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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 March 31, 2007

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 April 30, 2007, 84,927,712
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 March 31, 2007 and June 30, 2006                                | 2   
|                                    | Consolidated Statements of Operations
     for the Three and Nine Months ended March 31, 2007 and 2006 | 3   
|                                    | Consolidated Statements of Cash Flows
     for the Three and Nine Months ended March 31, 2007 and 2006 | 4   
|                                    | Notes to Consolidated Financial
     Statements                                                        | 5   
|Item 2.                             | Management's Discussion and Analysis of
     Financial Condition and 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)

|                                                                    |               |                  |              |                   |  
|------------------------------------------------------------------- | ------------- | ---------------- | ------------ | ----------------- | -
|                                                                    | March 31,2007 |                  | June 30,2006 |                  
|ASSETS                                                             
|Current assets:                                                     |              
|Cash and cash equivalents                                           |               | $   40,576,297   |              | $   28,333,211    |  
|Available-for-sale investments                                      |               | 2,338,417        |              | 2,330,834         |  
|Accounts receivable                                                 |               | 415,014          |              | 69,591            |  
|Prepaid expenses and other current assets                           |               | 815,059          |              | 1,453,650         |  
|Total current assets                                                |               | 44,144,787       |              | 32,187,286        |  
|Property and equipment, net                                         |               | 6,350,181        |              | 6,347,705         |  
|Restricted cash                                                     |               | 475,000          |              | 475,000           |  
|Other assets                                                        |               | 856,103          |              | 1,037,296         |  
|Total assets                                                        |               | $   51,826,071   |              | $   40,047,287    |  
|                                                                   
|LIABILITIES AND STOCKHOLDERS' EQUITY                                |              
|Current liabilities:                                                |              
|Capital lease obligations and notes payable, current portion        |               | $        214,104 |              | $          86,564 |  
|Accounts payable                                                    |               | 3,104,708        |              | 3,092,962         |  
|Accrued expenses                                                    |               | 3,612,133        |              | 4,466,428         |  
|Accrued compensation                                                |               | 433,750          |              | 803,900           |  
|Deferred revenue, current portion                                   |               | 4,960,771        |              | 3,995,575         |  
|Total current liabilities                                           |               | 12,325,466       |              | 12,445,429        |  
|                                                                   
|Capital lease obligations and notes payable, net of current portion |               | 335,981          |              | 229,585           |  
|Deferred rent, net of current portion                               |               | 2,021,436        |              | 2,358,550         |  
|Deferred revenue, net of current portion                            |               | 13,031,778       |              | 6,713,942         |  
|Total liabilities                                                   |               | 27,714,661       |              | 21,747,506        |  
|                                                                   
|Commitments and contingencies (Note 8)                             
|                                                                   
|Stockholders' equity:                                               |              
|Preferred stock, $0.01 par value, 10,000,000 shares authorized:     |              
|Series A Convertible; 9,997 shares issued and outstanding as of     |              
|March 31, 2007 and June 30, 2006                                    |               | 100              |              | 100               |  
|Common stock, $0.01 par value, 150,000,000 shares authorized,       |              
|84,927,712 and 70,878,521 shares issued and outstanding as of       |              
|March 31, 2007 and June 30, 2006, respectively                      |               | 849,277          |              | 708,785           |  
|Additional paid-in capital                                          |               | 205,399,781      |              | 178,089,176       |  
|Accumulated other comprehensive loss                                |               | (47,153          | )            | (54,736           | )
|Accumulated deficit                                                 |               | (182,090,595     | )            | (160,443,544      | )
|Total stockholders' equity                                          |               | 24,111,410       |              | 18,299,781        |  
|Total liabilities and stockholders' equity                          |               | $   51,826,071   |              | $   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 March 31, |   | Nine Months Ended March 31, |  
|                               |  | 2007                         |   | 2006                        |   | 2007                  |   | 2006               |  
|REVENUES:                      |  |                              |   |                             |   |                       |   |                    |  
|Royalties                      |  | $                   -        |   | $                   -       |   | $                   - |   | $     1,508,862    |  
|Licenses, grants and           | 
|contracts                      |  | 3,090,036                    |   | 5,045,025                   |   | 11,768,247            |   | 13,267,079         |  
|Total revenues                 |  | 3,090,036                    |   | 5,045,025                   |   | 11,768,247            |   | 14,775,941         |  
|                              
|OPERATING EXPENSES:            | 
|Cost of product sales          |  | -                            |   | -                           |   | -                     |   | 2,041,175          |  
|Royalties                      |  | -                            |   | -                           |   | -                     |   | 299,995            |  
|Research and development       |  | 8,128,584                    |   | 10,954,466                  |   | 29,821,764            |   | 29,639,751         |  
|General and administrative     |  | 2,021,734                    |   | 1,838,967                   |   | 5,239,142             |   | 5,022,069          |  
|Total operating expenses       |  | 10,150,318                   |   | 12,793,433                  |   | 35,060,906            |   | 37,002,990         |  
|                              
|Loss from operations           |  | (7,060,282                   | ) | (7,748,408                  | ) | (23,292,659           | ) | (22,227,049        | )
|                              
|OTHER INCOME (EXPENSE):        | 
|Investment income              |  | 348,337                      |   | 155,677                     |   | 899,711               |   | 496,917            |  
|Interest expense               |  | (9,223                       | ) | (9,375                      | ) | (32,411               | ) | (17,477            | )
|Total other income, net        |  | 339,114                      |   | 146,302                     |   | 867,300               |   | 479,440            |  
|                              
|Loss before income taxes       |  | (6,721,168                   | ) | (7,602,106                  | ) | (22,425,359           | ) | (21,747,609        | )
|Income tax benefit             |  | -                            |   | -                           |   | 778,308               |   | 666,275            |  
|                              
|NET LOSS                       |  | $  (6,721,168                | ) | $  (7,602,106               | ) | $  (21,647,051        | ) | $  (21,081,334     | )
|                              
|Basic and diluted net loss per | 
|common share                   |  | $           (0.09            | ) | $           (0.13           | ) | $            (0.30    | ) | $            (0.37 | )
|                              
|Weighted average number of     | 
|common shares outstanding      | 
|used in computing basic        | 
|and diluted net loss per       | 
|common share                   |  | 78,052,712                   |   | 59,339,220                  |   | 73,329,042            |   | 57,503,198         |  

