UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K [X]
     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 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 _____________________________  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 DriveCranbury, New Jersey
     08512(Address of principal executive
     offices)
     (Zip Code) (609) 495-2200
(Registrant's telephone number, including area code)


Securities registered pursuant to
Section 12(b) of the Act:

|                                       |  |                                          
|-------------------------------------- |  | -----------------------------------------
|Title of Each Class                    |  | Name of Each Exchange on Which Registered
|Common Stock, par value $.01 per share |  | American Stock Exchange                  

Securities registered pursuant to
Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.    Yes [  ]   No [X]

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes [   ]   No [X]

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 if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the registrants knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]



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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]

State the aggregate market value of
the voting and non-voting common equity held by non-affiliates, computed by reference to
the price at which the common stock was last sold, or the average bid and asked price of
such common equity, as of the last business day of the registrants most recently
completed second fiscal quarter (December 31, 2006): $173,816,505.

Indicate the number of shares
outstanding of each of the registrants classes of common stock, as of the latest
practicable date (September 4, 2007): 85,204,169.

Documents Incorporated
by Reference

Portions of the registrants
proxy statement relating to its Annual Meeting of Stockholders, to be filed within 120
days of its June 30, 2007 fiscal year end are incorporated by reference into Part III of
this Annual Report on Form 10-K.



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PALATIN TECHNOLOGIES, INC.TABLE OF
CONTENTS

|         |                                                                                                                   |     
|-------- | ----------------------------------------------------------------------------------------------------------------- | ----
|         |                                                                                                                   | Page
|         | PART I                                                                                                            |     
|Item 1.  | Business                                                                                                          | 2   
|Item 1A. | Risk Factors                                                                                                      | 9   
|Item 1B. | Unresolved Staff Comments                                                                                         | 16  
|Item 2.  | Properties                                                                                                        | 17  
|Item 3.  | Legal Proceedings                                                                                                 | 17  
|Item 4   | Submission of Matters to a Vote of
     Security Holders                                                          | 17  
|         | PART II                                                                                                           |     
|Item 5.  | Market for Registrant's Common Equity,
     Related Stockholder Matters and Issuer Purchases of Equity Securities | 18  
|Item 6.  | Selected Financial Data                                                                                           | 20  
|Item 7.  | Management's Discussion and Analysis of
     Financial Condition and Results of Operations                        | 21  
|Item 7A. | Quantitative and Qualitative
     Disclosures About Market Risk                                                   | 26  
|Item 8.  | Financial Statements and Supplementary
     Data                                                                  | 27  
|Item 9.  | Changes In and Disagreements With
     Accountants on Accounting and Financial Disclosure                         | 46  
|Item 9A. | Controls and Procedures                                                                                           | 46  
|Item 9B. | Other Information                                                                                                 | 47  
|PART III
|Item 10. | Directors, Executive Officers and Corporate
     Governance                                                       | 48  
|Item 11. | Executive Compensation                                                                                            | 48  
|Item 12. | Security Ownership of Certain Beneficial
     Owners and Management and Related Stockholder Matters               | 48  
|Item 13. | Certain Relationships and Related
     Transactions, and Director Independence                                    | 48  
|Item 14. | Principal Accountant Fees and
     Services                                                                       | 48  
|PART IV 
|Item 15. | Exhibits and Financial Statement Schedules                                                                        | 49  

SIGNATURES

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Table of Contents

PART I

Item 1. Business.

Forward-looking statements

Statements
in this Annual Report on Form 10-K, 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 Annual Report on Form
10-K do not constitute guarantees of future performance. Investors are cautioned that
statements which are not strictly historical statements contained in this Annual Report on
Form 10-K, 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 our 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 under the caption Risk Factors and elsewhere in this Annual
Report, as well as in our other Securities and Exchange Commission (SEC)
filings.

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 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 disorders and inflammation-related diseases.

Bremelanotide
is our nasally administered MC-based peptide in clinical development for two distinct
indications, the treatment of male erectile dysfunction (ED) and the treatment
of female sexual dysfunction (FSD). In 2004, we entered into a collaborative
development and marketing agreement with King Pharmaceuticals, Inc. (King) to
jointly develop and commercialize bremelanotide. Pursuant to the agreement, we and King
shared all collaboration development costs based on an agreed percentage. In September
2007, we received notice from King terminating the agreement in accordance with its terms
effective December 5, 2007. Termination followed comments by the U.S. Food and Drug
Administration (FDA) raising serious concerns about the acceptable
benefit/risk ratio to support the progression of bremelanotide into Phase 3 studies for ED
as a first-line therapy in the general population. Upon termination, we will solely own
all rights to bremelanotide.

In
January 2007, we entered into an exclusive global licensing and research collaboration
agreement with AstraZeneca AB (AstraZeneca), a major international
pharmaceutical and healthcare business, to discover, develop and commercialize small
molecule compounds that target MC receptors for the treatment of obesity, diabetes and
related metabolic syndrome. The collaboration is based on Palatins MC receptor
obesity program and includes access to compound libraries, core technologies and expertise
in MC receptor drug discovery and development. We and AstraZeneca are in the process of
identifying clinical candidate MC therapeutic small molecules for the treatment of obesity
and related disorders.

We
have developed a library of novel natriuretic (promoting sodium excretion) receptor
compounds, and have identified a lead clinical candidate for which we have completed
preclinical studies and are preparing an Investigational New Drug (IND)
application for starting clinical trials for the treatment of congestive heart failure
(CHF). We are also conducting research to identify additional clinical
candidate compounds for the treatment of both chronic CHF and acutely decompensated
(rapidly deteriorated) CHF.

We
are evaluating future development and marketing activities involving NeutroSpec, our
radiolabeled monoclonal antibody product for imaging and diagnosing infection, with the
Mallinckrodt division of Covidien (Mallinckrodt), with whom we have a
strategic collaboration agreement. In December 2005, we and Mallinckrodt voluntarily
suspended the sales, marketing and distribution of NeutroSpec following certain serious
adverse events involving patients who received NeutroSpec. NeutroSpec was approved for
marketing for imaging and diagnosing equivocal appendicitis by the FDA in July 2004.

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

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drug discovery platform; acquiring
synergistic products and technologies; and partially funding our development and
discovery programs with the cash flow from our collaboration agreements.

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

Products and Technologies
in Research and Development

ED
and FSD  Bremelanotide. Bremelanotide is a patented, nasally administered peptide in
clinical development for the treatment of both ED and FSD. Bremelanotide, an MC
receptor-based agonist (which promotes a biologic function response) therapeutic, is a
synthetic analog of the naturally occurring hormone alpha-MSH (melanocyte-stimulating
hormone).

ED
is the consistent inability to attain and maintain an erection sufficient for sexual
intercourse. The condition is correlated with increasing age, cardiovascular disease,
hypertension, diabetes, hyperlipidemia and smoking. In addition, certain prescription
drugs and psychogenetic issues may contribute to ED. According to the Massachusetts Male
Aging Study, more than 50% of men aged 40-70 report episodes of ED and more than 30
million men in the United States may be afflicted with some form of ED, with less than 20%
seeking treatment. The incidence of ED increases with age. Studies show that chronic ED
affects about 5% of men in their 40s and 15% to 25% of men by the age of 65. The current
market size for ED is more than $2.5 billion per year.

FSD
is a multifactorial condition that has anatomical, physiological, medical, psychological
and social components. Studies estimate FSD is prevalent in approximately 50% of women
over the age of 30 and that more than 35 million women in the United States may be
afflicted with some form of FSD. FSD includes disorders associated with desire, arousal,
orgasm and pain. There is tremendous competition to develop, market and sell drugs for the
treatment of ED and FSD.

Bremelanotide
is the first compound to enter clinical trials in a new drug class, MC receptor agonists,
under development to treat sexual dysfunction. Our research suggests that bremelanotide
works through activation of MC receptors in the central nervous system, which is a
different mechanism of action from currently marketed ED therapies that act directly on
the vascular system. As a result, it may offer therapeutic benefits over currently
marketed products. The current ED market is primarily served by the PDE-5 inhibitors
Viagra®, a brand of sildenafil, Levitra®, a brand of vardenafil, and Cialis®,
a brand of tadalafil. A significant portion of ED patients are contraindicated for, or
non-responsive to, PDE-5 inhibitors.

We
have conducted clinical trials on a nasal formulation of bremelanotide, administered as a
single spray in one nostril, which results in a rapid onset of action. We have completed
various Phase 1 safety trials and Phase 2A and Phase 2B efficacy clinical trials in male
subjects and patients. Two recently completed Phase 2B clinical trials evaluated 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. Both
trials, conducted at clinical trial sites throughout the United States, involved an
at home, three-month treatment period and evaluated a range of bremelanotide
intranasal doses, safety, treatment duration and patient populations.

We
have delayed initiation of Phase 3 clinical trials for ED, following responses in late
August 2007 from the FDA raising serious concerns about the acceptable benefit/risk ratio
to support progression into Phase 3 as a first-line therapy in the general population. The
FDA questioned overall efficacy results and the clinical benefit of bremelanotide in both
general and diabetic populations, citing blood pressure increases as its greatest safety
concern.

We
are reviewing the FDAs comments in the context of our bremelanotide program to
determine next steps. The FDA indicated it was amenable to proposals for a different drug
development pathway, such as for a second-line therapy for ED in non-responders to
approved PDE-5 inhibitors.

We
have completed Phase 1 safety trials in female subjects and Phase 2A and Phase 2B efficacy
clinical trials in female patients with FSD. The Phase 2A trial included both
pre-menopausal and post-menopausal FSD patients, and showed, in both patient populations,
an increase in the level of sexual desire and genital arousal in subjects receiving
bremelanotide compared to subjects receiving placebo. The Phase 2B trial also included
both pre-menopausal and post-menopausal FSD patients, with an at home
two-month treatment period. We are in the process of evaluating the results from this
Phase 2B trial, and anticipate releasing further information in the second half of
calendar 2007.

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Collaborative
Development and Marketing Agreement with King. In August 2004, we entered into a
collaboration agreement with King to jointly develop and commercialize bremelanotide.
Pursuant to the terms of the agreement, we and King shared all collaboration development
and marketing costs based on an agreed percentage.

Following
the decision to delay Phase 3 clinical trials for ED, we received notice from King
terminating the agreement in accordance with its terms effective December 5, 2007. Upon
termination, we will solely own all rights to bremelanotide, without any financial
obligation to King.

Obesity.
We have an active development program for MC receptor-targeted small molecule
compounds for the treatment of obesity, diabetes and related metabolic
syndrome. Obesity is a multifactorial condition with significant biochemical
components relating to satiety (feeling full), energy utilization and
homeostasis. A number of different metabolic and hormonal pathways are being
evaluated by companies around the world in efforts to develop better treatments
for obesity. Scientific research has established that MC receptors have a role
in eating behavior and energy homeostasis, and that MC receptor agonists, such
as alpha-MSH, decrease food intake and induce weight loss.

Obesity
is a significant healthcare issue, often correlated with a variety of cardiovascular and
other diseases, including diabetes. In the United States, approximately 65 percent of
adult Americans are categorized as being overweight or obese. Each year, obesity causes at
least 300,000 excess deaths in the United States, and healthcare costs of American adults
with obesity amount to approximately $100 billion. Additionally, studies in adolescents
indicate that there is a trend towards increased prevalence of the disease.

MC
receptor agonists are also involved in other physiological responses, including sexual
response. MC receptor agonists with potential for use in the treatment of obesity
generally induce a sexual response. To our knowledge, there are no reports in the
scientific literature of MC receptor-target compounds which are effective in animal or
human studies for the treatment of obesity and which do not induce a sexual response.

We
have developed a class of small molecule compounds targeting MC receptors which are
effective in the treatment of obesity in animal models but which do not induce a sexual
response. Certain of these compounds have been demonstrated to be effective in normal
diet-induced obese and genetically obese animal models for decreasing food intake and body
weight, without an increase in sexual response in normal animals at the same or higher
dose levels. Tests to date have been conducted only in animal models and in laboratory
tests. We believe that we have developed approaches that allow us to differentiate MC
receptor-targeted compounds useful for treating obesity and related disorders from
compounds that induce a sexual response.

Research
Collaboration and License Agreement with AstraZeneca. We have an exclusive global
licensing and research collaboration agreement with AstraZeneca to discover, develop and
commercialize small molecule compounds that target MC receptors for the treatment of
obesity, diabetes and related metabolic syndrome. Pursuant to the terms of the agreement,
we received an upfront payment of $10 million from AstraZeneca and are eligible for
milestone payments totaling up to $300 million, with up to $180 million contingent upon
development and regulatory milestones and the balance on achievement of sales targets, and
royalties on sales of approved products. AstraZeneca has assumed responsibility for
product commercialization, product discovery and development costs. We are providing
certain scientific expertise in the research collaboration at a negotiated rate.

Congestive
Heart Failure. We have a program for developing compounds that mimic natural peptides
(peptidomimetics) for the treatment of CHF. CHF is an illness in which the
heart is unable to pump blood efficiently, and includes acutely decompensated CHF with
dyspnea (shortness of breath) at rest or with minimal activity. Endogenous (naturally
produced) natriuretic peptides have a number of beneficial results, including vasodilation
(relaxation of blood vessels), natriuresis (excretion of sodium), and diuresis (excretion
of fluids). One product is commercially available in the United States, Natrecor®, a
brand of nesiritide, which is a recombinant (genetically made) form of human B-type
natriuretic peptide. However, Natrecor® is approved only for use in acutely
decompensated CHF with administration by intravenous injection, typically limiting
administration to a hospital setting.

CHF
directly affects nearly five million people in the United States, with over 500,000 new
cases diagnosed each year. Annual medical treatment costs for CHF, which frequently
involves expensive hospitalization and therapies, are estimated at over $25 billion.

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We
have developed a library of novel peptidomimetic natriuretic agonists. Certain of these
compounds have demonstrated efficacy in animal models when administered by subcutaneous
(under the skin) injection. These compounds remain active in animal models for longer
periods than do natural or recombinant natriuretic peptides.

We
have identified a clinical candidate drug for the treatment of CHF. The drug will be
initially evaluated in a subcutaneous form, primarily for the treatment of chronic CHF. We
believe that a subcutaneous form of peptidomimetic compound could be used in a clinic or
doctors office, and would not be limited to use in hospitals or specialized medical
facilities. We have completed toxicity testing and other preclinical studies with the
clinical candidate drug in preparation for filing an IND, and anticipate filing the IND in
the second half of calendar 2007. We are also developing an intravenous form of the
peptidomimetic compound for acutely decompensated CHF.

MIDAS
Drug Development Platform. Our obesity and other early-stage programs derived lead
compound series by utilizing our MIDAS (Metal Ion-induced Distinctive Array of
Structures) proprietary platform technology to design and synthesize novel molecules that
mimic the activity of peptides. MIDAS uses metal ions to fix the three-dimensional
configuration of peptides, forming conformationally rigid molecules that remain folded
specifically in their active forms. These MIDAS molecules are simple to synthesize, are
chemically and proteolytically stable, and have the potential to be orally bioavailable.
Unlike most other drug discovery approaches, MIDAS can be used to generate both receptor
antagonists (which block a normal biological metabolic response) and agonists. In
addition, MIDAS molecules are information-rich and provide data on structure-activity
relationships that can be used to design small molecule, non-peptide drugs.

Generation
of commercially viable protein and peptide drug molecules with desirable properties
continues to be arduous, expensive and labor-intensive. We believe that our MIDAS
technology simplifies the development process by eliminating many of the inherent
limitations associated with peptides and proteins.

NeutroSpec®. NeutroSpec,
our trade name for technetium (99m Tc) fanolesomab, includes an anti-CD 15 monoclonal
antibody which selectively binds to a type of white blood cell, neutrophils, involved in
the immune response. When labeled with the radioactive tracer technetium and injected
into the blood stream, the antibody binds to neutrophils accumulated at the infection
site, labeling these cells. As a result, physicians can rapidly image and locate an
infection using a gamma camera, a common piece of hospital equipment that detects
radioactivity.

In
July 2004, we received approval from the FDA to market NeutroSpec for imaging of patients
with equivocal signs and symptoms of appendicitis who are five years of age or older.
During 2005, we and Mallinckrodt 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 Mallinckrodt and us 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 complete. Together with Mallinckrodt, we are reviewing
data and assessing approaches for understanding the relationship between NeutroSpec use
and the observed serious adverse events. All ongoing clinical trials and plans for future
clinical trials and regulatory approvals of NeutroSpec have been suspended and no final
decision concerning future activities involving NeutroSpec has been made. We anticipate
making a decision on whether to seek to proceed with NeutroSpec in the second half of
calendar 2007.

Strategic
Collaboration Agreement with Mallinckrodt. Mallinckrodt has exclusive worldwide marketing
and distribution rights to NeutroSpec under our collaboration agreement. We are
responsible for the manufacture of NeutroSpec and Mallinckrodt agreed to pay us a transfer
price on each product unit sold to Mallinckrodt and a royalty on their net sales of
NeutroSpec. If NeutroSpec is reintroduced to the market, we may receive milestone payments
from Mallinckrodt on the achievement of development, regulatory or sales objectives;
however, we may not be able to reintroduce NeutroSpec to the market or meet development or
sales objectives.

Competition

Our
products under development will compete on the basis of quality, performance, cost
effectiveness, and application suitability with numerous established products and
technologies. We have many competitors, including pharmaceutical, biopharmaceutical and
biotechnology companies. Furthermore, there are several well-established products in our
target markets that we will have to compete against. Products using new technologies which
may be competitive with our proposed products may also be introduced by others. Most of
the companies selling or developing competitive products have financial, technological,
manufacturing and distribution resources significantly greater than ours and may represent
significant competition for us. We cannot guarantee that we will be able to compete
successfully in the future or that developments by others will not render our proposed
products under development or our future product candidates obsolete or non-competitive or
that our collaborators or customers will not choose to use competing technologies or
products.

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The
pharmaceutical and biotechnology industry is characterized by extensive research efforts
and rapid technological change with many companies that have developed or are working to
develop products similar to ours. Such companies may succeed in developing technologies
and products that are more effective or less costly than any of those that we may develop.
Such companies may be more successful than us in developing, manufacturing and marketing
products.

There
are currently three FDA-approved PDE-5 drugs for ED in the United States and these
products are also approved in major foreign markets. We are aware of several products in
clinical development for both ED and FSD. We cannot assure you that our competitors will
not succeed in developing products that are more effective than any that we are
developing. We believe that our ability to compete in the sexual dysfunction market
depends on a number of factors including the success and timeliness with which we complete
FDA trials, the breadth of indications, if any, for which our products receive approval,
and the effectiveness, cost, safety and ease of use of bremelanotide in comparison to the
products of our competitors.

There
are several FDA-approved drugs for the treatment of obesity, and a large number of
products in clinical development by others, including products which target MC receptors.
Clinical trials for obesity are lengthy, time-consuming and expensive, and we may not be
able to proceed if AstraZeneca terminates our January 2007 license agreement.

One
natriuretic peptide product is approved by the FDA and is marketed by a major
pharmaceutical company, and another natriuretic peptide product is approved and marketed
in Japan. There are a number of other FDA-approved products for the treatment of CHF, and
products in preclinical or clinical development by other companies.

Other
imaging modalities, including computerized tomography (CT) and ultrasound
technologies, are used for diagnosis of indications with which NeutroSpec may compete.
There are FDA-approved products for attaching radiotracers to blood cells for use in
imaging and locating infections. There is also at least one other company developing a
technetium-labeled product for imaging infections, which is reported to be in Phase 2
clinical trials, as well as an antibody-based product marketed in some European countries
which may compete with NeutroSpec for certain indications.

Patents and Proprietary
Information

Patent
protection. Our success will depend in substantial part on our ability to obtain, defend
and enforce patents, maintain trade secrets and operate without infringing upon the
proprietary rights of others, both in the United States and abroad. We aggressively seek
patent protection for our technology and products in the United States and in those
foreign countries where protection is important to the development of our business.

We
own issued United States and foreign patents covering bremelanotide, and additionally have
pending United States and foreign applications. The claims of issued patents covering
bremelanotide may not provide meaningful protection. In addition, third parties may
challenge the validity or scope of any issued patent. We also license certain patents
relating to compounds and methods of treatment for sexual dysfunction, and believe these
patents have value but are not required to commercialize bremelanotide.

We
have a number of United States and foreign patent applications relating to our obesity and
CHF programs. However, these patent applications have not yet been examined, and we do not
know the scope of patent claims that will be allowed, or whether any claims will be
allowed.

We
own patents relating to certain aspects of NeutroSpec, but the claims of those patents
would not be effective in preventing others from developing competing products. In
addition, the validity of these patents has not been determined. We have exclusive rights
to the cell line which produces the monoclonal antibody used in NeutroSpec, but this
protection is dependant on maintaining the cell line as proprietary.

