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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, 2005

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) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
   Yes [X]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2
of the Exchange Act. (Check one):

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

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

As of January 31, 2006, 59,223,054
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, 2005 and June 30, 2005                               | 2   
|                                    | Consolidated Statements of Operations
     for the Three and Six Months ended December 31, 2005 and 2004 | 3   
|                                    | Consolidated Statements of Cash Flows
     for the Three and Six Months ended December 31, 2005 and 2004 | 4   
|                                    | Notes to Consolidated Financial
     Statements                                                          | 5   
|Item 2.                             | Management's Discussion and Analysis of
     Financial Conditionand Results of Operations                | 12  
|Item 3.                             | Quantitative and Qualitative
     Disclosures About Market Risk                                          | 18  
|Item 4.                             | Controls and Procedures                                                                                  | 18  

PART II - OTHER
INFORMATION

|        |                                                                  |   
|------- | ---------------------------------------------------------------- | --
|Item 1. | Legal Proceedings                                                | 19
|Item 2. | Unregistered Sales of Equity Securities and
     Use of Proceeds | 19
|Item 3. | Defaults Upon Senior Securities                                  | 19
|Item 4. | Submission of Matters to a Vote of Security
     Holders         | 19
|Item 5. | Other Information                                                | 19
|Item 6. | Exhibits                                                         | 19

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,          June 30,
                                                                       2005                2005
                                                                 ----------------    ---------------
ASSETS
Current assets:
  Cash and cash equivalents                                        $  16,763,421     $   15,720,364
  Available for sale investments                                       2,353,930          2,385,570
  Accounts receivable                                                  1,396,914          5,441,425
  Inventories                                                                  -          1,382,160
  Prepaid expenses and other current assets                            2,015,755          1,889,269
                                                                   --------------    ---------------
      Total current assets                                            22,530,020         26,818,788

Property and equipment, net                                            6,565,857          6,464,324
Restricted cash                                                          475,000            475,000
Other assets                                                           1,224,371          1,408,158
                                                                   --------------    ---------------
      Total assets                                                 $  30,795,248     $   35,166,270
                                                                   ==============    ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Capital lease obligations, current portion                       $      77,281     $       11,269
  Accounts payable                                                     3,116,946          4,773,297
  Accrued expenses                                                     4,802,971          3,925,406
  Accrued compensation                                                   250,000            545,870
  Deferred revenue, current portion                                    4,310,625          3,790,828
                                                                   --------------    ---------------
      Total current liabilities                                       12,557,823         13,046,670

Capital lease obligations, net of current portion                        273,779             18,934
Deferred rent, net of current portion                                  2,884,704          3,001,980
Deferred revenue, net of current portion                               8,293,690          9,873,438
                                                                   --------------    ---------------
      Total liabilities                                               24,009,996         25,941,022
                                                                   --------------    ---------------

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $.01 par value, 10,000,000 shares authorized:
    Series A Convertible; 10,497 and 11,447 shares issued and
    outstanding as of December 31, 2005 and June 30, 2005,
    respectively                                                             105                114
  Common stock, $.01 par value, 150,000,000 shares authorized,
    59,069,692 and 54,236,544 shares issued and outstanding as of
    December 31, 2005 and June 30, 2005, respectively                    590,697            542,365
  Additional paid-in capital                                         151,189,980        140,167,431
  Accumulated other comprehensive loss                                   (31,640)                 -
  Accumulated deficit                                               (144,963,890)      (131,484,662)
                                                                   --------------    ---------------
      Total stockholders' equity                                       6,785,252          9,225,248
                                                                   --------------    ---------------
      Total liabilities and stockholders' equity                   $  30,795,248     $   35,166,270
                                                                   ==============    ===============


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

2

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Table of Contents

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

Three Months Ended December 31,   Six Months Ended December 31,
                             -------------------------------   -----------------------------
                                   2005            2004            2005             2004
                               ------------    ------------    -------------    ------------
REVENUES:

  Royalties                    $   593,347     $   214,359     $  1,508,862     $   541,673
  Product sales                          -       1,291,500                -       1,707,825
  Licenses, grants and
   contracts                     3,993,791       3,307,870        8,222,054       7,055,850
                               ------------    ------------    -------------    ------------
    Total revenues               4,587,138       4,813,729        9,730,916       9,305,348
                               ------------    ------------    -------------    ------------

OPERATING EXPENSES:
  Cost of product sales          2,041,175         132,779        2,041,175         220,841
  Royalties                        116,666          87,512          299,995         159,394
  Research and development       9,319,917       6,116,359       18,685,285      11,765,124
  General and administrative     1,430,569       1,506,232        3,183,102       3,338,895
                               ------------    ------------    -------------    ------------
    Total operating expenses    12,908,327       7,842,882       24,209,557      15,484,254
                               ------------    ------------    -------------    ------------