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)

|                                                        |                             |                  |      |                  |  
|------------------------------------------------------- | --------------------------- | ---------------- | ---- | ---------------- | -
|                                                        | Nine Months Ended March 31, |                 
|                                                        | 2007                        |                  | 2006 |                 
|CASH FLOWS FROM OPERATING ACTIVITIES:                   |                             |                  |      |                  |  
|Net loss                                                |                             | $  (21,647,051   | )    | $  (21,081,334   | )
|Adjustments to reconcile net loss to net cash           |                            
|used in operating activities:                           |                            
|Depreciation and amortization                           |                             | 1,061,399        |      | 947,275          |  
|Stock-based compensation                                |                             | 1,247,078        |      | 863,795          |  
|Inventory write-off                                     |                             | -                |      | 2,041,175        |  
|Changes in operating assets and liabilities:            |                            
|Accounts receivable                                     |                             | (345,423         | )    | 5,388,393        |  
|Inventories                                             |                             | -                |      | (659,015         | )
|Prepaid expenses and other                              |                             | 791,095          |      | 335,666          |  
|Accounts payable                                        |                             | 11,746           |      | (484,519         | )
|Accrued expenses and other                              |                             | (1,561,559       | )    | 1,469,352        |  
|Deferred revenues                                       |                             | 7,283,032        |      | (2,035,801       | )
|Net cash used in operating activities                   |                             | (13,159,683      | )    | (13,215,013      | )
|                                                       
|CASH FLOWS FROM INVESTING ACTIVITIES:                   |                            
|Purchases of property and equipment                     |                             | (685,834         | )    | (589,059         | )
|Net cash used in investing activities                   |                             | (685,834         | )    | (589,059         | )
|                                                       
|CASH FLOWS FROM FINANCING ACTIVITIES:                   |                            
|Payments on capital lease obligations and notes payable |                             | (115,416         | )    | (19,744          | )
|Proceeds from issuances of common stock and warrants    |                             | 26,204,019       |      | 12,051,920       |  
|Net cash provided by financing activities               |                             | 26,088,603       |      | 12,032,176       |  
|                                                       
|NET INCREASE (DECREASE) IN CASH                         |                            
|AND CASH EQUIVALENTS                                    |                             | 12,243,086       |      | (1,771,896       | )
|                                                       
|CASH AND CASH EQUIVALENTS, beginning                    |                            
|of period                                               |                             | 28,333,211       |      | 15,720,364       |  
|                                                       
|CASH AND CASH EQUIVALENTS, end of period                |                             | $   40,576,297   |      | $   13,948,468   |  
|                                                       
|SUPPLEMENTAL CASH FLOW INFORMATION:                     |                            
|Equipment acquired under financing agreements           |                             | $        316,632 |      | $        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 a licensing and research collaboration agreement with AstraZeneca AB (AstraZeneca) to
discover, develop and commercialize small molecule compounds that target MC receptors for
treatment of obesity, diabetes and related metabolic syndrome and conducts research on the
treatment of other disorders, including congestive heart failure, with compounds 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 while the Company and
Mallinckrodt evaluate 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 March 31, 2007 and incurred a net loss for the three and nine months ended March 31,
2007. 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
March 31, 2007, 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 flows from operations.