We
own or have rights to United States and foreign patents and pending applications directed
to radiolabeling of antibodies, antibody fragments, and peptides; MIDAS peptides; small
molecules; and methods for making and using the foregoing in diagnostic and therapeutic
applications.

In
the event that a third party has also filed a patent application relating to an invention
we claimed in a patent application, we may be required to participate in an interference
proceeding adjudicated by the United States Patent and Trademark Office to determine
priority of invention. The possibility of an interference proceeding could result in
substantial uncertainties and cost, even if the eventual outcome is favorable to us. An
adverse outcome could result in the loss of patent protection for the subject of the
interference, subjecting us to significant liabilities to third parties, the need to
obtain licenses from third parties at undetermined cost or to cease using the technology.

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Future
patent infringement. We do not know for certain that our commercial activities will not
infringe upon patents or patent applications of third parties, some of which may not even
have been issued. Although we are not aware of any valid U.S. patents which are infringed
by bremelanotide or NeutroSpec or by our methods of making bremelanotide and NeutroSpec,
we cannot exclude the possibility that such patents might exist or arise in the future. We
may be unable to avoid infringement of any such patents and may have to seek a license,
defend an infringement action, or challenge the validity of such patents in court. Patent
litigation is costly and time consuming. If we do not obtain a license under any such
patents, are found liable for infringement, or if such patents are not found to be
invalid, we may be liable for significant monetary damages, may encounter significant
delays in bringing products to market, or may be precluded from participating in the
manufacture, use or sale of products or methods of treatment covered by such patents.

Proprietary
information. We rely on proprietary information, such as trade secrets and know-how, which
is not patented. We have taken steps to protect our unpatented trade secrets and know-how,
in part through the use of confidentiality and intellectual property agreements with our
employees, consultants and certain contractors. If our employees, scientific consultants
or collaborators or licensees develop inventions or processes independently that may be
applicable to our product candidates, disputes may arise about the ownership of
proprietary rights to those inventions and processes. Such inventions and processes will
not necessarily become our property, but may remain the property of those persons or their
employers. Protracted and costly litigation could be necessary to enforce and determine
the scope of our proprietary rights.

If
trade secrets are breached, our recourse will be solely against the person who caused the
secrecy breach. This might not be an adequate remedy to us, because third parties other
than the person who causes the breach will be free to use the information without
accountability to us. This is an inherent limitation of the law of trade secret
protection.

Governmental Regulation

The
FDA, comparable agencies in foreign countries and state regulatory authorities have
established regulations and guidelines which apply to, among other things, the clinical
testing, manufacturing, safety, efficacy, labeling, storage, record keeping, advertising,
promotion and marketing of our proposed products. Noncompliance with applicable
requirements can result in fines, recalls or seizures of products, total or partial
suspension of production, refusal of the regulatory authorities to approve marketing
applications, withdrawal of approvals and criminal prosecution.

After
approving a product for marketing, the FDA may require post-marketing testing, including
extensive Phase 4 studies, and surveillance to monitor the safety and effectiveness of the
product in general use. The FDA may withdraw product approvals if compliance with
regulatory standards is not maintained or if problems occur following initial marketing.
In addition, the FDA may impose restrictions on the use of a drug that may limit its
marketing potential. At the time of its initial approval, the FDA required specific future
studies for NeutroSpec, and if we seek to reintroduce NeutroSpec, we will have to comply
with this requirement. Additionally, if we seek to market NeutroSpec for new indications,
we will need to successfully complete Phase 2 and 3 clinical trials prior to making an
application to market NeutroSpec for those indications.

In
addition to obtaining approval of either a biologics license application or new drug
application from the FDA for any of our proposed products, any facility that manufactures
such a product must comply with current good manufacturing practices (cGMPs).
This means, among other things, that the drug manufacturing establishment must be
registered with, and subject to inspection by, the FDA. Foreign manufacturing
establishments must also comply with cGMPs and are subject to periodic inspection by the
FDA or by corresponding regulatory agencies in such other countries under reciprocal
agreements with the FDA. In complying with standards established by the FDA, manufacturing
establishments must continue to expend time, money and effort in the areas of production
and quality control to ensure full technical compliance. We depend on contract
manufacturing establishments, both in the United States and in foreign countries, to
manufacture NeutroSpec and bremelanotide. We anticipate that collaborators, licensees or
contract manufacturers will also manufacture our proposed obesity and CHF products.

Third-Party Reimbursements

Successful
sales of our proposed products in the United States and other countries will depend on
the availability of adequate reimbursement from third-party payors such as governmental
entities, managed care organizations and private insurance plans. Reimbursement by a
third-party payor may depend on a number of factors, including the payors
determination that the product has been approved by the FDA for the indication for which
the claim is being made and the use of the product is safe and efficacious, neither
experimental nor investigational, medically necessary, appropriate for the specific
patient and cost effective. Since reimbursement by one payor does not guarantee
reimbursement by another, we or our licensees may be required to seek approval from

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each payor individually. Seeking
such approvals is a time-consuming and costly process. Third-party payors routinely limit
the products that they will cover and the amount of money that they will pay and, in many
instances, are exerting significant pressure on medical suppliers to lower their prices.
There is significant uncertainty concerning third-party reimbursement for the use of any
pharmaceutical product incorporating new technology and we are not sure whether
third-party reimbursement will be available for our proposed products once approved, or
that the reimbursement, if obtained, will be adequate. There is also significant
uncertainty concerning third-party reimbursement for products treating ED and FSD. Less
than full reimbursement by governmental and other third-party payors for our proposed
products would adversely affect the market acceptance of these proposed products.
Further, healthcare reimbursement systems vary from country to country, and we are not
sure whether third-party reimbursement will be made available for our proposed products
under any other reimbursement system.

Manufacturing and
Marketing

To
be successful, our proposed products will need to be manufactured in commercial quantities
under cGMPs prescribed by the FDA and at acceptable costs. We do not have the facilities
to manufacture any of our proposed products under cGMPs. We intend to rely on
collaborators, licensees or contract manufacturers for the commercial manufacture of our
proposed products.

Our
bremelanotide product is a synthetic peptide. While the production process involves
well-established technology, there are limited manufacturers capable of scaling up to
commercial quantities under cGMPs at acceptable costs. Additionally, scaling up to
commercial quantities may involve production, purification, formulation and other problems
not present in the scale of manufacturing done to date. We currently contract with
third-party manufacturers for the production of peptides and have identified a
commercial-scale manufacturer.

Our
CHF program utilizes peptidomimetic molecules. We are in the process of evaluating
potential manufacturers, but have not yet identified commercial-scale manufacturers.

If
sales of NeutroSpec resume, we will be dependent on DSM N.V. of the Netherlands for the
manufacture of the NeutroSpec drug substance and intermediate drug product and on Ben
Venue Laboratories of Cleveland, Ohio for the manufacture of the final NeutroSpec drug
product. The failure of either of these manufacturers to comply with FDA cGMPs or to
perform, on a timely basis or at all, would force us to seek alternative sources of supply
and could interfere with our ability to deliver product on a timely basis or at all.
Establishing relationships with new suppliers, any of whom must be FDA-approved, is a
time-consuming and costly process. If sales of NeutroSpec resume, we will rely on our
arrangement with Mallinckrodt to market, sell and distribute NeutroSpec. We have limited
control over these activities. We package and ship our radiopharmaceutical products in the
form of non-radioactive kits. Prior to patient administration, the product is radiolabeled
with the specified radioisotope, generally by a specialized radiopharmacy. We do not sell
or distribute any radioactive substances.

Product Liability and
Insurance

Our
business may be affected by potential product liability risks which are inherent in the
testing, manufacturing, marketing and use of our proposed products. We have liability
insurance providing up to $10.0 million coverage in the aggregate as to certain clinical
trial risks.

Employees

As
of September 4, 2007, we employed 90 persons full time, of whom 73 are engaged in research
and development activities and 17 are engaged in administration and management.
Twenty-seven of our employees hold Ph.D. degrees. While we have been successful in
attracting skilled and experienced scientific personnel, competition for personnel in our
industry is intense. None of our employees are covered by a collective bargaining
agreement. All of our employees have executed confidentiality and intellectual property
agreements. We consider relations with our employees to be good.

From
time to time, we hire scientific consultants to work on specific research and development
programs. We also rely on independent organizations, advisors and consultants to provide
services, including aspects of manufacturing, clinical management and regulatory approval.
Our independent advisors and consultants sign agreements that provide for confidentiality
of our proprietary information and rights to any intellectual property developed while
working for us.

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Item 1A. Risk Factors.

We expect to continue to incur
substantial losses over the next few years and we may never become profitable.

We
have never been profitable and we may never become profitable. We expect to incur
additional losses as we continue our development of bremelanotide and our other product
candidates. Unless and until we receive approval from the FDA or other equivalent
regulatory authorities outside the United States, we cannot sell our products and will not
have product revenues from them. Therefore, for the foreseeable future, we will have to
fund all of our operations and capital expenditures from reimbursements and other contract
revenue under collaborative development agreements, existing cash balances and outside
sources of financing, which may not be available on acceptable terms, if at all. If we do
not succeed in raising additional funds on acceptable terms, we may be unable to complete
planned pre-clinical and clinical trials or obtain approval of our product candidates from
the FDA or other regulatory authorities. In addition, we could be forced to suspend or
discontinue our product development programs and forego attractive business opportunities,
which would have a material adverse effect on our business.

We have a limited operating history
upon which to base an investment decision.

Our
operations to date have been primarily focused on acquiring, developing and securing our
proprietary technology, conducting pre-clinical and clinical studies and formulating and
manufacturing our principal product candidates. These operations provide a limited basis
for you to assess our ability to commercialize our product candidates.

We
have not yet demonstrated our ability to perform the functions necessary for the
successful commercialization of any of our product candidates other than NeutroSpec. The
successful commercialization of our other product candidates will require us to perform a
variety of functions, including:

| |  |  | continuing
to conduct pre-clinical development and clinical trials;
| | - |  | -------------------------------------------------------------------

| |  |  | participating
in regulatory approval processes;
| | - |  | -----------------------------------------------

| |  |  | formulating
and manufacturing products, or having third parties formulate and manufacture
              products;
| | - |  | -----------------------------------------------------------------------------------------------------------------

| |  |  | conducting
sales and marketing activities, either alone or with a partner; and
| | - |  | ------------------------------------------------------------------------------

| |  |  | obtaining
additional capital.
| | - |  | -----------------------------

If
we are unable to obtain regulatory approval of any of our product candidates, or to
successfully commercialize any products for which we receive regulatory approval, we may
not be able to recover our investment in our development efforts.

Development and commercialization of
our proposed products involves a lengthy, complex and costly process and we may never
successfully develop or commercialize any product.

Our
product candidates are at various stages of research and development, will require
regulatory approval, and may never be successfully developed or commercialized. Our
products will require significant further research, development and testing before we can
seek regulatory approval to market and sell them.

We
must demonstrate that our products are safe and effective for use in patients in order to
receive regulatory approval for commercial sale. Preclinical studies in animals,
potentially using various doses and formulations, must be performed before we can begin
human clinical trials. Even if we obtain favorable results in the preclinical studies, the
results in humans may be different. Numerous small-scale human clinical trials may be
necessary to obtain initial data on a drug candidates safety and efficacy in humans
before advancing to large-scale human clinical trials. We face the risk that the results
of our trials in later phases of clinical trials may be inconsistent with those obtained
in earlier phases. Adverse or inconclusive results could delay the progress of our
development programs and may prevent us from filing for regulatory approval of our
products. Additional factors that can cause delay or termination of our human clinical
trials include:

| |  |  | timely
completion of clinical site protocol approval and obtaining informed consent from
              subjects;
| | - |  | ----------------------------------------------------------------------------------------------------------------

| |  |  | the
rate of patient enrollment in clinical studies;
| | - |  | ---------------------------------------------------

| |  |  | adverse
medical events or side effects in treated patients; and
| | - |  | ---------------------------------------------------------------

| |  |  | lack
of effectiveness of the product being tested.
| | - |  | --------------------------------------------------

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You
should evaluate us in light of these uncertainties, delays, difficulties and expenses
commonly experienced by early stage biopharmaceutical companies, as well as unanticipated
problems and additional costs relating to:

| |  |  | product
approval or clearance;
| | - |  | ------------------------------

| |  |  | regulatory
compliance;
| | - |  | ----------------------

| |  |  | good
manufacturing practices;
| | - |  | -----------------------------

| |  |  | intellectual
property rights;
| | - |  | -----------------------------

| |  |  | product
introduction; and
| | - |  | -------------------------

| |  |  | marketing
and competition.
| | - |  | --------------------------

The regulatory approval process is
lengthy, expensive and uncertain, and may prevent us from obtaining the approvals we
require.

Government
authorities in the United States and other countries extensively regulate the advertising,
labeling, storage, record-keeping, safety, efficacy, research, development, testing,
manufacture, promotion, marketing and distribution of drug products. Drugs are subject to
rigorous regulation by the FDA in the United States and similar regulatory bodies in other
countries. The steps ordinarily required by the FDA before a new drug may be marketed in
the United States include:

| |  |  | completion
of pre-clinical laboratory tests, pre-clinical trials and formulation studies;
| | - |  | -----------------------------------------------------------------------------------------

| |  |  | submission
to the FDA of an IND, which must become effective before clinical trials may begin;
| | - |  | ----------------------------------------------------------------------------------------------

| |  |  | performance
of adequate and well-controlled human clinical trials to establish the safety and
              efficacy of the drug for each proposed indication;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | submission
to the FDA of a new drug application, or NDA, or, for products categorized as
              biologicals such as NeutroSpec, a biological license application, or BLA;
and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | FDA
review and approval of the NDA or BLA before any commercial marketing or sale.
| | - |  | ----------------------------------------------------------------------------------

The
results of product development, pre-clinical studies and clinical studies are submitted to
the FDA as part of an NDA or BLA. The NDA or BLA also must contain extensive manufacturing
information. Once the submission has been accepted for filing, the FDA generally has ten
months to review the application and respond to the applicant. The review process is often
significantly extended by FDA requests for additional information or clarification. The
FDA may refer the NDA or BLA to an advisory committee for review, evaluation and
recommendation as to whether the application should be approved, but the FDA is not bound
by the recommendation of an advisory committee. The FDA may deny or delay approval of
applications that do not meet applicable regulatory criteria or if the FDA determines that
the clinical data do not adequately establish the safety and efficacy of the drug. Upon
approval, a drug candidate may be marketed only in those dosage forms and for those
indications approved by the FDA. Once approved, the FDA may withdraw the product approval
if compliance with pre- and post-market regulatory standards is not maintained or if
problems occur after the product reaches the marketplace. In addition, the FDA may require
post-marketing studies, referred to as Phase 4 studies, to monitor the effect of approved
products, and may limit further marketing of the product based on the results of these
post-market studies. The FDA has broad post-market regulatory and enforcement powers,
including the ability to levy fines and civil penalties, suspend or delay issuance of
approvals, seize or recall products, and withdraw approvals.

Satisfaction
of FDA pre-market approval requirements for new drugs typically takes several years and
the actual time required for approval may vary substantially based upon the type,
complexity and novelty of the product or disease. Government regulation may prevent
marketing of potential products or delay marketing for a considerable period of time and
impose costly procedures upon our activities. Therefore, our proposed products could take
a significantly longer time than we expect or may never gain approval. If regulatory
approval is delayed or never obtained, our value and our liquidity would be adversely
affected. Success in early stage clinical trials does not assure success in later stage
clinical trials. Data obtained from clinical activities is not always conclusive and may
be susceptible to varying interpretations that could delay, limit or prevent regulatory
approval. Even if a product receives regulatory approval, later discovery of previously
unknown problems with a product may result in restrictions on the product or even complete
withdrawal of the product from the market.

If
regulatory approval of any of our products is granted, it will be limited to certain
disease states or conditions. The manufacturers of approved products and their
manufacturing facilities will be subject to continual

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review and periodic inspections by
the FDA and other authorities where applicable, and must comply with ongoing regulatory
requirements, including the FDAs cGMP regulations. Failure to comply with the
statutory and regulatory requirements subjects the manufacturer to possible legal or
regulatory action, such as Warning Letters, suspension of manufacturing, seizure of
product, voluntary recall of a product, injunctive action or possible civil penalties.
Adverse experiences with the product must be reported to the FDA and could result in the
imposition of market restriction through labeling changes or in product removal. Product
approvals may be withdrawn if compliance with regulatory requirements is not maintained
or if problems concerning safety or efficacy of the product occur following approval.
Because we intend to contract with third parties for manufacturing of these products, our
ability to control third-party compliance with FDA requirements will be limited to
contractual remedies and rights of inspection. Failure of third-party manufacturers to
comply with cGMP or other FDA requirements may result in legal or regulatory action by
the FDA.

Outside
the United States, our ability to market our products will also depend on receiving
marketing authorizations from the appropriate regulatory authorities. The foreign
regulatory approval process generally includes all of the risks associated with FDA
approval described above. The requirements governing the conduct of clinical trials and
marketing authorization vary widely from country to country. At present, foreign marketing
authorizations are applied for at a national level, although within the European
Community, or EC, registration procedures are available to companies wishing to market a
product to more than one EC member state. If the regulatory authority is satisfied that
adequate evidence of safety, quality and efficiency has been presented, a marketing
authorization will be granted.

We may not be able to obtain
regulatory approval to reintroduce NeutroSpec to the market, and may be required to
conduct extensive clinical trials prior to regulatory approval.

NeutroSpec
was initially approved by the FDA for imaging of patients with equivocal signs and
symptoms of appendicitis. However, the reported serious adverse events were associated
with off-label use (use for an indication other than diagnosis of equivocal appendicitis),
and substantial sales of NeutroSpec were for off-label uses. We are conducting additional
laboratory studies to understand the relationship between NeutroSpec and reported serious
adverse events. We may not be able to develop a sufficient understanding of the
relationship to warrant application to the FDA to conduct additional studies or remarket
the product. We may also not be able to develop methods, formulations or protocols that
permit NeutroSpec to be used safely. We also do not know whether the FDA will concur in
our risk/benefit assessment of NeutroSpec, or permit NeutroSpec to be marketed again. Even
if we seek to reintroduce NeutroSpec to the market, we may seek approval to market
NeutroSpec for other indications, such as osteomyelitis (infection deep inside a bone),
which will require that Phase 2 and Phase 3 clinical trials be successfully completed
prior to seeking approval of the FDA.

If any approved product does not
achieve market acceptance, our business will suffer.

Regulatory
approval for the marketing and sale of any of our product candidates does not assure the
products commercial success. Any approved product will compete with other products
manufactured and marketed by major pharmaceutical and other biotechnology companies. The
degree of market acceptance of any such product will depend on a number of factors,
including:

| |  |  | perceptions
by members of the healthcare community, including physicians, about its safety and
              effectiveness;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

| |  |  | cost-effectiveness
relative to competing products and technologies;
| | - |  | -------------------------------------------------------------------

| |  |  | availability
of reimbursement for our products from government or other healthcare payors; and
| | - |  | ----------------------------------------------------------------------------------------------

| |  |  | advantages
over alternative treatment methods.
| | - |  | ----------------------------------------------

Because
we voluntarily withdrew NeutroSpec from the market, it may be more difficult to gain
market acceptance with NeutroSpec, assuming that the FDA permits NeutroSpec to be
reintroduced to the market.

If
bremelanotide is approved only for limited indications, such as for a second-line therapy
for ED in non-responders to approved PDE-5 inhibitors, the degree of market acceptance
will be necessarily limited.

If
any approved product does not achieve adequate market acceptance, our business, financial
condition and results of operations will be adversely affected.

We rely on third parties to conduct
clinical trials for our product candidates and their failure to timely perform their
obligations could significantly harm our product development.

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We
rely on outside scientific collaborators such as researchers at clinical research
organizations and universities in certain areas that are particularly relevant to our
research and product development plans, such as the conduct of clinical trials. The
competition for these relationships is intense, and we may not be able to maintain our
relationships with them on acceptable terms. These outside collaborators generally may
terminate their engagements with us at any time. As a result, we can control their
activities only within certain limits, and they will devote only a certain amount of their
time to conduct research on our product candidates and develop them. If they do not
successfully carry out their duties under their agreements with us, fail to inform us if
these trials fail to comply with clinical trial protocols or fail to meet expected
deadlines, our ability to develop our product candidates and obtain regulatory approval on
a timely basis, if at all, may be adversely affected.

The results of our clinical trials
may not support our product claims.