Loss from operations            (8,321,189)     (3,029,153)     (14,478,641)     (6,178,906)
                               ------------    ------------    -------------    ------------

OTHER INCOME (EXPENSE):
  Investment income                217,018         167,346          341,240         279,634
  Interest expense                  (5,676)         (4,981)          (8,102)         (7,039)
                               ------------    ------------    -------------    ------------
    Total other income, net        211,342         162,365          333,138         272,595
                               ------------    ------------    -------------    ------------

Loss before income taxes        (8,109,847)     (2,866,788)     (14,145,503)     (5,906,311)
Income tax benefit                 666,275         580,275          666,275         580,275
                               ------------    ------------    -------------    ------------

NET LOSS                       $(7,443,572)    $(2,286,513)    $(13,479,228)    $(5,326,036)
                               ============    ============    =============    ============

Basic and diluted net loss per
    common share               $     (0.13)    $     (0.04)    $      (0.24)    $     (0.10)
                               ============    ============    =============    ============

Weighted average number of
    common shares outstanding
    used in computing basic
    and diluted net loss per
    common share                58,869,492      53,997,547       56,605,144      53,686,347
                               ============    ============    =============    ============


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

3

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

Six Months Ended December 31,
                                                              -----------------------------
                                                                   2005             2004
                                                              -------------    ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                    $(13,479,228)    $(5,326,036)
  Adjustments to reconcile net loss to net cash
   (used in) provided by operating activities:
    Depreciation and amortization                                  609,349         537,418
    Stock-based compensation                                       612,608          (2,301)
    Changes in certain operating assets and liabilities:
      Accounts receivable                                        4,044,511      (2,808,991)
      Inventories                                                1,382,160        (683,559)
      Prepaid expenses and other                                    56,744      (1,104,415)
      Accounts payable                                          (1,656,351)      1,599,131
      Accrued expenses and other                                   464,569         133,665
      Deferred revenues                                         (1,059,951)     14,847,390
                                                              -------------    ------------
        Net cash (used in) provided by operating activities     (9,025,589)      7,192,302
                                                              -------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Sale or maturity of short-term investments                           -          50,000
    Purchases of property and equipment                           (384,111)        (99,668)
                                                              -------------    ------------
        Net cash used in investing activities                     (384,111)        (49,668)
                                                              -------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Payments on capital lease obligations                           (5,507)        (29,089)
    Proceeds from issuances of common stock and
     warrants, net                                              10,458,264       3,684,049
                                                              -------------    ------------
        Net cash provided by financing activities               10,452,757       3,654,960
                                                              -------------    ------------

NET INCREASE IN CASH
  AND CASH EQUIVALENTS                                           1,043,057      10,797,594

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

CASH AND CASH EQUIVALENTS, end of period                      $ 16,763,421     $28,744,670
                                                              =============    ============

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


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

4

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Table of Contents

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

(1)   ORGANIZATION

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

NeutroSpec®
is the Companys proprietary radiolabeled monoclonal antibody product for imaging and
diagnosing infection and is the subject of a strategic collaboration agreement with
Tyco Healthcare Mallinckrodt (Mallinckrodt). In December 2005, the Company and
Mallinckrodt voluntarily suspended the sales, marketing and distribution of NeutroSpec and
recalled all existing customer inventories. In July 2004, the Company had received
approval from the U.S. Food and Drug Administration (FDA) to market NeutroSpec
for imaging and diagnosing equivocal appendicits. In 2005, the Company and Mallinckrodt
reported to the FDA the occurrence of several serious adverse events, including two
deaths, involving patients who received NeutroSpec. All ongoing clinical trials and
regulatory approvals of NeutroSpec have been suspended. The Company and Mallinckrodt are
reviewing data and assessing approaches for understanding the relationship between
NeutroSpec use and the observed serious adverse events. The Company and Mallinckrodt are
preparing for an FDA Advisory Committee meeting expected to be held in 2006. No final
decision concerning future activities involving NeutroSpec has been made.

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

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

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 of
$144,963,890 as of December 31, 2005 and incurred a net loss in the six months ended
December 31, 2005. 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 had cash, cash equivalents and investments totaling $19,117,351 as of December 31,
2005. The Company expects that these amounts will be adequate to fund the Companys
operations for at least the next twelve months. Management plans to continue to refine its
operations, control expenses, evaluate alternative methods to conduct its business, and
seek available and attractive sources of financing and sharing of development costs
through strategic collaboration agreements or other resources. Should appropriate sources
of financing not be available, management would delay certain clinical trials and research
activities until such time as appropriate

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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.