Concentrations
 Concentrations in the Companys assets and operations subject it to certain related risks. Financial instruments that
subject the Company to concentrations of credit risk primarily consist of cash and cash
equivalents 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 March 31, 2007 consists of $232,333
due from AstraZeneca and $182,681 due from Mallinckrodt.

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Revenues
from collaboration partners as a percentage of total revenues were as follows:

|             |                              |     |                             |     |      |     |      |     | 
|------------ | ---------------------------- | --- | --------------------------- | --- | ---- | --- | ---- | --- | 
|             | Three Months Ended March 31, |     | Nine Months Ended March 31, |    
|             | 2007                         |     | 2006                        |     | 2007 |     | 2006 |    
|King         |                              | 82% |                             | 99% |      | 94% |      | 88% | 
|AstraZeneca  |                              | 17% |                             | -%  |      | 4%  |      | -%  | 
|Mallinckrodt |                              | 1%  |                             | 1%  |      | 2%  |      | 12% | 

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

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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 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, 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.

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 employees 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 (EITF) Issue 96-18, Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services, and SFAS 123(R). 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 a
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 nine months ended March 31, 2007 and 2006, 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 March 31, 2007 and
2006, 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 16,801,691 and 13,062,291, 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)    
          AGREEMENT WITH ASTRAZENECA

In
January 2007, the Company entered into an exclusive global licensing and research
collaboration agreement with AstraZeneca 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 received an up-front payment of $10,000,000 from
AstraZeneca and is eligible for milestone payments totaling to $300,000,000, with up to
$180,000,000 contingent upon development and regulatory milestones and the balance on
achievement of sales targets. In addition, the Company is eligible to receive royalties on
sales of approved products. AstraZeneca assumed responsibility for product
commercialization, product discovery and development costs, with both companies
contributing scientific expertise in the research collaboration. In addition, the Company
is providing research services to AstraZeneca at a contractual rate per
full-time-equivalent employee.

The
Company has determined that the license agreement and research services should be
evaluated together as a single unit for the purposes of revenue recognition under EITF
Issue 00-21, Revenue Arrangements with Multiple Deliverables. Accordingly, the
up-front payment of $10,000,000 received by the Company as a license fee is being
recognized as revenue on a straight-line basis over the maximum six-year period during
which the Company may perform research services under the agreement. Per-employee
compensation from AstraZeneca for research services is recognized as earned at the
contractual rate, which approximates the fair value of such services. Payments received
upon the attainment of substantive milestones are recognized as revenue when earned. The
maximum period during which the Company may perform research services includes extension
periods, for which AstraZeneca may exercise an option for no additional consideration. If
the Companys estimated period of performance is reduced to less than the maximum,
the amortization period for any remaining deferred revenue will also be reduced.

