for the three-month period reflects lower
reimbursable third-party costs incurred by the Company on the bremelanotide program in the
period. Decreased expenses for the conduct of Phase 2 clinical trials were partially
offset by higher costs for process development activities and the manufacturing of drug
supplies. Higher reimbursement revenue in the six-month period ended December 31, 2006
compared to the 2005 period reflects higher spending in the first quarter of the year.
License and contract revenue from Mallinckrodt in the three and six months ended December
31, 2006 were comparable to prior-year amounts and reflect Mallinckrodts share of
the costs incurred in certain NeutroSpec development activities.

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. The amount of such revenue will depend on a number of factors,
including bremelanotide development activities performed and decisions about the division
of responsibility for such activities between us and King. 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  For the three and six months ended December 31, 2005, we
recognized $2.0 million in cost of product sales related to NeutroSpec. Cost of product
sales in those periods represents our write-off of inventory due to the suspension of
sales of NeutroSpec in December 2005.

Royalties
Expense  For the three and six months ended December 31, 2006, we recognized no
royalties expense. Royalties expense in the three and six months ended December 31, 2005
amounted to $0.1 million and $0.3 million, respectively, and represented amounts due
licensors based primarily on Mallinckrodts net sales of NeutroSpec to customers.
Sales and marketing activities related to NeutroSpec were suspended in December 2005. We
will not incur future royalty expenses related to NeutroSpec unless and until commercial
sales of NeutroSpec resume.

Research
and Development  Research and development expenses increased to $9.6 million for the
three months ended December 31, 2006 from $9.3 million for the three months ended December
31, 2005. Research and development expenses increased to $21.7 million for the six months
ended December 31, 2006 from $18.7 million for the six months ended December 31, 2005.

Research
and development expenses related to bremelanotide increased to $5.3 million for the three
months ended December 31, 2006 period from $5.1 million in the comparable period in 2005.
These amounts include both third-party costs incurred by us and partially
reimbursed by King, which decreased in the period as discussed above under Licenses,
Grants and Contracts, and our share of costs for development activities performed
by King, which increased during the period due primarily to higher clinical study costs.
In the six months ended December 31, 2006, expenses related to bremelanotide increased to
$13.1 million from $10.3 million in the comparable period in 2005, primarily as a result
of increased spending on clinical studies.

In
the six months ended December 31, 2006, in conjunction with King, we completed two Phase
2B studies evaluating the safety and efficacy of bremelanotide in patients suffering from
mild to severe ED, with one trial limited to non-diabetic patients and the other to
diabetic patients, and 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 $5 million to $10 million of additional direct costs (excluding allocated
general expenses and net of reimbursements from King) for our share of bremelanotide
expenses in the remainder of the current fiscal year to conduct clinical studies for ED
and FSD and continue related process and development activities prior to initiating Phase
3 clinical trials.

Research
and development expenses related to our MIDAS program amounted to $0.8 million for the
three months ended December 31, 2006, which was comparable to MIDAS program expenses for the
three months ended December 31, 2005. Spending for the six months ended December 31, 2006
increased to $1.5 million from $1.2 million for the comparable period of the prior year,
primarily as a result of additional contract services for assistance with the
optimization of lead compounds. Quarterly spending may decrease during the remainder of
the current fiscal year as a result of the January 2007 licensing and research
collaboration agreement with AstraZeneca AB under which AstraZeneca AB assumes
responsibility for discovery and development costs related to our obesity program.  The
amount of such spending and the nature of future development activities are dependent on
a number

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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 development partners.

Research
and development spending on NeutroSpec decreased to $0.1 million and $0.2 million for the
three- and six-month periods ended December 31, 2006, respectively, from $0.4 million and
$1.1 million for the three- and six-month periods ended December 31, 2005, respectively,
as a result of lower costs related to manufacturing and process development activities. We
have suspended substantial development activities, including research to evaluate
NeutroSpecs 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 $0.1 million to $0.5 million of direct costs on NeutroSpec during the
remainder of the current fiscal year to conduct selected studies, review the safety of
NeutroSpec and explore other indications. A significant portion of these costs 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.

The
historical amounts of project spending above exclude general research and development
spending, which increased to $3.4 million and $6.9 million for the three- and six-month
periods ended December 31, 2006 from $3.0 million and $6.1 million for the three- and
six-month periods ended December 31, 2005, primarily due to increased personnel costs and
the expansion of facilities.