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, short-term
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 as of December 31, 2005 consisted of amounts due
from Mallinckrodt under its collaboration agreements.

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

|             |  |                                 |     |                               |  |      |  |      |     |  |  |    
|------------ |  | ------------------------------- | --- | ----------------------------- |  | ---- |  | ---- | --- |  |  | ---
|             |  | Three Months Ended December 31, |     | Six Months Ended December 31,
|             |  | 2005                            |     | 2004                          |  | 2005 |  | 2004
|King         |  |                                 | 85% |                               |  | 68%  |  |      | 82% |  |  | 54%
|Mallinckrodt |  |                                 | 15% |                               |  | 31%  |  |      | 18% |  |  | 46%

(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, 2005, its results of operations for the three and six months ended December 31,
2005 and 2004 and its cash flows for the six months ended December 31, 2005 and 2004. The results of operations for the three and
six month periods ended December 31, 2005 may not necessarily be indicative of the results of operations expected for the full
year, except that the Company expects to incur a significant loss for the fiscal year ending June 30, 2006.

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

(3)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

The Company has estimated and
accrued certain costs associated with the suspension of sales of NeutroSpec and the related recall of inventories, including the
Companys share of costs incurred by others, as determined in accordance with existing agreements. If the Company has
underestimated the actual amount of these costs, the Company will record additional expenses in future periods.

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 accounts for its investments in accordance with Statement of Financial
Accounting Standards (SFAS) 115, Accounting For Certain Investments in
Debt and Equity Securities. The Company classifies such 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.

6

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

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

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

Impairment
of Long-Lived Assets  The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. To determine recoverability of its long-lived assets,
management evaluates whether the estimated future undiscounted net cash flows, without
interest charges, are less than the carrying amount of the assets. 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 includes certain license fee payments related to PT-141 and the
Companys collaboration agreement with King, which are being amortized over the
period in which the Company performs certain development activities under the agreement.

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

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

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

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

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

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

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

The
previously-disclosed pro forma impact on earnings of using the fair-value-based method of
accounting for stock-based compensation under SFAS 123 for the three and six months
ended December 31, 2004 is as follows:

|                                                                                                      |  |                                           |  |                                        
|----------------------------------------------------------------------------------------------------- |  | ----------------------------------------- |  | ---------------------------------------
|                                                                                                      |  | Three
     months ended December 31, 2004 |  | Six months
     ended December 31, 2004
|Net loss attributable to common stockholders:                                                         |  |                                           |  |                                        
|As reported                                                                                           |  | $ (2,286,513)                             |  | $ (5,326,036)                          
|Stock-based employee compensation expense  included in
     the determination of net loss as reported |  | -                                         |  | 68,333                                 
|Impact of total stock-based compensation
     expense  determined under fair-value-based method       |  | (264,245)                                 |  | (585,203)                              
|Pro forma                                                                                             |  | $ (2,550,758)                             |  | $ (5,842,906)                          
|Basic and diluted net loss per common share:                                                          |  |                                           |  |                                        
|As reported                                                                                           |  | $
             (0.04)                     |  | $
             (0.10)                  
|Pro forma                                                                                             |  | $
             (0.05)                     |  | $
             (0.11)                  

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

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

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

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

Net
Loss per Common Share  The Company applies SFAS 128, Earnings per Share,
which requires dual presentation of basic and diluted earnings per share (EPS)
for complex capital structures on the face of the statement of operations. Basic EPS is
computed by dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution from the exercise
or conversion of securities into common stock, such as stock options and warrants. For the
three and six months ended December 31, 2005 and 2004, there were no dilutive effects of
stock options or warrants as the Company incurred a net loss in each period. Common shares
issuable upon conversion of Series A Convertible Preferred Stock and the exercise of
outstanding options and warrants amounted to an aggregate of 13,975,601 and 13,189,335 as
of December 31, 2005 and 2004, respectively.

Reclassifications
 Certain amounts in prior years consolidated financial statements have been
reclassified to conform to the current year presentation.