Even
if our clinical trials are completed as planned, we cannot be certain that their results
will support our product claims. Success in pre-clinical testing and early clinical trials
does not ensure that later clinical trials will be successful, and we cannot be sure that
the results of later clinical trials will replicate the results of prior clinical trials
and pre-clinical testing. The clinical trial process may fail to demonstrate that our
product candidates are safe for humans and effective for indicated uses. This failure
would cause us to abandon a product candidate and could delay development of other product
candidates. Any delay in, or termination of, our clinical trials will delay or eliminate
our ability to commercialize our product candidates and generate product revenues.

Production and supply of our product
candidates depend on contract manufacturers over whom we have no control.

We
do not have the facilities to manufacture bremelanotide, NeutroSpec or our other product
candidates. Our contract manufacturers must perform these manufacturing activities in a
manner that complies with FDA regulations. Failure to conduct their activities in
compliance with FDA regulations could delay our development programs or negatively impact
our ability to receive FDA approval of our potential products. Establishing relationships
with new suppliers, who must be FDA-approved, is a time-consuming and costly process.

We are subject to extensive
regulation in connection with the laboratory practices and the hazardous materials we use.

We
are subject to various laws and regulations regarding laboratory practices, the
experimental use of animals and the use and disposal of hazardous or potentially hazardous
substances in connection with our research. In each of these areas, as noted above, the
FDA and other regulatory authorities have broad regulatory and enforcement powers,
including the ability to levy fines and civil penalties, suspend or delay issuance of
approvals, seize or recall products and withdraw approvals, any one or more of which could
have a material adverse effect upon us. We are also subject to numerous federal, state and
local laws relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. We may incur significant costs to comply with such laws and
regulations now or in the future.

Contamination or injury from
hazardous materials used in the development of our products could result in a liability
exceeding our financial resources.

Our
research and development involves the use of hazardous materials and chemicals, including
radioactive compounds. We cannot completely eliminate the risk of contamination or injury
from these materials. In the event of contamination or injury, we may be responsible for
any resulting damages. Damages could be significant and could exceed our financial
resources, including the limits of our insurance.

We have no experience in marketing,
distributing and selling products and will substantially rely on our marketing partners to
provide these capabilities.

We
are developing bremelanotide for ED and FSD and a product for the treatment of CHF. We do
not have marketing partners for either product. If either product is approved by the FDA
or other regulatory authorities, we must either develop marketing, distribution and
selling capacity and expertise, which will be costly and time consuming, or enter into
agreements with other companies to provide these capabilities. There can be no assurance
that we will be able to enter into suitable agreements on acceptable terms.

If
we recommence sales of NeutroSpec, we will depend on Mallinckrodt, our strategic
collaboration partner, to market, sell and distribute the product. If Mallinckrodt fails
to adequately market NeutroSpec or devote enough resources to NeutroSpec, our potential
revenues will be adversely affected. If the arrangement with Mallinckrodt fails, we may
have difficulty establishing new marketing relationships, and in any event, we will have
limited control over these activities.

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Competing products and technologies
may make our proposed products noncompetitive.

We
are aware of three oral FDA-approved PDE-5 inhibitor drugs for the treatment of ED. These
products are also approved in Europe, Japan and most of the worlds pharmaceutical
markets. In addition, other products are being developed for ED and FSD. In order to
achieve approval and market acceptance, bremelanotide may potentially be required to
demonstrate efficacy and safety equivalent or superior to these other products.

We
are aware of one company developing a technetium imaging product and another company
marketing an antibody-based technetium product in some European countries, both of which
may compete with NeutroSpec for certain indications. In addition, other technologies may
also be used to diagnose appendicitis, osteomyelitis and other infection-related diseases,
including CT and ultrasound technologies.

We
are aware of one recombinant natriuretic peptide product for acutely decompensated CHF
approved and marketed in the United States, and another recombinant natriuretic peptide
product approved and marketed in Japan. Clinical trials on another recombinant product are
being conducted in Europe. In addition, other products for treatment of CHF are either
marketed or in development.

The
biopharmaceutical and diagnostic industries are highly competitive. We are likely to
encounter significant competition with respect to bremelanotide, NeutroSpec and our other
potential products. Many of our competitors have substantially greater financial and
technological resources than we do. Many of them also have significantly greater
experience in research and development, marketing, distribution and sales than we do.
Accordingly, our competitors may succeed in developing, marketing, distributing and
selling products and underlying technologies more rapidly than we may. These competitive
products or technologies may be more effective and useful or less costly than
bremelanotide, NeutroSpec or our other potential products. In addition, academic
institutions, hospitals, governmental agencies and other public and private research
organizations are also conducting research and may develop competing products or
technologies on their own or through strategic alliances or collaborative arrangements.

Our ability to achieve significant
revenues from the sale of our future products will depend, in part, on the ability of
healthcare providers to obtain adequate reimbursement from Medicare, Medicaid, private
insurers and other healthcare payers.

The
continuing efforts of government and insurance companies, health maintenance organizations
(HMOs) and other payers of healthcare costs to contain or reduce costs of
healthcare may adversely affect our future revenues and ability to achieve profitability.
Our ability to successfully commercialize our future products will depend, in significant
part, on the extent to which healthcare providers can obtain appropriate reimbursement
levels for the cost of our products and related treatment. Third-party payers are
increasingly challenging the prices charged for diagnostic and therapeutic products and
related services. Also, the trend towards managed healthcare in the U.S. and the
concurrent growth of organizations such as HMOs could control or significantly influence
the purchase of healthcare services and products. In addition, legislative proposals to
reform healthcare or reduce government insurance programs may result in lower prices or
the actual inability of prospective customers to purchase our future products. The cost
containment measures that healthcare payers and providers are instituting and the effect
of any healthcare reform could materially and adversely affect our ability to operate
profitably. Furthermore, even if reimbursement is available, it may not be available at
price levels sufficient for us to realize a positive return on our investment.

We could lose our rights to
NeutroSpec, which could adversely affect our potential revenues.

Our
rights to a key antibody used in NeutroSpec are dependent upon an exclusive license
agreement with The Wistar Institute of Biology and Anatomy. This agreement contains
specific performance criteria and requires us to pay royalties and make other payments.
Failure to meet these requirements, or any other event of default under the license
agreement, could lead to termination of the license agreement. If the license agreement is
terminated, we will be unable to make or market NeutroSpec, in which case we may lose the
value of our substantial investment in developing the product, as well as any future
revenues from selling NeutroSpec.

If we fail to adequately protect or
enforce our intellectual property rights or secure rights to patents of others, the value
of our intellectual property rights would diminish.

Our
success, competitive position and future revenues will depend in part on our ability and
the abilities of our licensors to obtain and maintain patent protection for our products,
methods, processes and other technologies, to preserve our trade secrets, to prevent third
parties from infringing on our proprietary rights and to operate without infringing the
proprietary rights of third parties. We cannot predict:

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| |  |  | the
degree and range of protection any patents will afford us against competitors, including
              whether third parties will find ways to invalidate or otherwise circumvent
our patents;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | if
and when patents will be issued;
| | - |  | -----------------------------------

| |  |  | whether
or not others will obtain patents claiming aspects similar to those covered by our
              patents and patent applications; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | whether
we will need to initiate litigation or administrative proceedings, which may be costly
              whether we win or lose.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------

If
our products, methods, processes and other technologies infringe the proprietary rights of
other parties, we could incur substantial costs and we may have to:

| |  |  | obtain
licenses, which may not be available on commercially reasonable terms, if at all;
| | - |  | ----------------------------------------------------------------------------------------

| |  |  | redesign
our products or processes to avoid infringement;
| | - |  | ---------------------------------------------------------

| |  |  | stop
using the subject matter claimed in the patents held by others;
| | - |  | --------------------------------------------------------------------

| |  |  | pay
damages; or
| | - |  | ---------------

| |  |  | defend
litigation or administrative proceedings, which may be costly whether we win or lose,
              and which could result in a substantial diversion of our management
resources.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If we are unable to keep our trade
secrets confidential, our technologies and other proprietary information may be used by
others to compete against us.

In
addition to our reliance on patents, we attempt to protect our proprietary technologies
and processes by relying on trade secret laws and agreements with our employees and other
persons who have access to our proprietary information. These agreements and arrangements
may not provide meaningful protection for our proprietary technologies and processes in
the event of unauthorized use or disclosure of such information. In addition, our
competitors may independently develop substantially equivalent technologies and processes
or gain access to our trade secrets or technology, either of which could materially and
adversely affect our competitive position.

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

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

Our collaboration agreements may fail
or be terminated unexpectedly, which could result in significant delays and substantial
increases in the cost of our research, development and the commercialization of our
potential products.

We
are a party to various arrangements with academic, governmental and other corporate
partners. The successful development and commercialization of the potential products
covered by these arrangements will depend upon the ability of these third parties to fully
perform their contractual responsibilities. If any of these parties breaches or
unexpectedly terminates their agreement with us, or otherwise fails to conduct their
activities in a timely manner, the development or commercialization of our potential
products may be delayed.

We
intend to enter into additional collaborations to develop and commercialize our potential
products in the future. We may not be able to negotiate these arrangements on favorable
terms, if at all, and these relationships may not be successful. In addition, our
collaborative partners may pursue alternative technologies or develop alternative
compounds designed to treat the same diseases that are the subject of their collaborative
programs with us.

We may incur substantial liabilities
and may be required to limit commercialization of our products in response to product
liability lawsuits.

14

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The
testing and marketing of medical products entails an inherent risk of product liability.
If we cannot successfully defend ourselves against product liability claims, we may incur
substantial liabilities or be required to limit commercialization of our products or cease
clinical trials. Our inability to obtain sufficient product liability insurance at an
acceptable cost to protect against potential product liability claims could prevent or
inhibit the commercialization of pharmaceutical products we develop, alone or with
corporate collaborators. We currently carry product/medical professional liability
insurance, which includes liability insurance for our clinical trials. We, or any
corporate collaborators, may not be able to obtain insurance at a reasonable cost or in
sufficient amounts, if at all. Even if our agreements with any future corporate
collaborators entitle us to indemnification against losses, such indemnification may not
be available or adequate should any claim arise.

We are highly dependent on our
management team and senior research professionals.

We
are a relatively small company. Our success depends on our continued ability to attract,
retain and motivate highly qualified management and scientific personnel, including
executive officers and senior members of management that oversee our development programs.
In addition, certain research personnel possess significant technical expertise and
experience relevant to our development programs and we will need to hire additional
personnel to expand our research and development activities. Our success also depends on
our ability to develop and maintain relationships with consultants and scientific
advisors. Competition for personnel is intense. If we lose the services of existing
personnel or fail to attract required new personnel, our development programs could be
adversely affected.

If we acquire other products,
technologies or operations, we will incur a variety of risks that could adversely affect
our current business operations.

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. Any such acquisition may expose us to additional risks,
including the need to devote significant resources to new activities and to raise
additional funds.

Stockholders may experience dilution
from the exercise of outstanding options and warrants and the vesting of restricted stock
units.

As
of June 30, 2007, options and warrants to purchase 15,338,686 shares of common stock were
outstanding at various exercise prices ranging from $1.00 per share to $7.75 per share and
975,000 shares were issuable under restricted stock units that will vest if shares of our
common stock trade at certain share prices. The issuance or potential issuance of common
stock upon the exercise of these options and warrants and vesting of restricted stock
units may adversely affect the market price of our common stock or result in substantial
dilution to our existing stockholders.

Anti-takeover provisions of Delaware
law and our charter documents may make potential acquisitions more difficult and could
result in the entrenchment of management.

We
are incorporated in Delaware. Anti-takeover provisions of Delaware law and our charter
documents may make a change in control or efforts to remove management more difficult.
Also, under Delaware law, our board of directors may adopt additional anti-takeover
measures. Under Section 203 of the Delaware General Corporation Law, a corporation may not
engage in a business combination with an interested stockholder for a period
of three years after the date of the transaction in which the person first becomes an
interested stockholder, unless the business combination is approved in a
prescribed manner.

Our
charter authorizes us to issue up to 10,000,000 shares of preferred stock and to determine
the terms of those shares of stock without any further action by our stockholders. If we
exercise this power, it could be more difficult for a third party to acquire a majority of
our outstanding voting stock.

In
addition, our equity incentive plans generally permit us to accelerate the vesting of
options granted under these plans in the event of a change of control. If we accelerate
the vesting of options, this action could make an acquisition more costly.

The
application of these provisions could have the effect of delaying or preventing a change
of control, which could adversely affect the market price of our common stock.

Our stock price is, and we expect it
to remain, volatile, which could limit investors ability to sell stock at a profit.

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The
volatile price of our stock makes it difficult for investors to predict the value of their
investment, to sell shares at a profit at any given time, or to plan purchases and sales
in advance. A variety of factors may affect the market price of our common stock. These
include, but are not limited to:

| |  |  | publicity
regarding actual or potential clinical results relating to products under development
                  by our competitors or us;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | delay
or failure in initiating, completing or analyzing pre-clinical or clinical trials or
                  unsatisfactory design or result of these trials;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | achievement
or rejection of regulatory approvals by our competitors or by us;
| | - |  | -----------------------------------------------------------------------------

| |  |  | announcements
of technological innovations or new commercial products by our competitors or by
                  us;
| | - |  | --------------------------------------------------------------------------------------------------------------------

| |  |  | developments
concerning proprietary rights, including patents;
| | - |  | --------------------------------------------------------------

| |  |  | developments
concerning our collaborations;
| | - |  | -------------------------------------------

| |  |  | regulatory
developments in the U.S. and foreign countries;
| | - |  | ----------------------------------------------------------

| |  |  | economic
or other crises and other external factors;
| | - |  | ----------------------------------------------------

| |  |  | period-to-period
fluctuations in our revenue and other results of operations;
| | - |  | -----------------------------------------------------------------------------

| |  |  | changes
in financial estimates by securities analysts; and
| | - |  | ----------------------------------------------------------

| |  |  | sales
of our common stock.
| | - |  | --------------------------

We
will not be able to control many of these factors, and we believe that period-to-period
comparisons of our financial results will not necessarily be indicative of our future
performance. If our revenues, if any, in any particular period do not meet expectations,
we may not be able to adjust our expenditures in that period, which could cause our
operating results to suffer further. If our operating results in any future period fall
below the expectations of securities analysts or investors, our stock price may fall by a
significant amount.

In
addition, the stock market in general, and the market for biotechnology companies in
particular, has experienced extreme price and volume fluctuations that may have been
unrelated or disproportionate to the operating performance of individual companies. These
broad market and industry factors may seriously harm the market price of our common stock,
regardless of our operating performance.

The
American Stock Exchange and other national stock exchanges maintain standards for initial
and continued listing of shares for trading. These standards include requirements for
minimum per share stock prices and/or aggregate market values of shares outstanding. If we
are unable to meet these requirements and are delisted, the ability of investors to buy or
sell our shares will be restricted, in which case the market value of our common stock and
our ability to obtain additional financing on acceptable terms may be adversely affected.

We expect to sell additional equity
securities, which will cause dilution.

We
expect to sell more equity securities in the future to obtain cash for operations. We may
sell these securities at a discount to the market price. Any future sales of equity will
dilute the holdings of existing stockholders, possibly reducing the value of their
investment.

We do not intend to pay cash
dividends in the foreseeable future.

We
do not anticipate paying any cash dividends in the foreseeable future and intend to retain
any future earnings for the development and expansion of our business. In addition, the
terms of existing or future agreements may limit our ability to pay dividends. Therefore,
our stockholders will not receive a return on their shares unless the value of their
shares increases.

We have broad discretion over the use
of available cash and may not realize an adequate return.

We
have considerable discretion in the application of available cash and have not fixed the
amounts that we will apply to various corporate purposes, including potential
acquisitions. We may use cash for purposes that do not yield a significant return, if any,
for our stockholders.

Item 1B. Unresolved Staff
Comments

None.

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Table of Contents

Item 2. Properties.

Our
corporate offices and research and development facilities are located at 4C Cedar Brook
Drive, Cedar Brook Corporate Center, Cranbury, NJ 08512, where we lease approximately
28,000 square feet under a lease which expires July 17, 2012. We also lease 10,000 square
feet of additional office space and 12,000 square feet of laboratory space in two other
buildings in the same center under leases that expire in 2015 and 2008, respectively. The
leased properties are in good condition.

Item 3. Legal Proceedings.

Competitive
Technologies, Inc. (CTI) initiated arbitration proceedings with us on June 6,
2006 before the American Arbitration Association asserting breach of the terms of our
license agreement for patent rights related to certain compounds and methods of treatment
for sexual dysfunction and for other actions asserted to arise out of the license
agreement. CTI alleged that we committed certain tortious acts against CTI, including
fraud and negligent misrepresentation relating to entering into the license agreement
originally and tortious interference with business expectancy concerning termination by us
and King of the sublicense of the CTI license agreement to King and also seeks a
declaration that bremelanotide is covered by the license agreement. CTI is seeking
unspecified damages in excess of $500,000. We filed a reply to CTIs statement of
claim, denying all material allegations asserted by CTI, and asserting counterclaims
against CTI for declaratory judgment that claims are barred by the previous settlement
agreement with CTI and that bremelanotide is not subject to the license agreement with
CTI. The license agreement provides for binding arbitration as the remedy for dispute
resolution. Motions for summary adjudication of certain claims have been filed by us and
CTI, and limited discovery has been conducted relating to the motions. Oral argument on
the motions for summary adjudication is scheduled in the second half of calendar 2007,
with a hearing on the merits, if required, currently scheduled for the first half of
calendar 2008.

CTI
also initiated litigation against us on September 16, 2005 by filing a suit in Connecticut
Superior Court for breach of the settlement agreement of an earlier arbitration between
CTI and us. CTI generally asserted that we failed to timely register for resale shares of
our common stock valued at approximately $300,000 issued to CTI in the settlement, and
additionally asserted claims for breach of implied warranties, unfair trade practices,
fraudulent inducement, fraudulent non-disclosure and fraud. We denied all material
allegations of CTIs claims and asserted defenses and 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 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 filed a reply generally denying our counterclaims and
asserting defenses. Discovery has been initiated by both CTI and us.

We
cannot reasonably predict the outcome of the disputes with CTI or reasonably estimate the
range of potential loss, if any. Although the amount of any liability that could arise
with respect to these matters cannot be predicted, we do not believe that the resolution
of these matters will have a material adverse effect on our financial position, results of
operations or liquidity.

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

None.

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Table of Contents

PART II

Item 5. Market for Registrants
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The
table below provides, for the fiscal quarters indicated, the reported high and low sales
prices for the common stock on the American Stock Exchange (the AMEX) since
July 1, 2005.

|                                     |       |      
|------------------------------------ | ----- | -----
|FISCAL YEAR
     ENDED JUNE 30, 2007 | HIGH  | LOW  
|Fourth Quarter                       | $2.13 | $1.80
|Third Quarter                        | 4.00  | 1.75 
|Second Quarter                       | 3.03  | 1.85 
|First Quarter                        | 2.50  | 1.71 
|                                     |       |      
|FISCAL YEAR
     ENDED JUNE 30, 2006 | HIGH  | LOW  
|Fourth Quarter                       | $2.88 | $1.95
|Third Quarter                        | 3.72  | 2.67 
|Second Quarter                       | 4.03  | 1.96 
|First Quarter                        | 2.36  | 1.85 
|                                     |       |      

Our
common stock has been quoted on the AMEX under the symbol PTN since December 21, 1999. It
previously traded on The Nasdaq SmallCap Market under the symbol PLTN.

Holders
of common stock. On September 4, 2007, we had approximately 240 holders of record of
common stock. On September 4, 2007, the closing sales price of our common stock as
reported on the AMEX was $0.67 per share.

Dividends
and dividend policy. We have never declared or paid any dividends. We currently intend to
retain earnings, if any, for use in our business. We do not anticipate paying dividends in
the foreseeable future.

Dividend
restrictions. Our outstanding Series A Preferred Stock, consisting of 4,997 shares on
September 4, 2007, provides that we may not pay a dividend or make any distribution to
holders of any class of stock unless we first pay a special dividend or distribution of
$100 per share to the holders of the Series A Preferred Stock.