(5)    
          OTHER COMPREHENSIVE LOSS

Other
comprehensive loss consists of the following:

|                          |                              |               |                             |               |      |                |      |                |  
|------------------------- | ---------------------------- | ------------- | --------------------------- | ------------- | ---- | -------------- | ---- | -------------- | -
|                          | Three Months Ended March 31, |               | Nine Months Ended March 31, |              
|                          | 2007                         |               | 2006                        |               | 2007 |                | 2006 |               
|Net loss                  |                              | $  (6,721,168 | )                           | $  (7,602,106 | )    | $  (21,647,051 | )    | $  (21,081,334 | )
|Unrealized gain (loss) on |                             
|investments               |                              | 5,040         |                             | (12,053       | )    | 7,583          |      | (43,693        | )
|Comprehensive loss        |                              | $  (6,716,128 | )                           | $  (7,614,159 | )    | $  (21,639,468 | )    | $  (21,125,027 | )

(6)    INVESTMENTS

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

|                               |               |             |              |             |  
|------------------------------ | ------------- | ----------- | ------------ | ----------- | -
|                               | March 31,2007 |             | June 30,2006 |            
|Cost                           |               | $ 2,385,570 |              | $ 2,385,570 |  
|Unrealized loss on investments |               | (47,153     | )            | (54,736     | )
|Fair value                     |               | $ 2,338,417 |              | $ 2,330,834 |  

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(7)    
          STOCKHOLDERS EQUITY

Sale
of Stock

In
February 2007, the Company completed the sale of 13,750,000 shares of common stock in a
registered offering. Net proceeds to the Company, after costs of the offering, amounted to approximately
$25,500,000.

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
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
approximately $1,800,000, which is expected to be recognized over a weighted-average
period of approximately three years. In the three and nine months ended March 31, 2007,
the Company recognized $167,781 and $335,563, respectively, 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.

(8)    
          COMMITMENTS AND CONTINGENCIES

As
discussed in the Companys annual report on Form 10-K for the fiscal year ended June
30, 2006 and quarterly report on Form 10-Q for the quarter ended December 31, 2006,
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. In response to the Companys
counterclaims against CTI for fraud, fraudulent inducement, unfair trade practices, breach
of the settlement agreement and declaratory judgment that under the settlement the Company
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
filed a reply generally denying the Companys counterclaims and asserting defenses.
Discovery has been initiated by both Palatin and CTI. As discussed in the Companys
quarterly report on Form 10-Q for the quarter ended December 31, 2006, in the arbitration
proceeding before the American Arbitration Association (AAA) which was
initiated by CTI, the party-appointed arbitrators agreed upon a chairperson for the
arbitration panel, and the chairperson has now been confirmed by the AAA. In preliminary
hearings, a schedule for dispositive motions, discovery and a hearing on the merits have
been set, but 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.

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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 fiscal year ended June 30, 2006, our quarterly report on Form 10-Q for the
quarter ended December 31, 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 fiscal 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 under the King Pharmaceuticals, Inc. (King) collaboration are
deferred and amortized to revenue over the related performance period. Due to the
uncertainty inherent in the related development program, 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 to be the period in
which we perform development activities during the initial research term, which is
currently estimated to be five and one-half 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 the
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 as revenue and corresponding decreases in the amount of
revenue recognized each period. In the three months ended March 31, 2007, we increased our
estimated performance period, reducing revenue by approximately $0.1 million compared to
the previous quarter. As of March 31, 2007, a one-year increase in the estimated period of
performance would result in a decrease in the amount of deferred revenue recognized as
revenue per quarter of approximately $0.2 million.

Non-refundable
up-front fees under the licensing and research collaboration with AstraZeneca AB (AstraZeneca)
are deferred and amortized to revenue over the six-year maximum term over which we may
perform research services for AstraZeneca. The nature and extent of our future services
under the agreement during its term are subject to change by the parties on an ongoing
basis. Accordingly, 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.
Our actual performance period may be less than the six-year maximum based on AstraZenecas
requirements. Decreases in the estimated performance period would result in decreases in
the period over which our deferred revenue is to be recognized as revenue and
corresponding increases 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

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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 forfeitures, our reported expenses will be understated until
such time as we adjust our estimate.  Changes in estimated forfeitures will affect our reported expenses
in the period of change and 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.

We
have a collaborative development and marketing agreement with King to jointly develop and
commercialize bremelanotide (formerly known as PT-141), our nasally administered MC-based
peptide. Bremelanotide has completed Phase 2 clinical studies for treatment of male
erectile dysfunction (ED) and is in Phase 2 clinical studies for 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.

In
January 2007, we entered into an exclusive global licensing and research collaboration
agreement with AstraZeneca 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 received an upfront payment of $10.0
million from AstraZeneca, and may receive future milestone payments totaling to $300.0
million, contingent upon development and regulatory milestones and the achievement of
sales targets, and royalties on sales of approved products.