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(4)   OTHER COMPREHENSIVE LOSS

Other comprehensive loss
consists of the following:

|                               |  |                                 |  |                               |  |                |  |              
|------------------------------ |  | ------------------------------- |  | ----------------------------- |  | -------------- |  | -------------
|                               |  | Three Months Ended December 31, |  | Six Months Ended December 31,
|                               |  | 2005                            |  | 2004                          |  | 2005           |  | 2004         
|Net Loss                       |  | $ (7,443,572)                   |  | $ (2,286,513)                 |  | $ (13,479,228) |  | $ (5,326,036)
|Unrealized loss on investments |  | (12,051)                        |  | (10,420)                      |  | (31,640)       |  | (15,196)     
|Comprehensive loss             |  | $ (7,455,623)                   |  | $ (2,296,933)                 |  | $ (13,510,868) |  | $ (5,341,232)

(5)   INVESTMENTS

The following is a summary of
available for sale investments:

|             |  |                   |  |                        |  |                         |  |            
|------------ |  | ----------------- |  | ---------------------- |  | ----------------------- |  | -----------
|             |  | December 31, 2005
|             |  | Cost              |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value 
|Mutual funds |  | $ 2,385,570       |  | $                 -    |  | $    (31,640)           |  | $ 2,353,930
|Total        |  | $ 2,385,570       |  | $                 -    |  | $    (31,640)           |  | $ 2,353,930

|             |  |               |  |                        |  |                         |  |            
|------------ |  | ------------- |  | ---------------------- |  | ----------------------- |  | -----------
|             |  | June 30, 2005
|             |  | Cost          |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Fair Value 
|Mutual funds |  | $ 2,385,570   |  | $                 -    |  | $                 -     |  | $ 2,353,930
|Total        |  | $ 2,385,570   |  | $                 -    |  | $                 -     |  | $ 2,385,570

(6) STOCKHOLDERS EQUITY

Common Stock Transactions -
In September 2005, the Company sold 4,499,336 shares of its common stock and warrants to purchase 719,894 shares of its common
stock in a private placement to King for a total purchase price of $10,000,000. The warrants are exercisable for a three-year
period commencing September 26, 2005, at an exercise price of $2.22 per share. The sale of the stock and warrants was made
pursuant to the Company's collaborative development and marketing agreement with King. Under the agreement, King may pay future
milestone payments to the Company totaling up to $90,000,000 for achieving certain male erectile dysfunction ("ED") and female
sexual dysfunction ("FSD") development and regulatory approval targets. After regulatory approval and commercialization of PT-141,
King may also pay milestone payments to the Company totaling up to an additional $130,000,000 upon achieving specified annual
North American net sales thresholds. A portion of the above milestones may be received in the form of equity contributions.

Stock Option Plan - The
Company's 2005 Stock Plan was approved by the Company's stockholders in June 2005 and provides for incentive and nonqualified
stock option grants for up to 5,000,000 shares of common stock to employees, non-employee directors and consultants. The 2005
Stock Plan is administered under the direction of the Board of Directors, which may specify grant terms and recipients. Options
granted by the Company under the 2005 Stock Plan generally expire ten years from the date of grant and generally vest over three
to four years. As of December 31, 2005, 3,819,043 shares were available for grant under the 2005 Stock Plan.

As of December 31, 2005,
there were 138,894 options available for grant under the 1996 Stock Option Plan, which expires in August 2006. The 1996 Stock
Option Plan is administered under the direction of the Board of Directors, which may specify grant terms and recipients. Options
granted by the Company under the 1996 Stock Option Plan generally expire ten years from the date of grant and generally vest over
three to four years.

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The Company also has
outstanding options that were granted under previous option plans.

The following table
summarizes option activity for the six months ended December 31, 2005:

|                                                                 |  |                  |  |                                      |  |                                      |  |                               
|---------------------------------------------------------------- |  | ---------------- |  | ------------------------------------ |  | ------------------------------------ |  | ------------------------------
|                                                                 |  | Number of Shares |  | Weighted Average Exercise
     Price |  | Weighted Average
     Remaining Term |  | Aggregate Intrinsic
     Value
|Outstanding at beginning of period                               |  | 4,688,152        |  | $3.41                                |  |                                      |  |                               
|Granted                                                          |  | 1,211,097        |  | 2.06                                 |  |                                      |  |                               
|Forfeited                                                        |  | (97,524)         |  | 2.22                                 |  |                                      |  |                               
|Exercised                                                        |  | (16,368)         |  | 1.40                                 |  |                                      |  |                               
|Cancelled                                                        |  | (86,717)         |  | 3.82                                 |  |                                      |  |                               
|Outstanding at end of period                                     |  | 5,698,640        |  | 3.14                                 |  | 6.5                                  |  | $3,558,791                    
|Exercisable at end of period                                     |  | 4,111,054        |  | 3.49                                 |  | 5.4                                  |  | $1,870,055                    
|Weighted average fair value of options granted during the period |  |                  |  | $1.35                                |  |                                      |  |                               

The
intrinsic value of options exercised in the six months ended December 31, 2005 was
$18,328.