Stock
performance graph. The following graph compares the yearly change in the cumulative total
shareholder return on our common stock with the cumulative total return on the Nasdaq
Composite Index and the Nasdaq Biotechnology Index for the last five fiscal years, ending
June 30, 2007. The graph assumes the investment of $100 in each stock or index on June 30,
2002, and the reinvestment of any dividends (we have never paid a dividend).

|stock_performance_graph
|-----------------------

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Table of Contents

Securities
authorized for issuance under equity compensation plans.

|                                                               |  |                                                                                         |  |                                                                         |           |                                                                                                                                             |  |           | 
|-------------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | 
|Equity Compensation Plan
     Informationas of June 30, 2006  
|Plan category                                                  |  | Number of securitiesto be issued uponexercise of outstandingoptions, warrants andrights |  | Weighted-averageexercise price ofoutstandingoptions, warrantsand rights |           | Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding
     securitiesreflected in column (a))
|                                                               |  | (a)                                                                                     |  | (b)                                                                     |           | (c)                                                                                                                                        
|Equity compensation plansapproved by security holders          |  | 6,388,654 (1)                                                                           |  |                                                                         | $2.89 (1) |                                                                                                                                             |  | 2,795,777 | 
|                                                              
|Equity compensation plans notapproved by security
     holders |  | 646,967                                                                                 |  |                                                                         | 1.84      |                                                                                                                                             |  | 0         | 
|                                                              
|Total                                                          |  | 7,035,621                                                                               |  |                                                                         |           |                                                                                                                                             |  | 2,795,777 | 

(1)    
          Excludes an aggregate of 975,000 shares issuable upon vesting of restricted
          stock units. Restricted stock units will vest in 325,000-share increments if our
          closing share price is greater than $4.00, $6.00 and $8.00 for twenty
          consecutive trading days.

We
have authorized the issuance of equity securities under the compensation plans described
below, without the approval of stockholders.

| |  | Richard J. Murphy Stock Option Agreement, dated December 4, 1997: provided stock options
to a former director to purchase 5,000 shares at $5.44 per share and 1,066 shares at $7.50
per share, with an expiration date of December 4, 2007. These options replaced options for
the same number of shares at the same prices which terminated under our 1996 Stock Option
Plan.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Wistar Institute of Anatomy and Biology warrants, dated December 15, 2000: provided common
stock purchase warrants to a technology licensor to purchase 15,000 shares at $4.00 per
share, with an expiration date of December 15, 2010.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Wistar Institute of Anatomy and Biology warrants, dated May 13, 2002: provided common
stock purchase warrants to a technology licensor to purchase 15,000 shares at $2.82 per
share, with an expiration date of May 13, 2012.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | North Coast Securities Corporation warrants, dated November 30, 2004: provided common
stock purchase warrants to an advisor to purchase 50,000 shares at $2.97 per share and
25,000 shares at $3.38 per share, with an expiration date of November 30, 2007.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Placement warrants: provided common stock purchase warrants as compensation to various
private offering placement agents to purchase an aggregate of 535,901 shares. These
warrants have the following share amounts, exercise prices (rounded to the nearest cent)
and expiration dates:
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |           |  |                   |  |               |  |                | 
| | --------- |  | ----------------- |  | ------------- |  | -------------- | 
| | Offering  |  | SharesPurchasable |  | ExercisePrice |  | ExpirationDate | 
| | July 2002 |  | 51,502            |  | $1.46         |  | 07-29-07       | 
| | July 2002 |  | 25,752            |  | $1.37         |  | 07-29-07      
| | Fall 2002 |  | 458,647           |  | $1.54         |  | 11-15-07       | 

19

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Table of Contents

Item 6. Selected Financial Data.

The
following selected consolidated financial data has been derived from the audited
consolidated financial statements of Palatin Technologies, Inc. This data should be read
in conjunction with our consolidated financial statements, including the notes to the
consolidated financial statements, and Managements Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 of this report.

|                                                                                          |  |  |   |                                                          |   |   |          |   |   |          |   |   |         |   |   |         |  
|----------------------------------------------------------------------------------------- |  |  | - | -------------------------------------------------------- | - | - | -------- | - | - | -------- | - | - | ------- | - | - | ------- | -
|                                                                                          |  |  |   | (In thousands, except per share data)Year Ended June 30,
|                                                                                          |  |  |   | 2007                                                     |   |   | 2006 (1) |   |   | 2005 (1) |   |   | 2004    |   |   | 2003    |  
|Statement of Operations Data:                                                            
|REVENUES                                                                                 
|Licenses, grants and contracts (2)                                                        |  |  | $ | 14,406                                                   |   | $ | 18,240   |   | $ | 13,897   |   | $ | 2,315   |   | $ | 1,270   |  
|Royalties                                                                                 |  |  |   | -                                                        |   |   | 1,509    |   |   | 1,586    |   |   | -       |   |   | -       |  
|Product sales                                                                             |  |  |   | -                                                        |   |   | -        |   |   | 2,474    |   |   | -       |   |   | -       |  
|Total revenues                                                                            |  |  |   | 14,406                                                   |   |   | 19,749   |   |   | 17,957   |   |   | 2,315   |   |   | 1,270   |  
|OPERATING EXPENSES                                                                        |  | 
|Cost of product sales                                                                     |  |  |   | -                                                        |   |   | 2,041    |   |   | 535      |   |   | -       |   |   | -       |  
|Royalties                                                                                 |  |  |   | -                                                        |   |   | 300      |   |   | 328      |   |   | -       |   |   | -       |  
|Research and development                                                                  |  |  |   | 36,914                                                   |   |   | 41,014   |   |   | 25,045   |   |   | 23,333  |   |   | 17,439  |  
|General and administrative                                                                |  |  |   | 7,293                                                    |   |   | 6,844    |   |   | 7,461    |   |   | 5,740   |   |   | 4,867   |  
|Total operating expenses                                                                  |  |  |   | 44,207                                                   |   |   | 50,199   |   |   | 33,369   |   |   | 29,073  |   |   | 22,306  |  
|OTHER INCOME (EXPENSE)                                                                    |  | 
|Investment income                                                                         |  |  |   | 1,324                                                    |   |   | 856      |   |   | 488      |   |   | 222     |   |   | 248     |  
|Interest expense                                                                          |  |  |   | (53                                                      | ) |   | (31      | ) |   | (14      | ) |   | (23     | ) |   | (22     | )
|Total other income, net                                                                   |  |  |   | 1,271                                                    |   |   | 825      |   |   | 474      |   |   | 199     |   |   | 226     |  
|Loss before income taxes                                                                  |  |  |   | (28,530                                                  | ) |   | (29,625  | ) |   | (14,938  | ) |   | (26,559 | ) |   | (20,810 | )
|Income tax benefit                                                                        |  |  |   | 778                                                      |   |   | 666      |   |   | 580      |   |   | 241     |   |   | 245     |  
|NET LOSS                                                                                  |  |  |   | (27,752                                                  | ) |   | (28,959  | ) |   | (14,358  | ) |   | (26,318 | ) |   | (20,565 | )
|DEEMED DIVIDEND                                                                           |  |  |   | -                                                        |   |   | -        |   |   | -        |   |   | -       |   |   | (203    | )
|NET LOSS ATTRIBUTABLE TOCOMMON STOCKHOLDERS                                               |  |  | $ | (27,752                                                  | ) | $ | (28,959  | ) | $ | (14,358  | ) | $ | (26,318 | ) | $ | (20,768 | )
|Basic and diluted net loss attributable to
          common stockholders per common share |  |  | $ | (0.36                                                    | ) | $ | (0.48    | ) | $ | (0.27    | ) | $ | (0.55   | ) | $ | (0.73   | )
|Weighted average common shares
          outstanding                                      |  |  |   | 76,204                                                   |   |   | 60,357   |   |   | 53,861   |   |   | 47,688  |   |   | 28,362  |  
|Balance Sheet Data (at period end):                                                       |  | 
|Cash, cash equivalents and investments                                                    |  |  | $ | 33,771                                                   |   | $ | 30,664   |   | $ | 18,106   |   | $ | 20,412  |   | $ | 18,383  |  
|Property and equipment, net                                                               |  |  |   | 6,070                                                    |   |   | 6,348    |   |   | 6,464    |   |   | 6,356   |   |   | 7,246   |  
|Working capital                                                                           |  |  |   | 25,823                                                   |   |   | 19,742   |   |   | 13,772   |   |   | 15,485  |   |   | 14,742  |  
|Total assets                                                                              |  |  |   | 42,781                                                   |   |   | 40,047   |   |   | 35,166   |   |   | 27,800  |   |   | 26,568  |  
|Long-term debt, net of current portion                                                    |  |  |   | 275                                                      |   |   | 230      |   |   | 19       |   |   | 30      |   |   | 76      |  
|Stockholders' equity                                                                      |  |  |   | 18,532                                                   |   |   | 18,300   |   |   | 9,225    |   |   | 19,387  |   |   | 18,657  |  

|(1) |  | In the fiscal year ended June 30, 2005, we received FDA approval to market
               NeutroSpec for equivocal appendicitis. We suspended sales of NeutroSpec during
               the fiscal year ended June 30, 2006.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | In September 2007, we received notice from King, effective December 2007,
               terminating our collaborative development agreement, under which we earned
               license revenue and cost reimbursement revenue related to our bremelanotide
               program.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Table of Contents

Item
7. 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 annual report on Form 10-K.

Critical Accounting
Policies.

Our
significant accounting policies are described in Note 2 to the consolidated financial
statements included in this annual report on Form 10-K. We believe that our accounting
policies and estimates relating to revenue recognition, accrued expenses and stock-based
compensation charges 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 on a straight-line basis over the related performance period. We
estimate the performance period as the period in which we perform certain development
activities under the applicable agreement. Estimated reimbursements for research and
development activities and government grants are recorded in the period that we perform
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.

In
2004, we entered into a collaborative development and marketing agreement with King to
jointly develop and commercialize bremelanotide. Deferred revenue related to the King
agreement has been recognized as revenue over the estimated period of our performance
during the initial development term of this agreement. Specific performance periods were
not stated in the agreement and were estimated by management based on detailed development
programs agreed upon by the parties. In September 2007, we received notice from King
terminating the agreement in accordance with its terms effective December 5, 2007. Upon
termination, we will solely own all rights to bremelanotide. In connection with the
termination of the agreement, we expect to recognize in our fiscal year ending June 30,
2008 all remaining deferred up-front license fees received from King, together with
associated deferred costs, which prior to termination were being recognized as revenues
and costs over the estimated period of our performance under the agreement. As of June 30,
2007, deferred revenue and deferred costs, included in other current assets and other
assets, amounted to $7,064,996 and $886,479, respectively.

Deferred
revenue related to the AstraZeneca agreement is being recognized as revenue on a
straight-line basis over the maximum period during which we may perform research services
under the agreement. If our estimated period of performance is reduced to less than the
maximum, the amortization period for any remaining deferred revenue may be reduced.

Accrued Expenses

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

Stock-based Compensation

The
fair value of stock options granted has been calculated using the Black-Scholes model,
which requires us to make estimates of volatility and expected option lives. We estimate
these factors at the time of grant based on our own prior experience, public sources of
information and information for comparable companies. The amount of recorded compensation
related to an option grant is not adjusted for subsequent changes in these estimates or
for actual experience. The amount of our recorded compensation is also dependent on our
estimates of future option forfeitures and the probability of achievement of performance
conditions. If we initially over-estimate future 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 our share
price. As a result, share-based compensation charges may vary significantly from period to
period.

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Table of Contents

Results of Operations

Year Ended June 30, 2007 Compared to
the Year Ended June 30, 2006:

Licenses,
grants and contracts  In the year ended June 30, 2007 (fiscal 2007), we
recognized $14.4 million of revenue from licenses, grants and contracts compared to $18.2
million for the year ended June 30, 2006 (fiscal 2006). In fiscal 2007 and
fiscal 2006, we recognized $12.9 million and $17.9 million of revenue, respectively, from
our collaboration agreement with King related to bremelanotide, consisting of (i) $10.1
million and $14.8 million, respectively, of reimbursements for Kings share of
bremelanotide development expenses and (ii) $2.8 million and $3.1 million, respectively,
of license fees, which represents the portion of deferred revenue recognized during the
year from Kings August 2004 up-front payment. The decrease in reimbursement revenue
from King is related to decreased reimbursable bremelanotide costs during the year.
Reimbursable bremelanotide costs were higher in fiscal 2006 due to the conduct of two
significant Phase 2 clinical trials. Upon the termination of our collaboration agreement
with King, we will no longer receive such reimbursement revenue. In fiscal 2007, we
recognized less license revenue related to the King agreement as a result of increasing
our estimated period of performance under the agreement. In connection with the
termination of our collaboration agreement, we expect to recognize in the year ending June
30, 2008 (fiscal 2008) the remainder of the deferred revenue related to
Kings up-front payment. In fiscal 2007, we recognized $1.2 million of revenue
related to our January 2007 license agreement with AstraZeneca. This amount consists of
$0.6 million of revenue related to our research services performed during the year and
$0.6 million of license revenue related to AstraZenecas $10.0 million up-front
license fee received at the inception of the agreement. Revenue from reimbursements for
Mallinckrodts share of NeutroSpec development expenses amounted to $0.3 million and
$0.3 million in fiscal 2007 and 2006, respectively. Future contract revenue from
AstraZeneca and Mallinckrodt, in the form of reimbursement of shared development costs and
the recognition of deferred license fees, will fluctuate based on development activities
in our obesity and NeutroSpec programs. We may also earn contract revenue based on the
attainment of certain development milestones.

Royalties
 For fiscal 2007 and fiscal 2006, we recognized royalty revenues of $0 and $1.5
million, respectively, on Mallinckrodts sales of NeutroSpec, pursuant to our
collaboration agreement. We received FDA approval to market NeutroSpec in July 2004 and
suspended sales in December 2005. We will not earn future royalty revenues from NeutroSpec
unless and until NeutroSpec sales resume.

Cost
of product sales and royalties  Royalty expense amounted to $0 and $0.3 million in
fiscal 2007 and 2006, respectively. We will not incur future royalty expenses on
NeutroSpec unless and until commercial sales of NeutroSpec resume.

Research
and development  Research and development (R&D) expenses decreased
to $36.9 million for fiscal 2007 compared to $41.0 million for fiscal 2006. In fiscal
2007, development spending directly associated with bremelanotide decreased approximately
$5.9 million, from $24.2 million in fiscal 2006 to $18.3 million in fiscal 2007. Costs
related to the conduct of various clinical trials were higher in fiscal 2006, including
costs of an at-home efficacy study in ED patients and an at-home
efficacy study in ED patients with diabetes mellitus. Associated costs include fees to
clinicians, laboratory expenses and study monitoring and management. Partially offsetting
decreased clinical study costs were greater process development and manufacturing costs in
fiscal 2007. In fiscal 2007, fiscal 2006 and the year ended June 30, 2005 (fiscal
2005) and cumulatively to date, we have incurred approximately $27.5 million, $33.2
million, $18.3 million and $111.6 million, respectively, in R&D expenses on
bremelanotide, including an allocated portion of general R&D expenses. Spending to
date has been primarily related to formulation, manufacturing, preclinical and clinical
activities. Bremelanotide spending in fiscal 2008 will be dependent on our review of the
FDAs comments and decisions regarding the design and timing of any future clinical
trials.

Research
and development expenses directly related to our obesity, CHF and other preclinical
programs increased from $2.6 million in fiscal 2006 to $3.8 million in fiscal 2007.
Spending on our obesity and CHF programs increased approximately $0.4 million and $0.8
million, respectively. In fiscal 2007, fiscal 2006 and fiscal 2005 and cumulatively to
date, we have incurred approximately $9.0 million, $5.1 million, $3.7 million and $32.1
million, respectively, in R&D expenses on these preclinical programs, including an
allocated portion of general R&D expenses. Spending to date has been primarily related
to the identification and optimization of lead compounds. We expect to spend approximately
$2 million to $3 million of direct costs during fiscal 2008 on laboratory research on
various compounds, which may increase in the event we file an IND and commence clinical
trials for a compound. 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 AstraZeneca and other potential development partners.

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In
fiscal 2007, research and development spending directly related to NeutroSpec decreased to
$0.4 million from $1.1 million in fiscal 2006, primarily 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. In fiscal 2007,
fiscal 2006 and fiscal 2005 and cumulatively to date, we have incurred approximately $0.4
million, $2.7 million, $3.1 million and $55.0 million, respectively, in R&D expenses
on NeutroSpec, including an allocated portion of general R&D expenses. Spending to
date has been primarily related to an initial indication of imaging equivocal
appendicitis.

Total
general R&D expenses, increased from $12.9 million in fiscal 2006 to $14.5 million in
fiscal 2007, primarily due to increased personnel costs, including higher costs for
stock-based compensation, and additions to laboratory facilities.

General
and administrative  General and administrative expenses increased from $6.8 million
in fiscal 2006 to $7.3 million in fiscal 2007. The increase primarily reflects higher
personnel costs in fiscal 2007, including higher stock-based compensation expense.
Increased legal expenses related to collaborative agreements and arbitration proceedings
partially offset lower insurance costs that followed the withdrawal of NeutroSpec.

Investment
income  Investment income increased to $1.3 million for fiscal 2007 from $0.9
million for fiscal 2006, primarily reflecting income on greater invested cash balances
maintained during the period as a result of our February 2007 registered direct offering
of common stock and the initial license fee from AstraZeneca.

Income
tax benefit  During fiscal 2007 and fiscal 2006, we sold New Jersey state net
operating loss carryforwards, which resulted in the recognition of $0.8 million and $0.7
million of income tax benefits, respectively. Assuming the state of New Jersey continues
to fund this program, which is not assured, the amount of net operating losses and tax
credits we may sell will depend upon the allocation among qualifying companies of an
annual pool established by the state of New Jersey.

Year Ended June 30, 2006 Compared to
the Year Ended June 30, 2005:

Licenses,
grants and contracts  For fiscal 2006, we recognized $18.2 million of revenue from
licenses, grants and contracts compared to $13.9 million for fiscal 2005. In fiscal 2006
and fiscal 2005, we recognized $17.9 million and $11.5 million of revenue, respectively,
related to our collaboration agreement with King related to bremelanotide, consisting of
(i) $14.8 million and $8.1 million, respectively, of reimbursements for Kings share
of bremelanotide development expenses and (ii) $3.1 million and $3.4 million,
respectively, of license fees, which represents the portion of Kings August 2004
up-front payment recognized as revenue during the year. The increase in reimbursement
revenue from King is related to increased bremelanotide costs during the year and to the
existence of the collaboration agreement for the full fiscal year. The agreement with King
was completed in August 2004. In fiscal 2006 and fiscal 2005, we recognized $0.3 million
and $2.3 million of revenue, respectively, related to our collaboration agreement with
Mallinckrodt related to NeutroSpec, consisting of (i) $0.3 million and $0.3 million,
respectively, of reimbursements for Mallinckrodts share of NeutroSpec development
expenses and (ii) $0 and $2.0 million, respectively, of license fees. In fiscal 2005, we
earned a $2.0 million milestone payment from Mallinckrodt upon FDA approval of NeutroSpec.

Royalties
 For fiscal 2006 and fiscal 2005, we recognized royalty revenues of $1.5 million and
$1.6 million, respectively, on Mallinckrodts sales of NeutroSpec, pursuant to our
collaboration agreement. Royalty revenues were comparable in fiscal 2006 and fiscal 2005,
reflecting higher unit sales by Mallinckrodt during the shorter, six-month period of
fiscal 2006 in which the product was sold.

Product
sales  Prior to the suspension of sales and marketing activities, we earned revenue
from product sales on our shipment of manufactured units of NeutroSpec to Mallincrodt,
which were billed upon shipment of product to Mallinckrodt on standard trade terms.
Revenue was recognized upon acceptance of the product by Mallinckrodt based on conformance
with product specifications. Each Mallinckrodt purchase of NeutroSpec from us was subject
to certain minimum quantities, resulting in a limited number of product shipments.
Accordingly, our periodic revenue from product sales was highly dependent on the timing of
orders and shipments. There were no sales of NeutroSpec to Mallinckrodt during fiscal
2006.

23

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Cost
of product sales and royalties  As noted above, there were no sales of NeutroSpec to
Mallinckrodt in fiscal 2006. In fiscal 2006, cost of product sales represents our
write-off of inventory due to the suspension of sales of NeutroSpec. For fiscal 2005, we
recognized $0.5 million in cost of product sales related to shipments of NeutroSpec to
Mallinckrodt. Prior to the FDA approval of NeutroSpec in July 2004, all costs associated
with the manufacturing of NeutroSpec were included in research and development expenses
when incurred, including costs of usable raw materials and finished goods in inventory at
the date of approval. As we used and sold this inventory, the cost of product sales we
recognized excluded amounts previously expensed. On the date of approval, we had
sufficient active drug substance to produce all of the product units sold prior to
December 2005. Cost of sales for these units primarily consisted of packaging and other
materials.

Royalty
expense amounted to approximately $0.3 million in each of fiscal 2006 and fiscal 2005. We
will not incur future royalty expenses on NeutroSpec unless and until commercial sales of
NeutroSpec resume.