Cumulative
spending from inception to December 31, 2006 on our bremelanotide, NeutroSpec and MIDAS
programs amounts to approximately $104 million, $55 million and $25 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 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 increased to $1.7 million
and $3.2 million in the three- and six-month periods ended December 31, 2006,
respectively, from $1.4 million and $3.2 million for the three- and six-months periods
ended December 31, 2005, respectively. The increase in expenses for the 2006 periods
primarily reflects higher share-based compensation expense, which was partially offset by
lower insurance expense and decreases in miscellaneous taxes and other overhead expenses.

Income
Tax Benefit  Income tax benefits of $0.8 million in the three and six months ended
December 31, 2006 and $0.7 million in the three and six months ended December 31, 2005
relate to the sale of New Jersey State net operating loss carryforwards and research and
development credit carryforwards.  The amount of such losses and tax credits that we are able to sell
depends on annual pools and allocations established by the state of New Jersey.

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 obesity and CHF 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.                                  

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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 six months ended December 31, 2006, we used $14.8 million of cash for our operating
activities, compared to $9.0 million in the six months ended December 31, 2005. Lower net
cash outflows from operations in the 2005 quarter resulted primarily from lower operating
expenses and the timing of the receipt of reimbursements from King for bremelanotide
costs. In the six months ended December 31, 2005, our accounts receivable balance
decreased $4.0 million. Our periodic accounts receivable balances will continue to be
highly dependent on the timing of such receipts and the division of development
responsibilities between us and King.

During
the six months ended December 31, 2006, net cash provided by financing activities amounted
to $0.6 million, primarily from the exercise of outstanding warrants. In the six months
ended December 31, 2005, net proceeds from the issuance of common stock and warrants
amounted to $10.5 million, reflecting primarily the proceeds from the sale of common stock
and warrants to King, related to our collaboration agreement.

In
January 2007, we entered into an exclusive global licensing and research
collaboration agreement with AstraZeneca AB to discover, develop and commercialize small
molecule compounds that target MC receptors for treatment of obesity, diabetes
and related metabolic syndrome. Under the terms of the agreement, we will receive
an upfront payment of $10 million from AstraZeneca, potential future milestone payments
totaling up to $300 million, contingent upon development and regulatory milestones and the
achievement of sales targets, and royalties on sales of approved products.

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 believe that our cash, cash equivalents and
available-for-sale investments as of December 31, 2006, together with expected receipts
from collaboration and license agreements and other income, are adequate to fund our
operations for at least the next twelve months. The nature and timing of
our development activities are highly dependent on our financing
activities. 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 plan to continue to monitor the progress of our
development programs and the timing and amount of related expenditures and potential
milestone receipts, refine our operations, control expenses, evaluate alternative methods
to conduct our business and seek additional financing and sharing of development costs
through strategic collaboration agreements or other resources.

We
are actively searching for certain products and technologies to license or acquire, now or
in the future, and expect to continue to do so. 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 identified.

Our
license agreements related to NeutroSpec require royalty payments by us based 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 of NeutroSpec. We
do not reasonably expect to make any such contingent payments during the next twelve
months. We also 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.

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.

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Item 3. Quantitative and
Qualitative Disclosures About Market Risk.

Interest
Rate Risk. Our exposure to market risk from changes in interest rates relates primarily to
our investment portfolio. As of December 31, 2006, our cash and cash equivalents were
$13.7 million and investments, which consisted of mutual funds, were $2.3 million. Due to
the average maturity 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 Rules 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. In the most
recent fiscal quarter, we installed new accounting software to assist in the processing of
purchasing and disbursement transactions and the compilation of financial reports. There
were no other 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.

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PART II  OTHER
INFORMATION

Item 1. Legal Proceedings.

As
discussed in our annual report on Form 10-K for our fiscal year ended June 30, 2006,
Competitive Technologies, Inc. (CTI) initiated litigation against us by
filing a suit in Connecticut Superior Court for breach of a settlement agreement of an
earlier arbitration between CTI and us. We filed an answer denying all material
allegations asserted by CTI, and asserting counterclaims against CTI for fraud,
fraudulent inducement, unfair trade practices, breach of the settlement agreement and
declaratory judgment that under the settlement we were released from any further
obligations to CTI relating to payments we may receive in the future from King concerning
bremelanotide, that CTI should be compelled to comply with the settlement agreement and
withdraw its earlier arbitration request, or alternatively that the settlement agreement
of the earlier arbitration should be set aside. CTI has not timely filed a response to
our counterclaims nor has CTI requested an extension of time within which to answer. As
discussed in our quarterly report on Form 10-Q for the quarter ended September 30, 2006,
we filed a reply and counterclaims in the arbitration proceeding before the American
Arbitration Association (AAA) which was initiated by CTI, and subsequently
CTI filed a response generally denying our counterclaims and asserting defenses. The
party-appointed arbitrators have agreed upon a chairperson for the arbitration panel, to
which both parties have consented. However, the chairperson has not yet been confirmed by
the AAA. Discovery has not been initiated in the arbitration, and no decisions relating
to the merits of the arbitration have been made.