The
fair value of option grants is estimated at the date of grant using the Black-Scholes
model. For grants during the six months ended December 31, 2005, the Companys
weighted average assumptions for expected volatility, dividends, term and risk-free rate
were 85%, 0%, 6.7 years and 4.0%, respectively. Expected volatilities are based primarily
on the Companys historical volatility. The expected term of options is estimated
based on the Companys historical exercise and employment termination experience
determined separately for certain employee groups. The risk-free rate is based on U.S.
Treasury yields for securities with terms approximating the expected term of the option.
In the six months ended December 31, 2005, the Company recorded share-based compensation
of $612,608 representing approximately $0.01 per share, net of an allowance for estimated
forfeitures of $79,915, which is included in the Companys net loss for the period.
The Company did not record a tax benefit related to share-based compensation expense. As
of December 31, 2005, there was $1,631,418 of total unrecognized compensation cost related
to unvested options, which is expected to be recognized over a weighted-average period of
1.3 years.

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(7) COMMITMENTS AND CONTINGENCIES

Commitments

In the six months ended
December 31, 2005, the Company acquired $383,958 of equipment under a capital lease with a term of 48 months. The Company made an
initial down payment of $57,594. Scheduled lease payments under this obligation are as follows:

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

Contingencies

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

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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, 2005 and in our other Securities and Exchange Commission filings.

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

Critical Accounting
Policies and Estimates

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

Revenue Recognition

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

Accrued Expenses

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

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

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Stock-based Compensation

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

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

Overview

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

NeutroSpec®
is our proprietary radiolabeled monoclonal antibody product for imaging and diagnosing
infection and is the subject of a strategic collaboration agreement with Tyco
Healthcare Mallinckrodt (Mallinckrodt). In December 2005, we, along with Mallinckrodt,
voluntarily suspended the sales, marketing and distribution of NeutroSpec and recalled all
existing customer inventories. In July 2004, we had received approval from the U.S. Food
and Drug Administration (FDA) to market NeutroSpec for imaging and diagnosing
equivocal appendicits. In 2005, we had reported to the FDA the occurrence of several
serious adverse events, including two deaths, involving patients with severe underlying
cardiopulmonary compromise who received NeutroSpec for off-label uses. In December 2005,
the FDA informed us and Mallinckrodt that it had reconsidered the risk/benefit assessment
of NeutroSpec and determined that the product should not be administered to patients until
a further understanding and review of the relationship between NeutroSpec and reported
serious adverse events is completed. The FDA also stated that they will convene an FDA
Advisory Panel in 2006 to discuss the use of NeutroSpec with additional safeguards,
the evidence that will be needed to continue use of the product for equivocal appendicitis and plans for
other indications, including osteomyelitis (infection deep inside a bone). All ongoing clinical trials and regulatory
approvals of NeutroSpec have been suspended.

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

PT-141,
our lead therapeutic drug candidate, is a nasally administered peptide that is in clinical
development for the treatment of both male and female sexual dysfunction under a
collaborative development and marketing agreement with King Pharmaceuticals, Inc.
(King). It is an MC receptor-based therapeutic. Pursuant to the terms of the
collaboration agreement, Palatin and King will share all collaboration development and
marketing costs and all collaboration net profits derived from net sales of PT-141 in
North America based on an agreed upon percentage. Palatin and King currently plan to seek
a partner for PT-141 for territories outside of North America and will jointly share in
collaboration development and marketing costs and all collaboration revenues generated
from those territories. We have the option to create, with King, a urology specialty sales
force to co-promote the product in the United States if the product is successfully
developed and commercialized.

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

Key
elements of our business strategy include: entering into alliances and partnerships with
pharmaceutical companies to facilitate the development, manufacture, marketing, sale and
distribution of our product candidates under development; expansion of our pipeline
through the utilization of our MC expertise and patented drug discovery platform; and
opportunistic acquisition of synergistic products and technologies and partial funding of
our

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development and discovery programs with the cash flow from our
PT-141 collaboration agreements and, if we resume sales of NeutroSpec, our NeutroSpec collaboration agreement.

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

Results of Operations

Three and Six Months Ended December
31, 2005 Compared to the Three and Six Months Ended December 31, 2004.

Royalties
 For the three and six months ended December 31, 2005, we recognized royalty
revenues of $0.6 million and $1.5 million, respectively, compared to $0.2 million and $0.5
million, respectively, in the three and six months ended December 31, 2004. Royalty
revenues represent amounts due from Mallinckrodt pursuant to our collaboration agreement
and are earned based on a contractual percentage of Mallinckrodts net sales of
NeutroSpec to customers. NeutroSpec was approved by the FDA in July 2004. The increase in
royalty revenue primarily reflects higher unit sales by Mallinckrodt prior to the
suspension of sales in December 2005. We will not earn future royalty revenues from
NeutroSpec unless and until NeutroSpec sales resume.