Research
and development  Research and development expenses increased to $41.0 million for
fiscal 2006 compared to $25.0 million for fiscal 2005. In fiscal 2006, development
spending directly associated with bremelanotide increased approximately $11.2 million, as
increased clinical study costs related to the conduct of various clinical trials,
including an at-home efficacy study in ED patients and an at-home
efficacy study in ED patients with diabetes mellitus were partially offset by lower
formulation development costs. Associated costs include fees to clinicians, laboratory
expenses and study monitoring and management.

Research
and development expenses directly related to our obesity, CHF and other preclinical
programs increased from $1.3 million to $2.6 million from fiscal 2005 to fiscal 2006,
primarily as a result of additional contract services for assistance with the optimization
of lead compounds.

In
fiscal 2006, research and development spending directly related to NeutroSpec decreased
slightly from $1.3 million in fiscal 2005 to $1.1 million, primarily as a result of lower
costs related to clinical trials.

Total
general R&D expenses increased $3.6 million in fiscal 2006, primarily due to increased
personnel costs, including the recognition of compensation costs for stock option grants,
the expansion of facilities and associated support costs.

General
and administrative  General and administrative expenses decreased from $7.5 million
in fiscal 2005 to $6.8 million in fiscal 2006. Increased personnel costs in fiscal 2006
were more than offset by lower legal and consulting expenses. Legal expenses related to
collaborative agreements and arbitration proceedings, recruiting fees and expenses related
to compliance with new regulatory requirements were all higher in fiscal 2005.

Investment
income  Investment income increased to $0.9 million for fiscal 2006 from $0.5
million for fiscal 2005, primarily reflecting higher cash balances resulting from our
sales of common stock and warrants.

Income
tax benefit  During fiscal 2006 and fiscal 2005, we sold New Jersey state net
operating loss carryforwards, which resulted in the recognition of $0.7 million and $0.6
million of income tax benefits, respectively.

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;
| | - |  | --------------------------------------------------------------

| |  |  | product
approval or clearance;
| | - |  | ------------------------------

| |  |  | regulatory
compliance;
| | - |  | ----------------------

| |  |  | good
manufacturing practices;
| | - |  | -----------------------------

| |  |  | intellectual
property rights;
| | - |  | -----------------------------

| |  |  | product
introduction; and
| | - |  | -------------------------

| |  |  | marketing,
sales and competition.
| | - |  | ---------------------------------

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

During
fiscal 2007, we used $22.1 million of cash for our operating activities, compared to $23.4
million in fiscal 2006 and $5.1 million in fiscal 2005. In fiscal 2007, the receipt of
$10.0 million in license fees from AstraZeneca offset higher cash outflows for operating
expenses and the effect of higher reimbursement receipts from King in fiscal 2006. Lower
net cash outflows from operations in fiscal 2005 resulted from lower operating expenses,
amounts received from King under our collaboration agreement, which was completed in
August 2004 and sales and royalties related to NeutroSpec. Our periodic accounts
receivable balances will continue to be highly dependent on the timing of receipts from
our development partners. Upon the termination of our collaboration agreement with King,
we will no longer receive reimbursement revenue from them.

In
fiscal 2007, net cash provided by financing activities was $26.0 million primarily
reflecting proceeds from the sale of common stock in a registered direct offering
completed in February 2007. During fiscal 2006, net cash provided by financing activities
was $36.9 million and included proceeds from the sale of common stock and warrants to King
in September 2005 and the sale of common stock and warrants in an April 2006 offering. Net
cash provided by financing activities in fiscal 2005 of $3.8 million resulted primarily
from the issuance of common stock and warrants to King in connection with the August 2004
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 June 30, 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.

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, market and sell 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.

Contractual Obligations

We
have entered into various contractual obligations and commercial commitments. The
following table summarizes our most significant contractual obligations as of June 30,
2007:

|                              |  |  |   |                        |  |   |                 |  |   |             |  |   |             |  |   |              | 
|----------------------------- |  |  | - | ---------------------- |  | - | --------------- |  | - | ----------- |  | - | ----------- |  | - | ------------ | 
|                              |  |  |   | Payments due by Period
|                              |  |  |   | Total                  |  |   | Less than 1Year |  |   | 1 - 3 Years |  |   | 3 - 5 Years |  |   | After 5Years | 
|                             
|Facility operating leases     |  |  | $ | 9,435,945              |  | $ | 2,572,281       |  | $ | 3,026,081   |  | $ | 3,081,697   |  | $ | 755,886      | 
|Capital lease obligations     |  |  |   | 454,075                |  |   | 176,418         |  |   | 238,694     |  |   | 38,963      |  |   | -            | 
|Notes payable                 |  |  |   | 100,708                |  |   | 67,139          |  |   | 33,569      |  |   | -           |  |   | -            | 
|License agreements            |  |  |   | 1,225,000              |  |   | 175,000         |  |   | 350,000     |  |   | 350,000     |  |   | 350,000      | 
|Total contractual obligations |  |  | $ | 11,215,728             |  | $ | 2,990,838       |  | $ | 3,648,344   |  | $ | 3,470,660   |  | $ | 1,105,886    | 

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Our
license agreements also include royalty and other contingent payment obligations and may
be terminated by us under certain conditions.

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

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

Item 7A. 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 June 30, 2007, our cash and cash equivalents were $31.4
million and investments, which consisted of mutual funds, were $2.3 million. As of June
30, 2006, our cash and cash equivalents were $28.3 million and investments, which
consisted of mutual funds, were $2.3 million. Due to the average maturity and conservative
nature of our investment portfolio, we do not believe that short term fluctuations in
interest rates would materially affect the value of our securities.

Foreign
Currency Risk. Certain of our operating expenses are billed to us and settled in foreign
currencies, primarily the Euro. As of June 30, 2007 and 2006, the amount of accounts
payable and accrued expenses denominated in Euros was approximately $0.2 million.
Percentage increases in the U.S. dollar cost of Euros would result in corresponding
increases in such liabilities. We have not hedged our exposures to foreign exchange
fluctuations. However, we monitor our foreign-currency denominated liabilities and
commitments on an ongoing basis and may enter into hedging transactions in the future.

26

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Table of Contents

Item 8. Financial Statements and
Supplementary Data.

Table of ContentsConsolidated Financial
Statements

The following consolidated financial
statements of the Company are filed as part of this Report:

| |                                                              |     
| | ------------------------------------------------------------ | ----
| |                                                              | Page
|
| | Report of Independent Registered Public
     Accounting Firm | 28  
|
| | Consolidated Balance Sheets                                  | 29  
|
| | Consolidated Statements of
     Operations                   | 30  
|
| | Consolidated Statements of Cash Flows                        | 31  
|
| | Consolidated Statements of Stockholders'
     Equity         | 32  
|
| | Notes to Consolidated Financial
     Statements              | 33  

27

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Table of Contents (Financial)

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
and StockholdersPalatin Technologies, Inc.:

We
have audited the accompanying consolidated balance sheets of Palatin Technologies, Inc.
and subsidiary as of June 30, 2007 and 2006, and the related consolidated statements of
operations, cash flows, and stockholders equity for each of the years in the
three-year period ended June 30, 2007. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Palatin Technologies, Inc. and
subsidiary as of June 30, 2007 and 2006, and the results of their operations and their
cash flows for each of the years in the three-year period ended June 30, 2007, in
conformity with U.S. generally accepted accounting principles.

As
discussed in Note 2, the Company adopted SFAS No. 123(R), Share-Based Payment,effective
July 1, 2005 using the modified prospective method.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Palatin Technologies, Inc.s
internal control over financial reporting as of June 30, 2007, based on criteria
established in Internal Control  Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
September 12, 2007 expressed an unqualified opinion on managements assessment of,
and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Philadelphia, PennsylvaniaSeptember
12, 2007

28

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.

Consolidated Balance Sheets

|                                                                    |  |               |   |               |   |  |   |              |  
|------------------------------------------------------------------- |  | ------------- | - | ------------- | - |  | - | ------------ | -
|                                                                    |  | June 30, 2007 |   | June 30, 2006
|ASSETS                                                              |  |               |   |               |   |  |   |              |  
|Current assets:                                                     |  |              
|Cash and cash equivalents                                           |  |               | $ | 31,447,615    |   |  | $ | 28,333,211   |  
|Available-for-sale investments                                      |  |               |   | 2,323,642     |   |  |   | 2,330,834    |  
|Accounts receivable                                                 |  |               |   | 607,841       |   |  |   | 69,591       |  
|Prepaid expenses and other current assets                           |  |               |   | 1,008,464     |   |  |   | 1,453,650    |  
|Total current assets                                                |  |               |   | 35,387,562    |   |  |   | 32,187,286   |  
|                                                                   
|Property and equipment, net                                         |  |               |   | 6,070,226     |   |  |   | 6,347,705    |  
|Restricted cash                                                     |  |               |   | 475,000       |   |  |   | 475,000      |  
|Other assets                                                        |  |               |   | 848,446       |   |  |   | 1,037,296    |  
|Total assets                                                        |  |               | $ | 42,781,234    |   |  | $ | 40,047,287   |  
|                                                                   
|LIABILITIES AND STOCKHOLDERS' EQUITY                                |  |              
|Current liabilities:                                                |  |              
|Capital lease obligations and notes payable, current portion        |  |               | $ | 216,841       |   |  | $ | 86,564       |  
|Accounts payable                                                    |  |               |   | 1,120,894     |   |  |   | 3,092,962    |  
|Accrued expenses                                                    |  |               |   | 2,420,837     |   |  |   | 4,466,428    |  
|Accrued compensation                                                |  |               |   | 941,300       |   |  |   | 803,900      |  
|Deferred revenue, current portion                                   |  |               |   | 4,864,833     |   |  |   | 3,995,575    |  
|Total current liabilities                                           |  |               |   | 9,564,705     |   |  |   | 12,445,429   |  
|                                                                   
|Capital lease obligations and notes payable, net of current portion |  |               |   | 275,126       |   |  |   | 229,585      |  
|Deferred rent, net of current portion                               |  |               |   | 1,966,628     |   |  |   | 2,358,550    |  
|Deferred revenue, net of current portion                            |  |               |   | 12,443,087    |   |  |   | 6,713,942    |  
|Total liabilities                                                   |  |               |   | 24,249,546    |   |  |   | 21,747,506   |  
|                                                                   
|Commitments and contingencies (Note 8)                              |  |              
|                                                                   
|Stockholders equity:                                               |  |              
|Preferred stock of $.01 par value  authorized 10,000,000 shares;   |  |              
|Series A Convertible; issued and outstanding 4,997 and 9,997 shares |  |              
|as of June 30, 2007 and 2006, respectively                          |  |               |   | 50            |   |  |   | 100          |  
|Common stock of $.01 par value  authorized 150,000,000 shares;     |  |              
|issued and outstanding 85,126,915 and 70,878,521 shares as of       |  |              
|June 30, 2007 and 2006, respectively                                |  |               |   | 851,269       |   |  |   | 708,785      |  
|Additional paid-in capital                                          |  |               |   | 205,875,438   |   |  |   | 178,089,176  |  
|Accumulated other comprehensive loss                                |  |               |   | -             |   |  |   | (54,736      | )
|Accumulated deficit                                                 |  |               |   | (188,195,069  | ) |  |   | (160,443,544 | )
|Total stockholders equity                                          |  |               |   | 18,531,688    |   |  |   | 18,299,781   |  
|Total liabilities and stockholders equity                          |  |               | $ | 42,781,234    |   |  | $ | 40,047,287   |  

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

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.

Consolidated Statements of
Operations

|                                                        |  |                     |             |      |  |      |             |   |  |   |             |  
|------------------------------------------------------- |  | ------------------- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                        |  | Year Ended June 30,
|                                                        |  | 2007                |             | 2006 |  | 2005
|REVENUES:                                               |  |                     |             |      |  |      |             |   |  |  
|Licenses, grants and contracts                          |  | $                   | 14,405,665  |      |  | $    | 18,239,783  |   |  | $ | 13,896,818  |  
|Royalties                                               |  |                     | -           |      |  |      | 1,508,862   |   |  |   | 1,586,050   |  
|Product sales                                           |  |                     | -           |      |  |      | -           |   |  |   | 2,474,325   |  
|Total revenues                                          |  |                     | 14,405,665  |      |  |      | 19,748,645  |   |  |   | 17,957,193  |  
|                                                       
|OPERATING EXPENSES:                                     |  |                    
|Cost of product sales                                   |  |                     | -           |      |  |      | 2,041,175   |   |  |   | 534,932     |  
|Royalties                                               |  |                     | -           |      |  |      | 299,995     |   |  |   | 328,401     |  
|Research and development                                |  |                     | 36,913,739  |      |  |      | 41,013,894  |   |  |   | 25,045,279  |  
|General and administrative                              |  |                     | 7,293,090   |      |  |      | 6,843,817   |   |  |   | 7,460,607   |  
|Total operating expenses                                |  |                     | 44,206,829  |      |  |      | 50,198,881  |   |  |   | 33,369,219  |  
|                                                       
|Loss from operations                                    |  |                     | (29,801,164 | )    |  |      | (30,450,236 | ) |  |   | (15,412,026 | )
|                                                       
|OTHER INCOME (EXPENSE):                                 |  |                    
|Investment income                                       |  |                     | 1,324,671   |      |  |      | 855,601     |   |  |   | 488,262     |  
|Interest expense                                        |  |                     | (53,339     | )    |  |      | (30,522     | ) |  |   | (14,487     | )
|Total other income, net                                 |  |                     | 1,271,332   |      |  |      | 825,079     |   |  |   | 473,775     |  
|                                                       
|Loss before income taxes                                |  |                     | (28,529,832 | )    |  |      | (29,625,157 | ) |  |   | (14,938,251 | )
|Income tax benefit                                      |  |                     | 778,308     |      |  |      | 666,275     |   |  |   | 580,275     |  
|                                                       
|NET LOSS                                                |  | $                   | (27,751,524 | )    |  | $    | (28,958,882 | ) |  | $ | (14,357,976 | )
|                                                       
|Basic and diluted net loss per common share             |  | $                   | (0.36       | )    |  | $    | (0.48       | ) |  | $ | (0.27       | )
|                                                       
|Weighted average number of common shares  outstanding   |  |                    
|used in computing basic and diluted net loss per common |  |                    
|share                                                   |  |                     | 76,204,160  |      |  |      | 60,356,610  |   |  |   | 53,861,182  |  

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

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.

Consolidated Statements of Cash Flows

|                                                     |  |                     |             |      |  |      |             |   |  |   |             |  
|---------------------------------------------------- |  | ------------------- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                     |  | Year Ended June 30,
|                                                     |  | 2007                |             | 2006 |  | 2005
|CASH FLOWS FROM OPERATING ACTIVITIES:                | 
|Net loss                                             |  | $                   | (27,751,525 | )    |  | $    | (28,958,882 | ) |  | $ | (14,357,976 | )
|Adjustments to reconcile net loss to net cash        |  |                    
|used in operating activities:                        |  |                    
|Depreciation and amortization                        |  |                     | 1,449,577   |      |  |      | 1,263,899   |   |  |   | 1,075,306   |  
|Realized loss on investments                         |  |                     | 61,928      |      |  |      | -           |   |  |   | 114,551     |  
|Stock-based compensation                             |  |                     | 1,726,825   |      |  |      | 1,167,177   |   |  |   | 983         |  
|Changes in certain operating assets and liabilities: |  |                    
|Accounts receivable                                  |  |                     | (538,250    | )    |  |      | 5,371,834   |   |  |   | (5,441,425  | )
|Inventories                                          |  |                     | -           |      |  |      | 1,382,160   |   |  |   | (1,382,160  | )
|Prepaid expenses and other                           |  |                     | 673,991     |      |  |      | 805,368     |   |  |   | (2,422,621  | )
|Accounts payable                                     |  |                     | (1,972,068  | )    |  |      | (1,680,335  | ) |  |   | 2,753,327   |  
|Accrued expenses and other                           |  |                     | (2,300,113  | )    |  |      | 155,622     |   |  |   | 1,174,199   |  
|Deferred revenues                                    |  |                     | 6,598,403   |      |  |      | (2,954,749  | ) |  |   | 13,422,266  |  
|Net cash used in operating activities                |  |                     | (22,051,232 | )    |  |      | (23,447,906 | ) |  |   | (5,063,550  | )
|                                                    
|CASH FLOWS FROM INVESTING ACTIVITIES:                |  |                    
|Maturity of investments                              |  |                     | -           |      |  |      | -           |   |  |   | 50,000      |  
|Purchases of property and equipment                  |  |                     | (862,471    | )    |  |      | (819,953    | ) |  |   | (968,001    | )
|Net cash used in investing                           |  |                    
|activities                                           |  |                     | (862,471    | )    |  |      | (819,953    | ) |  |   | (918,001    | )
|                                                    
|CASH FLOWS FROM FINANCING ACTIVITIES:                |  |                    
|Payments on capital lease obligations and notes      |  |                    
|payable                                              |  |                     | (173,764    | )    |  |      | (40,268     | ) |  |   | (33,491     | )
|Proceeds from common stock, stock option             |  |                    
|and warrant issuances, net                           |  |                     | 26,201,871  |      |  |      | 36,920,974  |   |  |   | 3,788,330   |  
|Net cash provided by financing activities            |  |                     | 26,028,107  |      |  |      | 36,880,706  |   |  |   | 3,754,839   |  
|                                                    
|NET INCREASE (DECREASE) IN CASH                      |  |                    
|AND CASH EQUIVALENTS                                 |  |                     | 3,114,404   |      |  |      | 12,612,847  |   |  |   | (2,226,712  | )
|                                                    
|CASH AND CASH EQUIVALENTS, beginning                 |  |                    
|of year                                              |  |                     | 28,333,211  |      |  |      | 15,720,364  |   |  |   | 17,947,076  |  
|                                                    
|CASH AND CASH EQUIVALENTS, end of year               |  | $                   | 31,447,615  |      |  | $    | 28,333,211  |   |  | $ | 15,720,364  |  
|                                                    
|SUPPLEMENTAL CASH FLOW INFORMATION:                  |  |                    
|Cash paid for interest                               |  | $                   | 53,339      |      |  | $    | 30,522      |   |  | $ | 14,171      |  
|Equipment acquired under financing arrangements      |  |                     | 316,862     |      |  |      | 326,214     |   |  |   | -           |  
|Tenant allowances recognized in deferred rent        |  |                     | -           |      |  |      | -           |   |  |   | 210,924     |  
|Common stock issued for license fees                 |  |                     | -           |      |  |      | -           |   |  |   | 317,900     |  

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

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.