We
have identified a lead natriuretic peptide receptor clinical candidate compound for the
treatment of congestive heart failure (CHF), and are conducting preclinical
toxicity testing in preparation for starting clinical trials. We are also conducting
research to identify additional natriuretic peptide receptor clinical candidate compounds
for treatment of acute decompensated and chronic 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 collaboration agreements.

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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 Nine Months Ended March 31,
2007 Compared to the Three and Nine Months Ended March 31, 2006.

Royalties
Revenue  For the three and nine months ended March 31, 2007, we recognized no
royalty revenues. Royalty revenues in the three and nine months ended March 31, 2006 of $0
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.

Licenses,
Grants and Contracts  For the three and nine months ended March 31, 2007, we
recognized $3.1 million and $11.8 million, respectively, in licenses, grants and contracts
revenue compared to $5.0 million and $13.3 million for the three and nine months ended March
31, 2006.

Revenue
related to our collaboration agreement with King for bremelanotide decreased from $5.0
million to $2.5 million in the current three-month period and from $13.0 million to $11.1
million in the current nine-month period, relecting lower reimbursable costs incurred by
us in the periods. Reimbursable costs were higher in the prior year periods due to the
conduct of two Phase 2 clinical trials of bremelanotide.

In
the three and nine months ended March 31, 2007, revenue from AstraZeneca related to our
January 2007 licensing and research collaboration for the treatment of obesity and related
disorders amounted to $0.5 million, representing amounts due for our research services and
the amortization of a portion of the $10.0 million up-front license fee received at the
inception of the agreement.

Contract
revenue from Mallinckrodt in the three and nine months ended March 31, 2007 was 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 revenues under our collaboration agreements, in the
form of payments for our research services and the recognition as revenue of deferred license fees.
The amount of such revenue will depend on a number of factors, including development
activities performed and decisions about the division of responsibility for such
activities between us and our partners. 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 the attainment of certain
development milestones.

Cost
of Product Sales  For the nine months ended March 31, 2006, we recognized $2.0
million in cost of product sales related to NeutroSpec. Cost of product sales in that
period represented our write-off of inventory due to the suspension of sales of NeutroSpec
in December 2005.

Royalties
Expense  For the three and nine months ended March 31, 2007, we recognized no
royalties expense. Royalties expense in the three and nine months ended March 31, 2006
amounted to $0 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 decreased to $8.1 million for the
three months ended March 31, 2007 from $11.0 million for the three months ended March 31,
2006. Research and development expenses of $29.8 million for the nine months ended March
31, 2007 were comparable to research and development expenses for the nine months ended March 31, 2006.

Research
and development expenses related to bremelanotide decreased to $3.0 million for the three
months ended March 31, 2007 period from $6.8 million in the comparable period in 2006,
following completion of two Phase 2 clinical trials earlier this fiscal year. 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

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and study monitoring and management.
This decrease was partially offset by increased year-over-year spending in the first two
quarters of the current fiscal year, largely reflecting our share of clinical study costs
incurred by King. In the nine months ended March 31, 2007, expenses related to
bremelanotide decreased to $16.1 million from $17.1 million in the comparable period in
2006. We expect to spend less than $5 million of additional direct costs (excluding allocated
general expenses and net of reimbursements from King) for our share of bremelanotide
expenses prior to initiating Phase 3 clinical trials.

Research
and development expenses related to our other development programs increased to $1.4 million for the
three months ended March 31, 2007 from $0.7 million for the three months ended March 31,
2006 and to $2.9 million for the nine months ended March 31, 2007 from $1.9 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 and increased preclinical
study costs related to our development program for the treatment of CHF. Our spending related
to our obesity program may decrease as AstraZeneca assumes
responsibility for discovery and development activities. 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 development
partners.

Research
and development spending on NeutroSpec decreased to $0.1 million and $0.3 million for the
three- and nine-month periods ended March 31, 2007, respectively, from $0.1 million and
$1.3 million for the three- and nine-month periods ended March 31, 2006, 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 $0.3 million of direct costs on NeutroSpec on a quarterly
basis in this calendar year to review the safety of NeutroSpec and explore other
indications, a 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.