Product
Sales  We recorded no product sales for the three and six months ended December 31,
2005, compared to $1.3 million and $1.7 million, respectively, in the three and six months
ended December 31, 2004. Product sales represent revenue from our sale of NeutroSpec units
to Mallinckrodt, pursuant to our collaboration agreement. Under our agreement, each
Mallinckrodt purchase from us is subject to certain minimum quantities, which has resulted
in a limited number of product shipments by us over the course of a year. Accordingly, our
periodic revenue from product sales is highly dependent on the timing of orders and
shipments and may vary significantly. During the three and six months ended December 31,
2005, there were no such shipments of NeutroSpec to Mallinckrodt. We will not earn future
revenue from sales of NeutroSpec to Mallinckrodt unless and until NeutroSpec
commercial sales resume.

Licenses,
Grants and Contracts  For the three and six months ended December 31, 2005, we
recognized $4.0 million and $8.2 million, respectively, in licenses, grants and contracts
revenue consisting primarily of (i) $3.9 million and $8.0 million, respectively, related
to PT-141 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, 2004, we recognized $3.3
million and $7.1 million, respectively, in licenses, grants and contracts revenue
consisting primarily of (i) $3.3 million and $5.1 million, respectively, related to PT-141
pursuant to our collaboration agreement with King, and (ii) $0 and $2.0 million related to
NeutroSpec pursuant to our collaboration agreement with Mallinckrodt. The increase in
revenue from King primarily reflects increased reimbursements related to increased PT-141
costs and, with respect to the six-month period, the existence of the collaboration
agreement for the full six-month period. The agreement with King was completed in August
2004. License and contract revenue from Mallinckrodt in the six months ended
December 31, 2005 reflects Mallinckrodts share of the costs incurred in certain
NeutroSpec development activities. The $2.0 million received from Mallinckrodt in the
six months ended December 31, 2004 represented a milestone payment received upon
FDA approval of NeutroSpec in July 2004. We expect to continue to earn contract revenue
from King as the development of PT-141 continues, in the form of reimbursement of shared
development costs and the recognition of deferred license fees. Future cost reimbursements
from Mallinckrodt are dependent upon decisions we make together with Mallinckrodt
concerning future NeutroSpec development activities. We may also earn contract revenue
from Mallinckrodt, subject to decisions concerning future NeutroSpec activities, and King
based on the attainment of certain development milestones.

Cost
of Product Sales and Royalties  For the three and six months ended December 31,
2005, we recognized $2.0 million in cost of product sales related to NeutroSpec. As noted
above, there were no sales of NeutroSpec to Mallinckrodt in the three and six months ended
December 31, 2005. In the three and six month periods ended December 31, 2005, cost of
product sales represents our inventory write-off related to the suspension of sales of
NeutroSpec. For the three and six months ended December 31, 2004, we recognized $0.1
million and $0.2 million, respectively, in cost of product revenues related to product
sales of NeutroSpec to Mallinckrodt. Prior

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to the FDA approval of NeutroSpec in July 2004,
all costs associated with the manufacturing of NeutroSpec were included in research and
development expenses when incurred, including costs of usable raw materials and finished
goods in inventory at the date of approval. As we used and sold this inventory, the cost
of product sales we recognized excluded amounts previously expensed. On the date of
approval, we had sufficient active drug substance to produce all of the product units sold
during the period. Cost of sales for these units primarily consisted of packaging and other
materials.

Royalty
expense increased from $0.1 million and $0.2 million, respectively, in the three and six
months ended December 31, 2004 to $0.1 million and $0.3 million in the three and six
months ended December 31, 2005, primarily as a result of our increased royalty revenue
from sales of NeutroSpec.