Consolidated Statements of Stockholders Equity

|                                           |                 |              |         |          |               |              |      |         |       |            |  |   |         |  |   |             |   |   |         |   |   |         |   |   |              |   |   |             |  
|------------------------------------------ | --------------- | ------------ | ------- | -------- | ------------- | ------------ | ---- | ------- | ----- | ---------- |  | - | ------- |  | - | ----------- | - | - | ------- | - | - | ------- | - | - | ------------ | - | - | ----------- | -
|                                           | Accumulated     |             
|                                           | Additional      |              | Other   |         
|                                           | Preferred Stock | Common Stock | Paid-in | Deferred | Comprehensive | Accumulated  |     
|                                           | Shares          | Amount       | Shares  | Amount   | Capital       | Compensation | Loss | Deficit | Total
|Balance, July 1, 2004                      |                 |              |         | 11,697   |               | $            | 117  |         |       | 52,790,589 |  | $ | 527,906 |  | $ | 136,148,482 |   | $ | (78,407 | ) | $ | (84,772 | ) | $ | (117,126,686 | ) | $ | 19,386,640  |  
|Sale of common shares, net of costs        |                 |              |         | -        |               |              | -    |         |       | 1,176,125  |  |   | 11,761  |  |   | 3,566,684   |   |   | -       |   |   | -       |   |   | -            |   |   | 3,578,445   |  
|Issuance of common shares for license fees |                 |              |         | -        |               |              | -    |         |       | 170,000    |  |   | 1,700   |  |   | 316,200     |   |   | -       |   |   | -       |   |   | -            |   |   | 317,900     |  
|Conversion of preferred shares             |                 |              |         | (250     | )             |              | (3   | )       |       | 9,505      |  |   | 95      |  |   | (92         | ) |   | -       |   |   | -       |   |   | -            |   |   | -           |  
|Exercise of options and warrants           |                 |              |         | -        |               |              | -    |         |       | 90,325     |  |   | 903     |  |   | 208,982     |   |   | -       |   |   | -       |   |   | -            |   |   | 209,885     |  
|Stock-based compensation                   |                 |              |         | -        |               |              | -    |         |       | -          |  |   | -       |  |   | (72,825     | ) |   | -       |   |   | -       |   |   | -            |   |   | (72,825     | )
|Amortization of deferred compensation      |                 |              |         | -        |               |              | -    |         |       | -          |  |   | -       |  |   | -           |   |   | 78,407  |   |   | -       |   |   | -            |   |   | 78,407      |  
|Comprehensive loss:                        |                 |             
|Unrealized loss on investments             |                 |              |         | -        |               |              | -    |         |       | -          |  |   | -       |  |   | -           |   |   | -       |   |   | (29,779 | ) |   | -            |   |   | (29,779     | )
|Reclassification adjustment for            |                 |             
|realized losses included in net loss       |                 | 114,551      |         |          |               |              |      | 114,551 |      
|Net loss                                   |                 |              |         | -        |               |              | -    |         |       | -          |  |   | -       |  |   | -           |   |   | -       |   |   | -       |   |   | (14,357,976  | ) |   | (14,357,976 | )
|Total comprehensive loss                   |                 |              |         |          |               | (14,273,204  | )   
|Balance, June 30, 2005                     |                 |              |         | 11,447   |               |              | 114  |         |       | 54,236,544 |  |   | 542,365 |  |   | 140,167,431 |   |   | -       |   |   | -       |   |   | (131,484,662 | ) |   | 9,225,248   |  
|Sale of common shares, net of costs        |                 |              |         | -        |               |              | -    |         |       | 15,478,013 |  |   | 154,780 |  |   | 34,669,275  |   |   | -       |   |   | -       |   |   | -            |   |   | 34,824,055  |  
|Conversion of preferred shares             |                 |              |         | (1,450   | )             |              | (14  | )       |       | 55,723     |  |   | 557     |  |   | (543        | ) |   | -       |   |   | -       |   |   | -            |   |   | -           |  
|Exercise of options and warrants           |                 |              |         | -        |               |              | -    |         |       | 1,108,241  |  |   | 11,083  |  |   | 2,085,836   |   |   | -       |   |   | -       |   |   | -            |   |   | 2,096,919   |  
|Stock-based compensation                   |                 |              |         | -        |               |              | -    |         |       | -          |  |   | -       |  |   | 1,167,177   |   |   | -       |   |   | -       |   |   | -            |   |   | 1,167,177   |  
|Comprehensive loss:                        |                 |             
|Unrealized loss on investments             |                 |              |         | -        |               |              | -    |         |       | -          |  |   | -       |  |   | -           |   |   | -       |   |   | (54,736 | ) |   | -            |   |   | (54,736     | )
|Net loss                                   |                 |              |         | -        |               |              | -    |         |       | -          |  |   | -       |  |   | -           |   |   | -       |   |   | -       |   |   | (28,958,882  | ) |   | (28,958,882 | )
|Total comprehensive loss                   |                 |              |         |          |               | (29,013,618  | )   
|Balance, June 30, 2006                     |                 |              |         | 9,997    |               |              | 100  |         |       | 70,878,521 |  |   | 708,785 |  |   | 178,089,176 |   |   | -       |   |   | (54,736 | ) |   | (160,443,544 | ) |   | 18,299,781  |  
|Sale of common shares, net of costs        |                 |              |         | -        |               |              | -    |         |       | 13,750,000 |  |   | 137,500 |  |   | 25,372,402  |   |   | -       |   |   | -       |   |   | -            |   |   | 25,509,902  |  
|Conversion of preferred shares             |                 |              |         | (5,000   | )             |              | (50  | )       |       | 199,203    |  |   | 1,992   |  |   | (1,942      | ) |   | -       |   |   | -       |   |   | -            |   |   | -           |  
|Exercise of options and warrants           |                 |              |         | -        |               |              | -    |         |       | 299,191    |  |   | 2,992   |  |   | 688,976     |   |   | -       |   |   | -       |   |   | -            |   |   | 691,969     |  
|Stock-based compensation                   |                 |              |         | -        |               |              | -    |         |       | -          |  |   | -       |  |   | 1,726,825   |   |   | -       |   |   | -       |   |   | -            |   |   | 1,726,825   |  
|Comprehensive loss:                        |                 |             
|Unrealized loss on investments             |                 |              |         | -        |               |              | -    |         |       | -          |  |   | -       |  |   | -           |   |   | -       |   |   | (7,192  | ) |   | -            |   |   | (7,192      | )
|Reclassification adjustment for            |                 |             
|realized losses included in net loss       |                 | 61,928       |         |          |               |              |      | 61,928  |      
|Net loss                                   |                 |              |         | -        |               |              | -    |         |       | -          |  |   | -       |  |   | -           |   |   | -       |   |   | -       |   |   | (27,751,525  | ) |   | (27,751,525 | )
|Total comprehensive loss                   |                 |              |         |          |               | (27,696,789  | )   
|Balance, June 30, 2007                     |                 |              |         | 4,997    |               | $            | 50   |         |       | 85,126,915 |  | $ | 851,269 |  | $ | 205,875,438 |   | $ | -       |   | $ | -       |   | $ | (188,195,069 | ) | $ | 18,531,688  |  

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

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements

(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 disorders and
inflammation-related diseases. The Company is exploring other receptor-specific
therapeutics, including congestive heart failure therapeutics.

Bremelanotide,
an MC receptor agonist, is a patented, nasally-administered peptide in clinical
development for the treatment of both male and female sexual dysfunction. In August 2004,
the Company entered into a collaborative development and marketing agreement with King
Pharmaceuticals, Inc. (King) for bremelanotide. See Note 11 regarding
subsequent events pertaining to the agreement with King.

The
Company has a licensing and research collaboration agreement with AstraZenecaAB
(AstraZeneca) to discover, develop and commercialize small molecule compounds
that target MC receptors for the treatment of obesity, diabetes and related metabolic
syndrome. The Company is also conducting research on peptidomimetic compounds for the
treatment of other disorders, including congestive heart failure. Certain compounds under
investigation result from the Companys MIDAS(TM)technology, a proprietary platform
technology to design and synthesize compounds that mimic the activity of peptides.

NeutroSpec
is the Companys radiolabeled monoclonal antibody product for imaging and diagnosing
infection and the subject of a strategic collaboration agreement with the Mallinckrodt
division of Covidien (Mallinckrodt). In July 2004, the Company received
approval from the U.S. Food and Drug Administration to market NeutroSpec for imaging and
diagnosing equivocal appendicitis. In December 2005, the Company and Mallinckrodt
voluntarily suspended the sales, marketing and distribution of NeutroSpec following the
occurrence of certain serious adverse events involving patients who received NeutroSpec.
Significant development activities pertaining to NeutroSpec are currently suspended while
the Company and Mallinckrodt evaluate future development and marketing alternatives.

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 June 30, 2007 and incurred a net loss for the fiscal year ended June 30, 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
June 30, 2007, together with expected receipts from collaboration and license agreements
and other income, are

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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, available-for-sale investments and
accounts receivable. The Companys cash and cash equivalents are primarily invested
in one money market fund sponsored by a large financial institution. The Companys
accounts receivable balance as of June 30, 2007 consists primarily of amounts due from
AstraZeneca.

Revenues
from collaboration partners as a percentage of total revenues were as follows (see Note 11
regarding subsequent events):

|             |                     |     |      |     |      |     | 
|------------ | ------------------- | --- | ---- | --- | ---- | --- | 
|             | Year Ended June 30, |    
|             | 2007                |     | 2006 |     | 2005 |    
|King         |                     | 90% |      | 91% |      | 64% | 
|AstraZeneca  |                     | 9%  |      | -%  |      | -%  | 
|Mallinckrodt |                     | 1%  |      | 9%  |      | 36% | 

(2)   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 based on quoted market prices. Unrealized
holding gains and losses, net of the related tax effect, if any, are generally 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, capital lease obligations and notes payable. Management
believes that the carrying value of these assets and liabilities are representative of
their respective fair values based on quoted market prices for investments and the
short-term nature of the other instruments.

Inventories The
Companys inventories of NeutroSpec were valued at the lower of cost or market using
the first-in, first-out method and excluded certain costs incurred prior to the FDA
approval of NeutroSpec in July 2004, which were charged directly to research and
development expense. Inventory costs consisted primarily of costs to third-party vendors
for work-in-progress materials and did not include

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general and administrative costs. In
the year ended June 30, 2006, the Company wrote off existing inventories of NeutroSpec
upon suspension of sales and marketing activities with a charge of $2,041,175 to cost of
product sales.

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 expense.
Maintenance and repairs are expensed as incurred while expenditures that extend the useful
life of an asset are capitalized.

Impairment
of Long-Lived Assets  The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. To determine recoverability of a long-lived asset,
management evaluates whether the estimated future undiscounted net cash flows from the
asset, without interest charges, are less than its carrying amount. If impairment is
indicated, the long-lived asset would be written down to fair value. Fair value is
determined by an evaluation of available price information at which assets could be bought
or sold, including quoted market prices, if available, or the present value of the
estimated future 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,
Revenue Recognition and, by analogy, to paragraph 4 of Financial Accounting
Standards Board (FASB) Technical Bulletin 90-1, Accounting for
Separately Priced Extended Warranty and Product Maintenance Contracts. See Note 11
regarding subsequent events.

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  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 on a straight-line basis 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.

Royalty
revenues represent amounts due from Mallinckrodt and were earned based on a contractual
percentage of Mallinckrodts net sales of NeutroSpec to customers. 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.

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

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.

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Stock
Options  Effective July 1, 2005, the Company adopted Statement of Financial
Accounting Standards (SFAS) 123(R), Share-Based Payment, using the
modified prospective method. 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), 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 below, the Company
accounted for option forfeitures as they occurred, rather than based on estimates of
future forfeitures.

The
pro forma impact on the Companys net loss using the fair-value-based method of
accounting for stock-based compensation under SFAS 123 for the year ended June 30, 2005 is
as follows:

|                                                                                                        |   |             |  
|------------------------------------------------------------------------------------------------------- | - | ----------- | -
|Net loss:                                                                                               |   |             |  
|As reported                                                                                             | $ | (14,357,976 | )
|Stock-based employee compensation expense included
        in the determination of net loss as reported |   | (15,879     | )
|Impact of total stock-based compensation expense
        determined under fair-value-based method       |   | (1,067,519  | )
|Pro forma                                                                                               | $ | (15,441,374 | )
|Basic and diluted net loss per common share:                                                            |   |             |  
|As reported                                                                                             | $ | (0.27       | )
|Pro forma                                                                                               | $ | (0.29       | )
|                                                                                                       
|Weighted average valuation assumptions:                                                                 |   |             |  
|Expected life of options in years                                                                       |   | 7           |  
|Risk-free interest rate                                                                                 |   | 3.9%        |  
|Expected volatility                                                                                     |   | 87%         |  
|Expected dividend yield                                                                                 |   | 0%          |  

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. 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 or
operating loss and tax credit 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
the period that includes the enactment date.

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

During
the years ended June 30, 2007, 2006 and 2005, the Company sold New Jersey state net
operating loss carryforwards and research and development credit carryforwards, which
resulted in the recognition of tax benefits.

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, including stock options and warrants, restricted stock units
and shares of Series A Convertible Preferred Stock. For the years ended June 30, 2007,
2006 and 2005, there were no dilutive effects of such securities as the Company incurred a
net loss in each period. Common shares issuable upon conversion of Series A Convertible
Preferred Stock, the exercise of outstanding options and warrants and the vesting of
restricted stock units amounted to an aggregate of 16,512,769, 15,954,843, and 13,384,915
as of June 30, 2007, 2006 and 2005, respectively.

New
Accounting Pronouncements  The FASB has issued SFAS 157, Fair Value
Measurements, which addresses how companies should measure fair value for
recognition or disclosure purposes, and SFAS 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which permits companies to measure
certain financial instruments and other items at fair value. The Company will be required
to adopt these standards beginning with its fiscal year ending June 30, 2008. The impact
of adopting these standards on the Companys consolidated financial statements is not
known.

(3)   AGREEMENT
WITH KING

In
August 2004, the Company entered into a Collaborative Development and Marketing Agreement
with King to jointly develop and commercialize bremelanotide. Pursuant to the terms of the
agreement, King and Palatin share collaboration development and marketing costs and
collaboration net profits derived from net sales of bremelanotide in North America based
on an agreed percentage.

King
paid the Company $20,000,000 at the closing of the agreement in August 2004 and purchased
Company common stock and warrants for an aggregate of $10,000,000 in September 2005, as
described in Note 9.

Of
the $20,000,000 payment received at closing, $3,606,672 was recorded as equity, based on
the estimated fair value of 1,176,125 shares of common stock and three-year warrants to
purchase 235,225 shares of common stock at $4.25 per share which were issued to King, and
$16,393,328 was recorded as deferred revenue related to licenses granted to King and
services to be performed by the Company. The Company has determined that the licenses and
services should be evaluated together as a single unit of accounting for the purposes of
revenue recognition based on guidance in EITF Issue 00-21, Revenue Arrangements with
Multiple Deliverables. Accordingly, the deferred revenue is being recognized as
revenue over the period of the Companys performance during the initial development
term of this agreement, which, as of June 30, 2007, was estimated to be approximately six
years from the inception of the agreement. Specific performance periods are not stated in
the agreement and have been 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. Increases
in the estimated performance period 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. For the years ended June 30, 2007, 2006 and 2005, the Company
recognized as revenue $2,808,441, $3,159,496 and $3,360,394, respectively, of the deferred
revenue.

See
Note 11 regarding subsequent events.

(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 the treatment of obesity, diabetes and
related metabolic syndrome.

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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 $300,000,000, with up to
$180,000,000 contingent upon development and regulatory milestones and the balance
contingent on achievement of sales targets. In addition, the Company would receive
royalties on sales of any 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 pursuant to
EITF Issue 00-21. 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
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. 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.
For the year ended June 30, 2007, the Company recognized as revenue $694,444 of the
deferred revenue.

(5)   INVESTMENTS

The
following is a summary of available-for-sale investments, which consist of mutual funds
that invest primarily in debt instruments:

|                        |  |   |              |  |  |   |              |  
|----------------------- |  | - | ------------ |  |  | - | ------------ | -
|                        |  |   | June 30,2007 |  |  |   | June 30,2006 |  
|Cost                    |  | $ | 2,323,642    |  |  | $ | 2,385,570    |  
|Gross unrealized losses |  |   | -            |  |  |   | (54,736      | )
|Fair value              |  | $ | 2,323,642    |  |  | $ | 2,330,834    |  

The
Company recorded realized losses of $61,928, $0 and $114,551 in its statement of
operations for the years ended June 30, 2007, 2006 and 2005, respectively, upon
determining that certain previously-unrealized losses were other than temporary, and
reduced the cost basis of the underlying securities accordingly.

(6)   PROPERTY AND EQUIPMENT, NET

Property
and equipment, net, consists of the following:

|                                                          |  |   |              |   |  |   |              |  
|--------------------------------------------------------- |  | - | ------------ | - |  | - | ------------ | -
|                                                          |  |   | June 30,2007 |   |  |   | June 30,2006 |  
|Office equipment                                          |  | $ | 1,928,219    |   |  | $ | 1,758,232    |  
|Laboratory equipment                                      |  |   | 3,695,680    |   |  |   | 3,041,209    |  
|Leasehold improvements                                    |  |   | 7,066,008    |   |  |   | 6,766,782    |  
|                                                          |  |   | 12,689,906   |   |  |   | 11,566,223   |  
|Less: Accumulated depreciation and
          amortization |  |   | (6,619,680   | ) |  |   | (5,218,518   | )
|                                                          |  | $ | 6,070,226    |   |  | $ | 6,347,705    |  

The
cost of assets acquired under capital leases amounted to $663,612 and $438,250 as of June
30, 2007 and 2006, respectively. Accumulated amortization associated with assets acquired
under capital leases amounted to $189,984 and $79,115 as of June 30, 2007 and 2006,
respectively.

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(7)   ACCRUED EXPENSES

Accrued
expenses consist of the following:

|                               |  |   |              |  |  |   |              | 
|------------------------------ |  | - | ------------ |  |  | - | ------------ | 
|                               |  |   | June 30,2007 |  |  |   | June 30,2006 | 
|Clinical study costs           |  | $ | 147,798      |  |  | $ | 893,041      | 
|Formulation development        |  |   | 203,250      |  |  |   | 1,000,000    | 
|Other operating expenses       |  |   | 635,810      |  |  |   | 1,146,635    | 
|Deferred rent, current portion |  |   | 959,303      |  |  |   | 852,546      | 
|Other                          |  |   | 474,676      |  |  |   | 574,206      | 
|                               |  | $ | 2,420,837    |  |  | $ | 4,466,428    | 

(8)   COMMITMENTS AND
CONTINGENCIES

Leases
 The Company currently leases facilities under three non-cancelable operating
leases. Future minimum lease payments under these leases are as follows:

| |                      |  |                 | 
| | -------------------- |  | --------------- | 
| | Year Ending June 30,
| | 2008                 |  | $     2,572,281 | 
| | 2009                 |  | 1,511,736       | 
| | 2010                 |  | 1,514,345       | 
| | 2011                 |  | 1,540,148       | 
| | 2012                 |  | 1,541,549       | 
| | Thereafter           |  | 755,886         | 

For
the years ended June 30, 2007, 2006 and 2005, rent expense was $1,657,842, $1,630,165 and
$897,856, respectively.

Capital
Leases and Notes Payable  The Company has acquired certain of its laboratory equipment
under leases classified as capital leases and with financing agreements.  Scheduled
future payments related to notes payable and capital leases as of June 30, 2007 are as
follows:

| |                              |  |          |   | 
| | ---------------------------- |  | -------- | - | 
| | Year Ending June 30,        
| | 2008                         |  | $243,557 |   | 
| | 2009                         |  | 188,891  |   | 
| | 2010                         |  | 83,372   |   | 
| | 2011                         |  | 22,264   |   | 
| | 2012                         |  | 16,699   |   | 
| | Total                        |  | 554,783  |   | 
| | Amount representing interest |  | (62,816  | ) | 
| | Net                          |  | $491,967 |   | 

Employment
Agreements  The Company has employment agreements with three executive officers,
which provide a stated annual compensation amount, subject to annual increases, and annual
bonus compensation in an amount to be approved by the Companys Board of Directors.
Each agreement allows the Company or the employee to terminate the agreement in certain
circumstances. In some circumstances, early termination by the Company may result in
severance pay to the employee for a period of 18 to 24 months at the salary then in
effect, continuation of health insurance premiums over the severance period and immediate
vesting of all stock options. Termination following a change in control will result in a
lump sum payment of one and one-half to two times the salary then in effect and immediate
vesting of all stock options.

License
Agreements  The Company has a license agreement for patent rights related to certain
compounds and methods of treatment for sexual dysfunction that requires minimum payments
of $150,000 per year. The license agreement requires contingent payments based on certain
up-front fees the Company receives as a result of a sublicense. The Company does not
reasonably expect to sublicense such rights or make any material contingent payments
during the next twelve months.

The
Company has license agreements related to NeutroSpec that require minimum annual payments
of $25,000, royalty payments on commercial net sales and payments of up to $2,250,000

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contingent on the achievement of
specified cumulative net margins on sales. No royalty payments or other contingent
amounts will be payable under these agreements unless the Company recommences sales and
marketing of NeutroSpec. The Company does not reasonably expect to make any such
contingent payments during the next twelve months.

Employee
Retirement Savings Plan  The Company maintains a defined contribution 401(k) plan
for the benefit of its employees. The Company currently matches a portion of employee
contributions to the plan. In the years ended June 30, 2007, 2006 and 2005, Company
contributions amounted to $211,778, $180,248 and $149,236, respectively.

Contingencies
 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 a reduction in expense in a future accounting period. The Company
records legal expenses associated with such contingencies as incurred.

Competitive
Technologies, Inc. (CTI) initiated arbitration proceedings with the Company
for breach of the terms of its license agreement for patent rights related to certain
compounds and methods of treatment for sexual dysfunction and for other actions asserted
to arise out of the license agreement. CTI also alleges that the Company committed certain
tortious acts against CTI, including fraud and negligent misrepresentation relating to
entering into the license agreement originally and tortious interference with business
expectancy concerning termination by the Company and King of the sublicense of the CTI
license agreement to King. CTI is seeking unspecified damages in excess of $500,000. In
addition, CTI seeks a declaration that bremelanotide is covered by the license agreement.
The Company filed a reply to CTIs statement of claim, denying all material
allegations asserted by CTI, and asserting counterclaims against CTI for declaratory
judgment that claims are barred by the previous settlement agreement with CTI and that
bremelanotide is not subject to the license agreement with CTI. The license agreement
provides for binding arbitration as the remedy for dispute resolution. Motions for summary
adjudication of certain claims have been filed by the Company and CTI, and limited
discovery has been conducted relating to the motions. Oral argument on the motions for
summary adjudication is scheduled in the second half of calendar 2007, with a hearing on
the merits, if required, currently scheduled for the first half of calendar 2008.