Item 1A.Risk Factors.

There
have been no material changes in our risk factors disclosed in our annual report on Form
10-K for the fiscal year ended June 30, 2006 in response to Item 1A., Part 1 of such Form
10-K, with the exception of the following:

We
do not control the development of compounds licensed to third parties and, as a result, we
may not realize a significant portion of the potential value of any such license
arrangements.

Under
our January 2007 license arrangement with AstraZeneca AB for our MC-based therapeutic
compounds for obesity, diabetes and related metabolic syndrome, we have no direct control
over the development of these drug candidates and have only limited, if any, input on the
direction of development efforts. If the results of development efforts are negative or
inconclusive, AstraZeneca may elect to defer or abandon further development of this
program. Because much of the potential value of the license arrangement with AstraZeneca
is contingent upon the successful development and commercialization of the licensed
technology, the ultimate value of this license will depend on the efforts of AstraZeneca.
If AstraZeneca does not succeed in developing the licensed technology for whatever reason,
or elects to discontinue the development of this program, we may be unable to realize the
potential value of this arrangement.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

16

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Table of Contents

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

At
our annual meeting of stockholders, which convened on December 15, 2006, the stockholders
voted on the following issues:

| |  | Election
of directors; and
|- |  | --------------------------

| | Ratification of the appointment of our independent registered public accounting firm for
the fiscal year ending June 30, 2007.
|- | ------------------------------------------------------------------------------------------------------------------------------

Common
stock and Series A convertible preferred stock voted as a single class on all matters. The
following tables show the votes cast. All directors identified below were re-elected and
their term of office continued after the meeting.

|                                                      |            |  |           |  |         | 
|----------------------------------------------------- | ---------- |  | --------- |  | ------- | 
|Election of directors:                                | For        |  | Withheld  | 
|Carl Spana, Ph.D.                                     | 62,294,475 |  | 1,017,575 | 
|John K.A. Prendergast, Ph.D.                          | 62,323,388 |  | 988,662   | 
|Perry B. Molinoff, M.D.                               | 62,315,296 |  | 996,754   | 
|Robert K. deVeer, Jr.                                 | 62,303,032 |  | 1,009,018 | 
|Zola P. Horovitz, Ph.D.                               | 60,534,095 |  | 2,777,955 | 
|Robert I. Taber, Ph.D.                                | 62,311,203 |  | 1,000,847 | 
|Errol De Souza, Ph.D.                                 | 62,313,248 |  | 998,802   | 
|J. Stanley Hull                                       | 62,317,796 |  | 994,254   | 
|                                                     
|Other                                                 | For        |  | Against   |  | Abstain | 
|Ratification of independent registeredaccounting firm | 62,613,134 |  | 638,719   |  | 60,197  | 

Item 5. Other
Information.

None.

Item 6. Exhibits.

Exhibits
filed with this report:

| |      |                                                                                                                                                                                                                                                                                                        
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1 | Restricted Stock Unit Agreement.                                                                                                                                                                                                                                                                      
| |      |                                                                                                                                                                                                                                                                                                        
| | 10.2 | Research Collaboration and License Agreement dated January 30, 2007,
     between Palatin and AstraZeneca AB. We have requested confidential treatment of certain provisions contained in this exhibit.
     The copy filed as an exhibit omits the information subject to the confidentiality request.
| |      |                                                                                                                                                                                                                                                                                                        
| | 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.                                                                                                                                                           

Management contract or
compensatory plan or arrangement.

17

---



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: February 7, 2007 |  | /s/ Carl
     SpanaCarl
     Spana, Ph.D.President andChief Executive Officer                                                           
|                       |  |                                                                                                                                         
|                       |  |                                                                                                                                         
|Date: February 7, 2007 |  | /s/ Stephen T. WillsStephen T. WillsExecutive Vice President andChief Financial Officer
     (PrincipalFinancial and Accounting Officer)

18

---



EXHIBIT INDEX

| |      |                                                                                                                                                                                                                                                                                                        
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1 | Restricted Stock Unit Agreement.                                                                                                                                                                                                                                                                      
| |      |                                                                                                                                                                                                                                                                                                        
| | 10.2 | Research Collaboration and License Agreement dated January 30, 2007,
     between Palatin and AstraZeneca AB. We have requested confidential treatment of certain provisions contained in this exhibit.
     The copy filed as an exhibit omits the information subject to the confidentiality request.
| |      |                                                                                                                                                                                                                                                                                                        
| | 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.                                                                                                                                                           

Management contract or
compensatory plan or arrangement.