Research
and Development  Research and development expenses increased
to $9.3 million and $18.7 million for the three and six months ended December 31, 2005,
respectively, compared to $6.1 million and $11.8 million for the three and six months
ended December 31, 2004, respectively. Research and development expenses related to PT-141
increased by $1.6 million and $4.5 million for the three and six months ended December 31,
2005, respectively, compared to the three and six months ended December 31, 2004, primarily
due to increased clinical development activities, including the initiation in July 2005 of
two Phase 2 studies, an at-home efficacy study in approximately 600 ED
patients and an at-home efficacy study in approximately 250 ED patients with
diabetes mellitus. Associated costs include fees to clinicians, costs of drug supplies and
study monitoring and management. For both the three and six months ended December 31,
2005, research and development spending on NeutroSpec increased $0.1 million, from the
three and six months ended December 31, 2004. The three and six month periods of 2005
included greater nonclinical development spending. Future NeutroSpec spending is dependent
upon decisions we make together with Mallinckrodt concerning future NeutroSpec development
activities following the suspension of NeutroSpec sales in December 2005. We have suspended
ongoing clinical trials and plans for future trials, including studies to evaluate
NeutroSpecs market potential as an imaging agent for other indications such as
osteomyelitis (infection deep inside a bone), fever of unknown origin, post surgical
infection, inflammatory bowel disease and pulmonary imaging. Research and development
expenses related to our MIDAS program increased $0.3 million and $0.4 million,
respectively, in the three and six months ended December 31, 2005, primarily as a result
of additional contract services for assistance with the optimization of lead compounds. We
expect spending on our MIDAS programs to continue to increase during the remainder of the
current fiscal year. Other general research and development spending increased $1.2
million and $1.9 million in the three and six months ended December 31, 2005, primarily
due to increased personnel, the expansion of facilities and license fees. The amount and
timing of future research and development expenses will depend on our review of safety
data related to NeutroSpec and on a number of factors described in this report and our
annual report on Form 10-K for the fiscal year ended June 30, 2005, including the results
of our research activities, our collaboration agreements and the availability and sources
of financing.

General
and Administrative  General and administrative expenses in the three and six months
ended December 31, 2005 were comparable to the corresponding periods of the prior year. In
the three months ended December 31, 2005, lower legal and recruiting fees were largely
offset by higher personnel costs. In the six months ended December 31, 2005, lower legal fees were
primarily offset by increased personnel costs and stock compensation charges.

Income
Taxes  Income tax benefits of $0.7 million in the three and six months ended
December 31, 2005 and $0.6 million in the three and six months ended December 31, 2004
relate to the sale of New Jersey State net operating loss carryforwards and research and
development credits. 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.

Stock
Options  Effective July 1, 2005, we have adopted SFAS 123(R), Share-Based
Payment. SFAS 123(R) establishes standards for the accounting for transactions
in which an entity exchanges its equity instruments for goods or services and requires
that the compensation cost relating to share-based payment transactions be recognized in
financial statements, measured by the fair value of the equity or liability instruments
issued, adjusted for estimated forfeitures. Prior to the adoption of SFAS 123(R), we
applied the intrinsic-value-based method of accounting prescribed by Accounting Principles
Board Opinion 25, Accounting for Stock Issued to Employees, and related
interpretations, to account for our fixed-plan stock options to employees. Under this
method, compensation cost was recorded only if the market price of the underlying stock on
the date of grant exceeded the exercise price. In the six months ended December 31, 2005,
we recorded approximately $0.6 million of compensation expense related to stock options.

Liquidity and Capital
Resources

Since
inception, we have incurred net operating losses, primarily related to spending on our
research and development programs. As of December 31, 2005, we had an accumulated deficit
of $145.0 million. We have financed our net operating losses primarily through equity
financings and revenue received under collaborative agreements.

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As
of December 31, 2005, we had cash, cash equivalents and investments totaling $19.1
million.

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 PT-141 and MIDAS products. In addition, in December 2005, we voluntarily suspended
the sales, marketing and distribution of NeutroSpec® and recalled all existing
customer inventories. The FDA has stated that they will convene an Advisory Panel in
2006 to discuss the use of NeutroSpec with additional safeguards, the evidence that will be needed to
continue use of the product for equivocal appendicitis and plans for other indications,
including osteomyelitis. Our product candidates under development will require significant
further research, development and testing. We may experience uncertainties, delays,
difficulties and expenses commonly experienced by early stage biopharmaceutical companies,
which may include unanticipated problems and additional costs relating to:

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

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

During
the six months ended December 31, 2005, we used $9.0 million of cash for our operating
activities. In the six months ended December 31, 2004, operating activities provided $7.2
million of cash as a result of amounts received from King under our collaboration
agreement, which was completed in August 2004. In the six months ended December 31, 2005,
our accounts receivable balance decreased $4.0 million due primarily to the timing of the
receipt of reimbursements from King for PT-141 costs. Our periodic accounts receivable
balances will continue to be highly dependent on the timing of such receipts. Accounts
receivable as of December 31, 2005 consisted of amounts due from Mallinckrodt, primarily
representing royalty revenue based on Mallinckrodts net sales during the quarter
ended December 31, 2005 and due from Mallinckrodt after the end of the quarter.

During
the six months ended December 31, 2005 and 2004, net cash provided by financing activities
was $10.5 million and $3.7 million, respectively, due primarily to proceeds from the
issuance of common stock and warrants to King and the exercise of options and warrants.