CTI
also initiated litigation against the Company by filing a suit in Connecticut Superior
Court for breach of the settlement agreement of an earlier arbitration between CTI and the
Company. CTI generally asserted that the Company failed to timely register for resale
shares of its common stock valued at approximately $300,000 issued to CTI in the
settlement, and additionally asserted claims for breach of implied warranties, unfair
trade practices, fraudulent inducement, fraudulent non-disclosure and fraud. The Company
denied all material allegations of CTIs claims and asserted defenses and
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 the Company may
receive 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 filed a
reply generally denying the Companys counterclaims and asserting defenses. Discovery
has been initiated by both CTI and the Company.

On
September 10, 2007 the Company received a Notice of Termination of the License Agreement from
CTI, asserting a breach of the license agreement relating to the Companys agreement with
King, and seeking termination of the license agreement with CTI.  The Notice further
provides sixty days for the Company to cure the asserted breach or otherwise respond.

The
Company cannot reasonably predict the outcome of the disputes or reasonably estimate the
range of potential loss, if any. Although the amount of any liability that could arise
with respect to these matters cannot be predicted, the Company does not believe that the
resolution of these matters will have a material adverse effect on its financial position,
results of operations or liquidity.

The
Company is subject to an inherent risk of product liability claims as a result of the
testing and marketing of its products. 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 the related
litigation.

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(9)   STOCKHOLDERS EQUITY

Series
A Convertible Preferred Stock  As of June 30, 2007, 4,997 shares of Series A
Convertible Preferred Stock were outstanding. Each share of Series A Convertible Preferred
Stock is convertible at any time, at the option of the holder, into the number of shares
of common stock equal to $100 divided by the Series A Conversion Price. As of
June 30, 2007, the Series A Conversion Price is $2.51, so each share of Series A
Convertible Preferred Stock is currently convertible into approximately 40 shares of
common stock. The Series A Conversion Price is subject to adjustment, under certain
circumstances, upon the sale or issuance of common stock for consideration per share less
than either (i) the Series A Conversion Price in effect on the date of such sale or
issuance, or (ii) the market price of the common stock as of the date of such sale or
issuance. The Series A Conversion Price is also subject to adjustment upon the occurrence
of a merger, reorganization, consolidation, reclassification, stock dividend or stock
split which will result in an increase or decrease in the number of shares of common stock
outstanding. Shares of Series A Convertible Preferred Stock have a preference in
liquidation, including certain merger transactions, of $100 per share, or $499,700 in the
aggregate as of June 30, 2007.

Common
Stock Transactions  In August 2004, upon the signing of the Companys
collaborative development and marketing agreement with King, the Company issued to King
1,176,125 shares of common stock and three-year warrants to purchase 235,225 shares of
common stock at an exercise price of $4.25 per share. Of the $20,000,000 aggregate
payment received from King upon signing, $3,606,672 was allocated to the shares and
warrants based on their estimated fair market value. In September 2005, the Company sold
to King 4,499,336 shares of its common stock and three-year warrants to purchase 719,894
shares of common stock at an exercise price of $2.22 per share for an aggregate purchase
price of $10,000,000. The sale of the stock and warrants was made pursuant to the Companys
collaborative development and marketing agreement with King.

In
April 2006, the Company sold 10,978,677 units in a private placement for a total purchase
price of $26,800,000. Each unit consisted of one share of its common stock and a five-year
warrant to purchase 0.30 shares of common stock at an exercise price of $2.88 per share.
Net proceeds to the Company, after offering costs, amounted to approximately $24,800,000.

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

Outstanding
Stock Purchase Warrants  As of June 30, 2007, the Company had outstanding warrants
exercisable for shares of common stock as follows:

| |                       |           |                         |                        |       |          | 
| | --------------------- | --------- | ----------------------- | ---------------------- | ----- | -------- | 
| | Shares of CommonStock |           | Exercise Price perShare | Latest TerminationDate |      
| |                       | 25,752    |                         |                        | $1.37 | 07/29/07 | 
| |                       | 51,502    |                         |                        | 1.46  | 07/29/07 | 
| |                       | 823,758   |                         |                        | 1.54  | 11/29/07 | 
| |                       | 2,464,789 |                         |                        | 1.77  | 03/21/08 | 
| |                       | 719,894   |                         |                        | 2.22  | 09/26/08 | 
| |                       | 182,705   |                         |                        | 2.75  | 07/29/07 | 
| |                       | 15,000    |                         |                        | 2.82  | 05/13/12 | 
| |                       | 3,293,591 |                         |                        | 2.88  | 04/17/11 | 
| |                       | 50,000    |                         |                        | 2.97  | 11/30/07 | 
| |                       | 25,000    |                         |                        | 3.38  | 11/30/07 | 
| |                       | 15,000    |                         |                        | 4.00  | 12/15/10 | 
| |                       | 1,041,750 |                         |                        | 4.06  | 01/28/09 | 
| |                       | 235,225   |                         |                        | 4.25  | 08/18/07 | 
| |                       | 8,943,966 |                         |                       

In
November 2004, the Company issued warrants to purchase 75,000 shares of common stock at
prices between $2.97 and $3.375 per share as partial consideration for financial advisory
services rendered during the year ended June 30, 2005. The warrants expire in November
2007. The fair value of these

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warrants of approximately $101,000,
as calculated by the Black-Scholes option pricing model, is included in general and
administrative expenses in the year ended June 30, 2005.

Stock
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
and other stock-based awards to employees, non-employee directors and consultants for up
to 5,000,000 shares of common stock. 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 generally expire ten years from the date of grant and generally
vest over three to four years. As of June 30, 2007, 2,795,777 shares were available for
grant under the 2005 Stock Plan.

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

The
following table summarizes option activity for the years ended June 30, 2007, 2006 and
2005:

|                 |  |                 |   |                              |     |                 |           |                              |    |                 |  |                              |   |    |    
|---------------- |  | --------------- | - | ---------------------------- | --- | --------------- | --------- | ---------------------------- | -- | --------------- |  | ---------------------------- | - | -- | ---
|                 |  | 2007            |   | 2006                         |     | 2005            |          
|                 |  | Number ofShares |   | WeightedAverageExercisePrice |     | Number ofShares |           | WeightedAverageExercisePrice |    | Number ofShares |  | WeightedAverageExercisePrice
|Outstanding at   |  |                 |   |                              |     |                 |           |                              |    |                 |  |                              |   |    |    
|beginning of     | 
|year             |  | 5,659,302       |   | $3                           | .12 |                 | 4,688,152 |                              | $3 | .41             |  | 4,365,601                    |   | $3 | .58
|Granted          |  | 1,406,975       |   | 2                            | .10 |                 | 1,276,297 |                              | 2  | .10             |  | 661,933                      |   | 2  | .45
|Forfeited        |  | (260,520        | ) | 1                            | .99 |                 | (149,527  | )                            | 2  | .33             |  | (69,134                      | ) | 3  | .50
|Exercised        |  | (78,460         | ) | 1                            | .48 |                 | (21,162   | )                            | 1  | .64             |  | (35,000                      | ) | 1  | .69
|Expired          |  | (332,577        | ) | 4                            | .52 |                 | (134,458  | )                            | 4  | .23             |  | (235,248                     | ) | 4  | .15
|Outstanding at   | 
|end of year      |  | 6,394,720       |   | 2                            | .89 |                 | 5,659,302 |                              | 3  | .12             |  | 4,688,152                    |   | 3  | .41
|Exercisable at   | 
|end of year      |  | 4,549,759       |   | 3                            | .18 |                 | 4,267,879 |                              | 3  | .41             |  | 3,830,910                    |   | 3  | .61
|Weighted average | 
|fair value of    | 
|options granted  | 
|during the year  |  |                 |   | $1                           | .52 |                 |           |                              | $1 | .38             |  |                              |   | $1 | .92

The
following table summarizes options outstanding as of June 30, 2007:

|                               |  |                 |  |                              |  |                              |  |                         | 
|------------------------------ |  | --------------- |  | ---------------------------- |  | ---------------------------- |  | ----------------------- | 
|                               |  | Number ofShares |  | WeightedAverageExercisePrice |  | WeightedAverageRemainingTerm |  | AggregateIntrinsicValue | 
|Options outstanding at end of  |  | 6,394,720       |  | $2.89                        |  | 6.4                          |  | $375,644                | 
|year                           | 
|Options vested and exercisable | 
|at end of year                 |  | 4,549,759       |  | 3.18                         |  | 5.4                          |  | 273,640                 | 
|Unvested options expected to   | 
|vest                           |  | 1,645,326       |  | 2.20                         |  | 8.7                          |  | 91,940                  | 

The
intrinsic value of options exercised in the years ended June 30, 2007, 2006 and 2005 was
$64,395, $21,368 and $32,384, respectively.

The
fair value of option grants is estimated at the grant date using the Black-Scholes model.
For grants during the year ended June 30, 2007, the Companys weighted average
assumptions for expected

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volatility, dividends, term and
risk-free interest rate were 80%, 0%, 6.2 years and 4.9%, respectively. For grants during
the year ended June 30, 2006, the Companys weighted average assumptions for
expected volatility, dividends, term and risk-free interest rate were 85%, 0%, 6.6 years
and 4.0%, respectively. Expected volatilities are based primarily on the Companys
historical volatility. The expected term of options is estimated based on the Companys
historical exercise and employment termination experience determined separately for
certain employee groups. The risk-free interest rate is based on U.S. Treasury yields for
securities with terms approximating the expected term of the option.

In
the years ended June 30, 2007 and 2006, in accordance with SFAS 123(R), the Company
recorded stock-based compensation related to stock options of $1,223,481 and $1,167,177,
respectively, representing approximately $0.02 per share in each year. The Company did not
record a tax benefit related to stock-based compensation expense. As of June 30, 2007,
there was $1,744,164 of total unrecognized compensation cost related to unvested options,
which is expected to be recognized over a weighted-average period of 1.4 years.

During
the year ended June 30, 2005, in accordance with APB 25, the Company reversed $15,879 of
previously-recognized stock-based compensation expense as a result of remeasuring certain
modified and performance-based options.

As
of June 30, 2007, options for 50,000 shares at an exercise price of $1.99 per share were
subject to vesting contingent on achievement of certain performance conditions.

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 year ended June 30, 2007, the Company recognized
$503,344 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.

(10)  INCOME TAXES

The
Company has had no income tax expense or benefit since inception because of operating
losses, except for amounts recognized for sales of New Jersey state operating loss
carryforwards. Deferred tax assets and liabilities are determined based on the estimated
future tax effect of differences between the financial statements and tax reporting basis
of assets and liabilities, as well as for operating loss carryforwards and research and
development credits, given the provisions of existing tax laws.

As
of June 30, 2007, the Company had federal and state net operating loss carryforwards of
approximately $163,000,000 and $113,000,000, respectively, which expire between 2008 and
2027 if not utilized. As of June 30, 2007 the Company had federal research and development
credits of approximately $4,500,000 that will begin to expire in 2012, if not utilized.

The
Tax Reform Act of 1986 (the Act) provides for limitation on the use of net
operating loss and research and development tax credit carryforwards following certain
ownership changes (as defined by the Act) that could limit the Companys ability to
utilize these carryforwards. The Company may have experienced various ownership changes,
as defined by the Act, as a result of past financings. Accordingly,

43

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Table of Contents (Financial)

the Companys ability to
utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws
limit the time during which these carryforwards may be applied against future taxes;
therefore the Company may not be able to take full advantage of these carryforwards for
federal and state income tax purposes.

The
Companys net deferred tax assets are as follows:

|                                             |  |   |              |   |  |   |              |  
|-------------------------------------------- |  | - | ------------ | - |  | - | ------------ | -
|                                             |  |   | June 30,2007 |   |  |   | June 30,2006 |  
|Net operating loss carryforwards             |  | $ | 63,610,000   |   |  | $ | 55,199,000   |  
|Research and development tax credits         |  |   | 4,513,000    |   |  |   | 3,967,000    |  
|Accrued expenses, deferred revenue and other |  |   | 8,569,000    |   |  |   | 5,091,000    |  
|                                             |  |   | 76,692,000   |   |  |   | 64,257,000   |  
|Valuation allowances                         |  |   | (76,692,000  | ) |  |   | (64,257,000  | )
|Net deferred tax assets                      |  | $ | -            |   |  | $ | -            |  

In
assessing the realizability of deferred tax assets, the Company considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income and the application of loss limitation provisions related to
ownership changes. Due to the Companys history of losses, the deferred tax assets
are fully offset by a valuation allowance as of June 30, 2007 and 2006. The valuation
allowance for the years ended June 30, 2007, 2006 and 2005 increased by $12,435,000,
$11,261,000 and $6,468,000, respectively, related primarily to additional net operating
losses incurred by the Company and the tax treatment of certain deferred revenue.

During
the years ended June 30, 2007, 2006 and 2005, the Company sold New Jersey state net
operating loss carryforwards, which resulted in the recognition of $778,308, $666,275 and
$580,275, respectively, in tax benefits.

(11)  SUBSEQUENT EVENTS

In
September 2007, the Company received notice from King terminating the Collaborative
Development and Marketing Agreement between the Company and King, in accordance with its
terms, effective December 5, 2007. The notice followed communication with representatives
of the FDA, which raised serious concerns about the benefits and risks of the progression
of bremelanotide into Phase 3 clinical studies for erectile dysfunction. Upon
termination, Palatin will solely own all rights to bremelanotide without any obligation
for future payments to King, other than any amounts payable for the reimbursement of
bremelanotide costs incurred by King prior to termination. King has no obligation for
future payments to Palatin, other than any amounts payable for the reimbursement of
bremelanotide costs incurred by Palatin prior to termination.

In
connection with the termination of the agreement, the Company expects to recognize in its
fiscal year ending June 30, 2008 all remaining deferred up-front license fees received
from King, together with associated deferred costs, which prior to termination were being
recognized as revenues and costs over the estimated period of the Companys
performance under the agreement. As of June 30, 2007, deferred revenue and deferred costs,
included in other current assets and other assets, amounted to $7,064,996 and $886,479,
respectively.

44

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Table of Contents (Financial)

(12)  CONSOLIDATED
QUARTERLY FINANCIAL DATA  UNAUDITED

The
following tables provide quarterly data for the years ended June 30, 2007 and 2006:

|                            |  |  |                                               |            |               |  |                  |            |                   |  |   |            |   |  |   |            |  
|--------------------------- |  |  | --------------------------------------------- | ---------- | ------------- |  | ---------------- | ---------- | ----------------- |  | - | ---------- | - |  | - | ---------- | -
|                            |  |  | Three Months Ended                           
|                            |  |  | June 30,2007                                  |            | March 31,2007 |  | December 31,2006 |            | September 30,2006
|                            |  |  | (amounts in thousands, except per share data)
|Total revenues              |  |  | $                                             | 2,638      |               |  | $                | 3,090      |                   |  | $ | 3,743      |   |  | $ | 4,935      |  
|Total operating expenses    |  |  |                                               | 9,147      |               |  |                  | 10,150     |                   |  |   | 11,224     |   |  |   | 13,686     |  
|Total other income, net     |  |  |                                               | 404        |               |  |                  | 339        |                   |  |   | 214        |   |  |   | 314        |  
|Loss before income taxes    |  |  |                                               | (6,105     | )             |  |                  | (6,721     | )                 |  |   | (7,267     | ) |  |   | (8,437     | )
|Income tax benefit          |  |  |                                               | -          |               |  |                  | -          |                   |  |   | 778        |   |  |   | -          |  
|Net loss                    |  |  | $                                             | (6,105     | )             |  | $                | (6,721     | )                 |  | $ | (6,489     | ) |  | $ | (8,437     | )
|Basic and diluted net loss  |  | 
|per common share            |  |  | $                                             | (0.07      | )             |  | $                | (0.09      | )                 |  | $ | (0.09      | ) |  | $ | (0.12      | )
|Weighted average number of  |  | 
|common shares outstanding   |  | 
|used in computing basic and |  | 
|diluted net loss per common |  | 
|share                       |  |  |                                               | 84,965,331 |               |  |                  | 78,052,712 |                   |  |   | 71,055,893 |   |  |   | 70,878,521 |  
|                           
|                            |  |  | Three Months Ended                           
|                            |  |  | June 30,2006                                  |            | March 31,2006 |  | December 31,2005 |            | September 30,2005
|                            |  |  | (amounts in thousands, except per share data)
|Total revenues              |  |  | $                                             | 4,973      |               |  | $                | 5,045      |                   |  | $ | 4,587      |   |  | $ | 5,144      |  
|Cost of product sales       |  |  |                                               | -          |               |  |                  | -          |                   |  |   | 2,041      |   |  |   | -          |  
|Royalties                   |  |  |                                               | -          |               |  |                  | -          |                   |  |   | 117        |   |  |   | 183        |  
|Other operating expenses    |  |  |                                               | 13,196     |               |  |                  | 12,793     |                   |  |   | 10,750     |   |  |   | 11,119     |  
|Total other income, net     |  |  |                                               | 346        |               |  |                  | 146        |                   |  |   | 211        |   |  |   | 122        |  
|Loss before income taxes    |  |  |                                               | (7,877     | )             |  |                  | (7,602     | )                 |  |   | (8,110     | ) |  |   | (6,036     | )
|Income tax benefit          |  |  |                                               | -          |               |  |                  | -          |                   |  |   | 666        |   |  |   | -          |  
|Net loss                    |  |  | $                                             | (7,877     | )             |  | $                | (7,602     | )                 |  | $ | (7,444     | ) |  | $ | (6,036     | )
|Basic and diluted net loss  |  | 
|per common share            |  |  | $                                             | (0.11      | )             |  | $                | (0.13      | )                 |  | $ | (0.13      | ) |  | $ | (0.11      | )
|Weighted average number of  |  | 
|common shares outstanding   |  | 
|used in computing basic and |  | 
|diluted net loss per common |  | 
|share                       |  |  |                                               | 68,948,204 |               |  |                  | 59,339,220 |                   |  |   | 58,869,492 |   |  |   | 54,488,412 |  

45

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Table of Contents

Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Our
management carried out an evaluation, with the participation of our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) as of the
end of the period covered by this report. Based upon this evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that, as of June 30, 2007, our
disclosure controls and procedures were effective.

A
control system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the control system are met, and no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud, if any,
within a company have been detected.

Managements Report
on Internal Control Over Financial Reporting

The management
of Palatin is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) or 15d-15(f) of the Exchange Act.
Palatins internal control system was designed to provide reasonable assurance to the
Companys management and Board of Directors regarding the preparation and fair
presentation of published financial statements.

All
internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.

There
was no change in our internal control over financial reporting during the fourth quarter
of the period covered by this Annual Report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

Palatins
management assessed the effectiveness of the Companys internal control over
financial reporting as of June 30, 2007. In making this assessment, it used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework. Based on its assessment, management believes
that, as of June 30, 2007, the Companys internal control over financial reporting is
effective based on those criteria.

Palatins
independent registered public accounting firm has issued an audit report on
managements assessment of the Companys internal control over financial
reporting. This report appears below.

Report Of Independent
Registered Public Accounting Firm

The Board of Directors
and StockholdersPalatin Technologies, Inc.:

We
have audited managements assessment, included in Managements Report on
Internal Control Over Financial Reporting presented above, that Palatin Technologies, Inc.
maintained effective internal control over financial reporting as of June 30, 2007, based
on criteria established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Palatin Technologies,
Inc.s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the Companys internal control over
financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.

46

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Table of Contents

A
companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In
our opinion, managements assessment that Palatin Technologies, Inc. maintained
effective internal control over financial reporting as of June 30, 2007, is fairly stated,
in all material respects, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Also, in our opinion, Palatin Technologies, Inc. maintained, in all material
respects, effective internal control over financial reporting as of June 30, 2007, based
on criteria established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Palatin Technologies,
Inc. and subsidiary as of June 30, 2007 and 2006, and the related consolidated statements
of operations, cash flows, and stockholders equity for each of the years in the
three-year period ended June 30, 2007, and our report dated September 12, 2007 expressed
an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Philadelphia, PennsylvaniaSeptember
12, 2007

Item 9B. Other Information.

None.

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Table of Contents

PART III

The
information required by Part III of Form 10-K under

| |  |  | Item
10 - Directors, Executive Officers and Corporate Governance
| | - |  | ----------------------------------------------------------------

| |  |  | Item
11 - Executive Compensation
| | - |  | --------------------------------

| |  |  | Item
12 - Security Ownership of Certain Beneficial Owners and Management and Related
           Stockholder Matters, except for the information required by Regulation S-K,
Item 201(d), which            is set forth under Item 5 of this report
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Item
13 - Certain Relationships and Related Transactions, and Director Independence
| | - |  | -----------------------------------------------------------------------------------

| |  |  | Item
14 - Principal Accountant Fees and Services
| | - |  | ------------------------------------------------

is incorporated by reference from our
definitive proxy statement relating to the 2007 Annual Meeting of Stockholders, which we
will file with the SEC within 120 days after our June 30, 2007 fiscal year end.