The
historical amounts of project spending above exclude general research and development
spending, which increased to $3.7 million and $10.5 million for the three- and nine-month
periods ended March 31, 2007 from $3.3 million and $9.4 million for the three- and
nine-month periods ended March 31, 2006, primarily due to increased personnel costs,
including share-based compensation, and the expansion of facilities.

Cumulative
spending from inception to March 31, 2007 on our bremelanotide, NeutroSpec and other
programs, including an allocated portion of general research and development expenses,
amounts to approximately $106 million, $55 million and $30 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 $2.0 million
and $5.2 million in the three- and nine-month periods ended March 31, 2007, respectively,
from $1.8 million and $5.0 million for the three-and nine-months periods ended March 31,
2006, respectively. The increase in expenses for the 2007 periods primarily reflects
higher share-based compensation expense and increased costs of market research, which were
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 nine months ended March 31,
2007 and $0.7 million in the nine months ended March 31, 2006 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.

We
will need regulatory approval to market and sell our products. Our product candidates are
at various stages of development and will require significant further research,
development and testing and some may never be successfully developed or commercialized. 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;

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|  |                                  
|- | ---------------------------------
| | 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.

In
each of the nine-month periods ended March 31, 2007 and March 31, 2006, we used $13.2
million of cash for our operating activities. Net cash outflows from operations in the
2007 period were affected by an upfront license payment of $10.0 million from
AstraZeneca. In the nine months ended March 31, 2006, our net cash outflows from
operations were affected by a $5.4 million decrease in our accounts receivable balance.
Our periodic accounts receivable balances and cash flows from operations will continue to
be highly dependent on the timing of such receipts and the division of development
responsibilities between us and King.

During
the nine months ended March 31, 2007, net cash provided by financing activities amounted
to $26.1 million, primarily from the sale of 13,750,000 shares in a registered offering in
February 2007. In the nine months ended March 31, 2006, net proceeds from the issuance of
common stock and warrants amounted to $12.1 million, reflecting primarily the proceeds
from the sale of common stock and warrants to King, related to our collaboration
agreement.

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 March 31, 2007, 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 March 31, 2007, our cash and cash equivalents were $40.6
million and investments, which consisted of mutual funds, were $2.3 million. Due to the
average maturity of investments held by the funds, 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. 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.

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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 and
our quarterly report on Form 10-Q for the quarter ended December 31, 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. In response to our 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 filed a reply generally denying our counterclaims
and asserting defenses. Discovery has been initiated by both Palatin and CTI. As discussed
in our quarterly report on Form 10-Q for the quarter ended December 31, 2006, in the
arbitration proceeding before the American Arbitration Association (AAA) which
was initiated by CTI, the party-appointed arbitrators agreed upon a chairperson for the
arbitration panel, and the chairperson has now been confirmed by the AAA. In preliminary
hearings, a schedule for dispositive motions, discovery and a hearing on the merits have
been set, but no decisions relating to the merits of the arbitration have been made.

Item 1A.Risk Factors.

Other
than previously disclosed in our quarterly report  on Form 10-Q for the quarter ended December 31, 2006,
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 I of such Form 10-K.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

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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 pursuant to Section 302 of the
     Sarbanes-Oxley Act of 2002.                                    
| |      |                                                                                                                                             
| | 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the
     Sarbanes-Oxley Act of 2002.                                    
| |      |                                                                                                                                             
| | 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.

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Table of Contents

SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.

|                  |  |                                                                                                                                         
|----------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|                  |  | Palatin Technologies, Inc.(Registrant)                                                                                                  
|                  |  |                                                                                                                                         
|                  |  |                                                                                                                                         
|Date: May 9, 2007 |  | /s/ Carl
     SpanaCarl
     Spana, Ph.D.President andChief Executive Officer                                                           
|                  |  |                                                                                                                                         
|                  |  |                                                                                                                                         
|Date: May 9, 2007 |  | /s/ Stephen T. WillsStephen T. WillsExecutive Vice President andChief Financial Officer
     (PrincipalFinancial and Accounting Officer)

18

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EXHIBIT INDEX

| |      |                                                                                                                                             
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the
     Sarbanes-Oxley Act of 2002.                                    
| |      |                                                                                                                                             
| | 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the
     Sarbanes-Oxley Act of 2002.                                    
| |      |                                                                                                                                             
| | 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.