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

We
have incurred cumulative negative cash flows from operations since our inception, and have
expended, and expect to continue to expend in the future, substantial funds to complete
our planned product development efforts. We expect that our existing capital resources
will be adequate to fund our projected operations through at least the next twelve months,
based on current and projected expenditure levels, which include receiving certain
milestone payments from collaborative partners. No assurance can be given that we will
earn future milestone payments that are contingent on specified events or that we will not
consume a significant amount of our available resources before that time. We intend to
continually monitor the progress of our development programs and the timing and amount of
related expenditures and potential milestone receipts and may seek additional financing
during the fiscal year ending June 30, 2006. We plan to continue to refine our operations,
control expenses, evaluate alternative methods to conduct our business and seek available
and attractive sources of financing and sharing of development costs through strategic
collaboration agreements or other resources.

We
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.

16

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Table of Contents

Risk Factors

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

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

We do not know whether the
safety concerns that may be related to the use of NeutroSpec can be successfully resolved. The FDA has indicated that it will
convene an advisory panel later this year to evaluate the possible use of NeutroSpec with additional safeguards, including the
evidence needed to continue use of NeutroSpec for the diagnosis of equivocal appendicitis as well as plans to seek approval for
other indications, such as osteomyelitis. We do not know whether, or with what limitations, the FDA will allow sales and marketing
of NeutroSpec to recommence. We also do not know what additional studies, if any, may be required by the FDA or the length of time
necessary to successfully complete the studies, if at all, or the cost of any such studies.

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

17

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Table of Contents

Item 3. Quantitative and
Qualitative Disclosures About Market Risk.

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

As
of December 31, 2005, our cash and cash equivalents were $16.8 million and our short-term
investments, which consisted of mutual funds, were $2.4 million. Due to the average
maturity and conservative nature of our investment portfolio, we do not believe that short
term fluctuations in interest rates would materially affect the value of our securities.

Item 4. Controls and
Procedures.

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

18

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Table of Contents

PART II  OTHER
INFORMATION

Item 1. Legal
Proceedings.

None.

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

None.

Item 3. Defaults Upon
Senior Securities.

None.

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

At
our annual meeting of stockholders, which convened on December 2, 2005, the stockholders
voted on the following issues:

|  |                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------
| | Election of directors; and                                                                               
| | Ratification of the appointment of our independent auditors for the
     fiscal year ending June 30, 2006

Common
stock and Series A convertible preferred stock voted as a single class on all matters. The
following tables show the votes cast.

|                                     |            |            |          
|------------------------------------ | ---------- | ---------- | ---------
|Election of directors:               |            | For        | Withheld 
|                                     |            |            |          
|Carl Spana, Ph.D.                    |            | 40,070,427 | 622,679  
|                                     |            |            |          
|John K.A. Prendergast, Ph.D.         |            | 40,233,616 | 459,490  
|                                     |            |            |          
|Perry B. Molinoff, M.D.              |            | 40,079,473 | 613,633  
|                                     |            |            |          
|Robert K. deVeer, Jr.                |            | 40,345,816 | 347,290  
|                                     |            |            |          
|Zola P. Horovitz, Ph.D.              |            | 38,200,788 | 2,492,318
|                                     |            |            |          
|Robert I. Taber, Ph.D.               |            | 40,345,061 | 348,045  
|                                     |            |            |          
|Errol De Souza, Ph.D.                |            | 40,330,956 | 362,150  
|                                     |            |            |          
|J. Stanley Hull                      |            | 40,345,241 | 347,865  
|                                     |            |            |          
|Other                                | For        | Against    | Abstain  
|                                     |            |            |          
|Ratification of independent auditors | 40,535,751 | 133,966    | 23,389   

Item 5. Other
Information.

None.

Item 6. Exhibits.

Exhibits
filed with this report:

| |      |                                                                                                                                             
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 | Certifications of Chief Executive Officer.                                                                                                  
| |      |                                                                                                                                             
| | 31.2 | Certifications 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.

19

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Table of Contents

Signatures

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

|                       |  |                                                                                                                                         
|---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|                       |  | Palatin Technologies, Inc.(Registrant)                                                                                                  
|                       |  |                                                                                                                                         
|                       |  |                                                                                                                                         
|Date: February 8, 2006 |  | /s/ Carl
     SpanaCarl
     Spana, Ph.D.President andChief Executive Officer                                                           
|                       |  |                                                                                                                                         
|                       |  |                                                                                                                                         
|Date: February 8, 2006 |  | /s/ Stephen T. WillsStephen T. WillsExecutive Vice President andChief Financial Officer
     (PrincipalFinancial and Accounting Officer)

20

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EXHIBIT INDEX

| |      |                                                                                                                                             
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 | Certifications of Chief Executive Officer.                                                                                                  
| |      |                                                                                                                                             
| | 31.2 | Certifications 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.