48

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PART IV

Item 15. Exhibits and Financial
Statement Schedules.

(a)  Documents
filed as part of the report:

1.
Financial statements: The following consolidated financial statements are filed as a part
of this report under Item 8  Financial Statements and Supplementary Data:

| |  |  | Report
of Independent Registered Public Accounting Firm
| | - |  | -------------------------------------------------------

| |  |  | Consolidated
Balance Sheets
| | - |  | ---------------------------

| |  |  | Consolidated
Statements of Operations
| | - |  | -------------------------------------

| |  |  | Consolidated
Statements of Cash Flows
| | - |  | -------------------------------------

| |  |  | Consolidated
Statements of Stockholders Equity
| | - |  | -----------------------------------------------

| |  |  | Notes
to Consolidated Financial Statements
| | - |  | ------------------------------------------

2.
Financial statement schedules: None.

3.
Exhibits:

|No. |  | Description
|--- |  | -----------

|3.01 |  | Restated
certificate of incorporation. Incorporated by reference to Exhibit 3.01 of our quarterly
report on Form 10-Q for the quarter ended March 31, 2005, filed with the SEC on May 9,
2005.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.02 |  | Bylaws.
Incorporated by reference to Exhibit 3.2 of our quarterly report on Form 10-QSB for the
quarter ended December 31, 1997, filed with the SEC on February 13, 1998.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.02 |  | 1996
Stock Option Plan, as amended effective January 1, 2001. Incorporated by reference to
Exhibit 4.1 of our registration statement on Form S-8, Commission File No. 333-83876,
filed with the SEC on March 6, 2002. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.03 |  | Carl
Spana Stock Option Agreement. Incorporated by reference to Exhibit 4.15 of our
registration statement on Form S-8, Commission File No. 333-57079, filed with the SEC on
June 17, 1998. 
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.04 |  | Executive
Officers Stock Option Agreement. Incorporated by reference to Exhibit 4.18 of our
registration statement on Form S-8, Commission File No. 333-57079, filed with the SEC on
June 17, 1998. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.06 |  | Strategic
Collaboration Agreement dated as of August 17, 1999, between Palatin and Mallinckrodt,
Inc. Incorporated by reference to Exhibit 10.21 of our amended annual report on Form
10-KSB/A for the year ended June 30, 1999, filed with the SEC on December 28, 1999.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.07 |  | Amendment
To Strategic Collaboration Agreement dated as of May 13, 2002 between Palatin and
Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.1 of our quarterly report on
Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002. We
have obtained confidential treatment of certain provisions contained in this exhibit. The
copy filed as an exhibit omits the information subject to the confidentiality request.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Form
of registration rights agreement for our October 2001 private placement. Incorporated by
reference to Exhibit 10.2 of our quarterly report on Form 10-Q for the quarter ended
September 30, 2001, filed with the SEC on November 14, 2001.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | Form
of stock purchase agreement for our June-July 2002 private placement. Incorporated by
reference to Exhibit 10.27 of our annual report on Form 10-K for the year ended June 30,
2002, filed with the SEC on September 30, 2002.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | Form
of registration rights agreement for our June-July 2002 private placement. Incorporated
by reference to Exhibit 10.28 of our annual report on Form 10-K for the year ended June
30, 2002, filed with the SEC on September 30, 2002.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | Form
of warrant issued to purchasers in our June-July 2002 private placement. Incorporated by
reference to Exhibit 10.29 of our annual report on Form 10-K for the year ended June 30,
2002, filed with the SEC on September 30, 2002.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Table of Contents

|10.20 |  | Form
of stock purchase agreement for our November 2002 private placement. Incorporated by
reference to Exhibit 10.30 of our annual report on Form 10-K for the year ended June 30,
2003, filed with the SEC on September 29, 2003.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | Form
of registration rights agreement for our November 2002 private placement. Incorporated by
reference to Exhibit 10.31 of our annual report on Form 10-K for the year ended June 30,
2003, filed with the SEC on September 29, 2003.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | Form
of warrant issued to purchasers in our November 2002 private placement. Incorporated by
reference to Exhibit 10.32 of our annual report on Form 10-K for the year ended June 30,
2003, filed with the SEC on September 29, 2003.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.23 |  | Form
of stock purchase agreement for our March 2003 private placement. Incorporated by
reference to Exhibit 10.33 of our annual report on Form 10-K for the year ended June 30,
2003, filed with the SEC on September 29, 2003.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.24 |  | Form
of warrant issued to purchasers in our March 2003 private placement. Incorporated by
reference to Exhibit 10.34 of our annual report on Form 10-K for the year ended June 30,
2003, filed with the SEC on September 29, 2003.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | Form
of stock purchase agreement, including warrant certificate, for our January 2004 private
placement. Incorporated by reference to Exhibit 10.01 of our quarterly report on Form
10-Q for the quarter ended December 31, 2003, filed with the SEC on February 17, 2004.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.27 |  | Securities
Purchase Agreement between Palatin and King Pharmaceuticals, Inc. Incorporated by
reference to Exhibit 10.27 of our annual report on Form 10-K for the year ended June 30,
2004, filed with the SEC on September 13, 2004. We have requested confidential treatment
of certain provisions contained in this exhibit. The copy filed as an exhibit omits the
information subject to the confidentiality request.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.28 |  | Collaborative
Development and Marketing Agreement between Palatin and King Pharmaceuticals, Inc.
Incorporated by reference to Exhibit 10.28 of our annual report on Form 10-K for the year
ended June 30, 2004, filed with the SEC on September 13, 2004. We have requested
confidential treatment of certain provisions contained in this exhibit. The copy filed as
an exhibit omits the information subject to the confidentiality request.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.29 |  | Form
of warrant certificate issued to King Pharmaceuticals, Inc. Incorporated by reference to
Exhibit 10.29 of our annual report on Form 10-K for the year ended June 30, 2004, filed
with the SEC on September 13, 2004.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.31 |  | 2005
Stock Plan.  Incorporated by reference to Exhibit 10.01 of our current report on Form
8-K, filed              with the SEC on June 10, 2005. 
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|10.32 |  | Amendment
to Strategic Collaboration Agreement dated as of October 1, 2005, between Palatin and
Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.32 of our quarterly report on
Form 10-Q for the quarter ended September 30, 2005, filed with the SEC on November 8,
2005. We have requested confidential treatment of certain provisions contained in this
exhibit. The copy filed as an exhibit omits the information subject to the
confidentiality request.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.36 |  | Form
of Option Certificate (incentive option) under the 2005 Stock Plan. Incorporated by
reference to Exhibit 10.1 of our current report on Form 8-K, filed with the SEC on
September 21, 2005. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.37 |  | Form
of Incentive Stock Option Agreement  Standard under the 2005 Stock Plan.
Incorporated by reference to Exhibit 10.2 of our current report on Form 8-K, filed with
the SEC on September 21, 2005. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.38 |  | Form
of Option Certificate (non-qualified option) under the 2005 Stock Plan. Incorporated by
reference to Exhibit 10.3 of our current report on Form 8-K, filed with the SEC on
September 21, 2005. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.39 |  | Form
of Non-Qualified Stock Option Agreement under the 2005 Stock Plan. Incorporated by
reference to Exhibit 10.4 of our current report on Form 8-K, filed with the SEC on
September 21, 2005. 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

50

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Table of Contents

|10.40 |  | Second
Amendment and Agreement dated as of December 16, 2005 amending the Collaborative
Development and Marketing Agreement between Palatin and King Pharmaceuticals, Inc. dated
August 12, 2004. Incorporated by reference to Exhibit 10.1 of our current report on Form
8-K, filed with the SEC on December 23, 2005.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.41 |  | Form
of stock purchase agreement for our April 2006 private placement. Incorporated by
reference to Exhibit 10.2 of our current report on Form 8-K, filed with the SEC on April
12, 2006.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.42 |  | Form
of warrant issued to purchasers in our April 2006 private placement. Incorporated by
reference to Exhibit 10.3 of our current report on Form 8-K, filed with the SEC on April
12, 2006.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.43 |  | Restricted
Stock Unit Agreement. Incorporated by reference to Exhibit 10.1 of our quarterly report
on Form 10-Q for the quarter ended December 31, 2006, filed with the SEC on February 8,
2007. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.44 |  | Research
Collaboration and License Agreement dated January 30, 2007, between Palatin and
AstraZeneca AB. Incorporated by reference to Exhibit 10.2 of our quarterly report on Form
10-Q for the quarter ended December 31, 2006, filed with the SEC on February 8, 2007. We
have requested confidential treatment of certain provisions contained in this exhibit.
The copy filed as an exhibit omits the information subject to the confidentiality
request.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.45 |  | Employment
Agreement dated as of July 1, 2007 between Palatin and Carl Spana. *
|----- |  | --------------------------------------------------------------------------------

|10.46 |  | Employment
Agreement dated as of July 1, 2007 between Palatin and Stephen T. Wills. *
|----- |  | --------------------------------------------------------------------------------------

|10.47 |  | Employment
Agreement dated as of May 1, 2007, between Palatin and Trevor Hallam. *
|----- |  | -----------------------------------------------------------------------------------

|21 |  | Subsidiaries
of the registrant. *
|-- |  | ---------------------------------

|23 |  | Consent
of KPMG LLP. *
|-- |  | ----------------------

|31.1 |  | Certification
of Chief Executive Officer. *
|---- |  | -------------------------------------------

|31.2 |  | Certification
of Chief Financial Officer. *
|---- |  | -------------------------------------------

|32.1 |  | Certification
of principal executive officer pursuant to U.S.C. Section 1350, as adopted pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002. *
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 |  | Certification
of principal financial officer pursuant to U.S.C. Section 1350, as adopted pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002. *
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

_________________

* Exhibit filed with this report.

 Management contract or compensatory
plan or arrangement.

51

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Table of Contents

SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) 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.

By: /s/ Carl Spana
      Carl Spana, Ph.D.
      President and Chief Executive Officer

Date: September 12, 2007

Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.

|Signature                 | Title                                                | Date              
|------------------------- | ---------------------------------------------------- | ------------------
|                          |                                                      |                   
|/s/ Carl Spana            | President, Chief Executive Officer and Director      | September 12, 2007
|Carl Spana                | (principal executive officer)                        |                   
|                          |                                                      |                   
|/s/ Stephen T. Wills      | Executive Vice President and Chief Financial Officer | September 12, 2007
|Stephen T. Wills          | (principal financial and accounting officer)         |                   
|                          |                                                      |                   
|/s/ John K.A. Prendergast | Chairman and Director                                | September 12, 2007
|John K.A. Prendergast     |                                                      |                   
|                          |                                                      |                   
|/s/ Perry B. Molinoff     | Director                                             | September 12, 2007
|Perry B. Molinoff         |                                                      |                   
|                          |                                                      |                   
|/s/ Robert K. deVeer, Jr. | Director                                             | September 12, 2007
|Robert K. deVeer, Jr.     |                                                      |                   
|                          |                                                      |                   
|/s/ Zola P. Horovitz      | Director                                             | September 12, 2007
|Zola P. Horovitz          |                                                      |                   
|                          |                                                      |                   
|/s/ Robert I. Taber       | Director                                             | September 12, 2007
|Robert I. Taber           |                                                      |                   
|                          |                                                      |                   
|/s/ Errol DeSouza         | Director                                             | September 12, 2007
|Errol DeSouza             |                                                      |                   
|                          |                                                      |                   
|/s/ J. Stanley Hull       | Director                                             | September 12, 2007
|J. Stanley Hull           |                                                      |                   

52

---



Table of Contents

EXHIBIT LIST

|No. |  | Description
|--- |  | -----------

|3.01 |  | Restated
certificate of incorporation. Incorporated by reference to Exhibit 3.01 of our quarterly
report on Form 10-Q for the quarter ended March 31, 2005, filed with the SEC on May 9,
2005.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.02 |  | Bylaws.
Incorporated by reference to Exhibit 3.2 of our quarterly report on Form 10-QSB for the
quarter ended December 31, 1997, filed with the SEC on February 13, 1998.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.02 |  | 1996
Stock Option Plan, as amended effective January 1, 2001. Incorporated by reference to
Exhibit 4.1 of our registration statement on Form S-8, Commission File No. 333-83876,
filed with the SEC on March 6, 2002. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.03 |  | Carl
Spana Stock Option Agreement. Incorporated by reference to Exhibit 4.15 of our
registration statement on Form S-8, Commission File No. 333-57079, filed with the SEC on
June 17, 1998. 
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.04 |  | Executive
Officers Stock Option Agreement. Incorporated by reference to Exhibit 4.18 of our
registration statement on Form S-8, Commission File No. 333-57079, filed with the SEC on
June 17, 1998. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.06 |  | Strategic
Collaboration Agreement dated as of August 17, 1999, between Palatin and Mallinckrodt,
Inc. Incorporated by reference to Exhibit 10.21 of our amended annual report on Form
10-KSB/A for the year ended June 30, 1999, filed with the SEC on December 28, 1999.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.07 |  | Amendment
To Strategic Collaboration Agreement dated as of May 13, 2002 between Palatin and
Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.1 of our quarterly report on
Form 10-Q for the quarter ended March 31, 2002, filed with the SEC on May 15, 2002. We
have obtained confidential treatment of certain provisions contained in this exhibit. The
copy filed as an exhibit omits the information subject to the confidentiality request.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Form
of registration rights agreement for our October 2001 private placement. Incorporated by
reference to Exhibit 10.2 of our quarterly report on Form 10-Q for the quarter ended
September 30, 2001, filed with the SEC on November 14, 2001.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | Form
of stock purchase agreement for our June-July 2002 private placement. Incorporated by
reference to Exhibit 10.27 of our annual report on Form 10-K for the year ended June 30,
2002, filed with the SEC on September 30, 2002.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | Form
of registration rights agreement for our June-July 2002 private placement. Incorporated
by reference to Exhibit 10.28 of our annual report on Form 10-K for the year ended June
30, 2002, filed with the SEC on September 30, 2002.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | Form
of warrant issued to purchasers in our June-July 2002 private placement. Incorporated by
reference to Exhibit 10.29 of our annual report on Form 10-K for the year ended June 30,
2002, filed with the SEC on September 30, 2002.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | Form
of stock purchase agreement for our November 2002 private placement. Incorporated by
reference to Exhibit 10.30 of our annual report on Form 10-K for the year ended June 30,
2003, filed with the SEC on September 29, 2003.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | Form
of registration rights agreement for our November 2002 private placement. Incorporated by
reference to Exhibit 10.31 of our annual report on Form 10-K for the year ended June 30,
2003, filed with the SEC on September 29, 2003.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | Form
of warrant issued to purchasers in our November 2002 private placement. Incorporated by
reference to Exhibit 10.32 of our annual report on Form 10-K for the year ended June 30,
2003, filed with the SEC on September 29, 2003.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.23 |  | Form
of stock purchase agreement for our March 2003 private placement. Incorporated by
reference to Exhibit 10.33 of our annual report on Form 10-K for the year ended June 30,
2003, filed with the SEC on September 29, 2003.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.24 |  | Form
of warrant issued to purchasers in our March 2003 private placement. Incorporated by
reference to Exhibit 10.34 of our annual report on Form 10-K for the year ended June 30,
2003, filed with the SEC on September 29, 2003.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | Form
of stock purchase agreement, including warrant certificate, for our January 2004 private
placement. Incorporated by reference to Exhibit 10.01 of our quarterly report on Form
10-Q for the quarter ended December 31, 2003, filed with the SEC on February 17, 2004.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.27 |  | Securities
Purchase Agreement between Palatin and King Pharmaceuticals, Inc. Incorporated by
reference to Exhibit 10.27 of our annual report on Form 10-K for the year ended June 30,
2004, filed with the SEC on September 13, 2004. We have requested confidential treatment
of certain provisions contained in this exhibit. The copy filed as an exhibit omits the
information subject to the confidentiality request.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.28 |  | Collaborative
Development and Marketing Agreement between Palatin and King Pharmaceuticals, Inc.
Incorporated by reference to Exhibit 10.28 of our annual report on Form 10-K for the year
ended June 30, 2004, filed with the SEC on September 13, 2004. We have requested
confidential treatment of certain provisions contained in this exhibit. The copy filed as
an exhibit omits the information subject to the confidentiality request.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.29 |  | Form
of warrant certificate issued to King Pharmaceuticals, Inc. Incorporated by reference to
Exhibit 10.29 of our annual report on Form 10-K for the year ended June 30, 2004, filed
with the SEC on September 13, 2004.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.31 |  | 2005
Stock Plan.  Incorporated by reference to Exhibit 10.01 of our current report on Form
8-K, filed              with the SEC on June 10, 2005. 
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|10.32 |  | Amendment
to Strategic Collaboration Agreement dated as of October 1, 2005, between Palatin and
Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.32 of our quarterly report on
Form 10-Q for the quarter ended September 30, 2005, filed with the SEC on November 8,
2005. We have requested confidential treatment of certain provisions contained in this
exhibit. The copy filed as an exhibit omits the information subject to the
confidentiality request.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.36 |  | Form
of Option Certificate (incentive option) under the 2005 Stock Plan. Incorporated by
reference to Exhibit 10.1 of our current report on Form 8-K, filed with the SEC on
September 21, 2005. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.37 |  | Form
of Incentive Stock Option Agreement  Standard under the 2005 Stock Plan.
Incorporated by reference to Exhibit 10.2 of our current report on Form 8-K, filed with
the SEC on September 21, 2005. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.38 |  | Form
of Option Certificate (non-qualified option) under the 2005 Stock Plan. Incorporated by
reference to Exhibit 10.3 of our current report on Form 8-K, filed with the SEC on
September 21, 2005. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.39 |  | Form
of Non-Qualified Stock Option Agreement under the 2005 Stock Plan. Incorporated by
reference to Exhibit 10.4 of our current report on Form 8-K, filed with the SEC on
September 21, 2005. 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.40 |  | Second
Amendment and Agreement dated as of December 16, 2005 amending the Collaborative
Development and Marketing Agreement between Palatin and King Pharmaceuticals, Inc. dated
August 12, 2004. Incorporated by reference to Exhibit 10.1 of our current report on Form
8-K, filed with the SEC on December 23, 2005.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.41 |  | Form
of stock purchase agreement for our April 2006 private placement. Incorporated by
reference to Exhibit 10.2 of our current report on Form 8-K, filed with the SEC on April
12, 2006.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.42 |  | Form
of warrant issued to purchasers in our April 2006 private placement. Incorporated by
reference to Exhibit 10.3 of our current report on Form 8-K, filed with the SEC on April
12, 2006.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.43 |  | Restricted
Stock Unit Agreement. Incorporated by reference to Exhibit 10.1 of our quarterly report
on Form 10-Q for the quarter ended December 31, 2006, filed with the SEC on February 8,
2007. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.44 |  | Research
Collaboration and License Agreement dated January 30, 2007, between Palatin and
AstraZeneca AB. Incorporated by reference to Exhibit 10.2 of our quarterly report on Form
10-Q for the quarter ended December 31, 2006, filed with the SEC on February 8, 2007. We
have requested confidential treatment of certain provisions contained in this exhibit.
The copy filed as an exhibit omits the information subject to the confidentiality
request.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.45 |  | Employment
Agreement dated as of July 1, 2007 between Palatin and Carl Spana. *
|----- |  | --------------------------------------------------------------------------------

|10.46 |  | Employment
Agreement dated as of July 1, 2007 between Palatin and Stephen T. Wills. *
|----- |  | --------------------------------------------------------------------------------------

|10.47 |  | Employment
Agreement dated as of May 1, 2007, between Palatin and Trevor Hallam. *
|----- |  | -----------------------------------------------------------------------------------

|21 |  | Subsidiaries
of the registrant. *
|-- |  | ---------------------------------

|23 |  | Consent
of KPMG LLP. *
|-- |  | ----------------------

|31.1 |  | Certification
of Chief Executive Officer. *
|---- |  | -------------------------------------------

|31.2 |  | Certification
of Chief Financial Officer. *
|---- |  | -------------------------------------------

|32.1 |  | Certification
of principal executive officer pursuant to U.S.C. Section 1350, as adopted pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002. *
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 |  | Certification
of principal financial officer pursuant to U.S.C. Section 1350, as adopted pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002. *
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

_________________

* Exhibit filed with this report.

 Management contract or compensatory
plan or arrangement.