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, 2006 or [   ]
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934  For the transition period from ___________ to
__________ Commission file number 001-15543 _____________________________  PALATIN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter) Delaware
     95-4078884(State or other jurisdiction of
     incorporation or organization)
     (I.R.S. Employer Identification
     No.)4C Cedarbrook 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. [  ]



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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, 2005): $184,688,242

Indicate the number of shares
outstanding of each of the registrants classes of common stock, as of the latest
practicable date (September 1, 2006): 70,878,521.

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, 2006 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                                                                                                        | 16  
|Item 3.  | Legal Proceedings                                                                                                 | 16  
|Item 4   | Submission of Matters to a Vote of
     Security Holders                                                          | 17  
|Item 5.  | Market for Registrant's Common Equity,
     Related Stockholder Matters and Issuer Purchases of Equity Securities | 18  
|Item 6.  | Selected Consolidated 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                         | 45  
|Item 9A. | Controls and Procedures                                                                                           | 45  
|Item 9B. | Other Information                                                                                                 | 46  
|PART III
|Item 10. | Directors and Executive Officers of the
     Registrant                                                           | 47  
|Item 11. | Executive Compensation                                                                                            | 47  
|Item 12. | Security Ownership of Certain Beneficial
     Owners and Management and Related Stockholder Matters               | 47  
|Item 13. | Certain Relationships and Related
     Transactions                                                               | 47  
|Item 14. | Principal Accountant Fees and
     Services                                                                       | 47  
|PART IV 
|Item 15. | Exhibits and Financial Statement Schedules                                                                        | 48  

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 that 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 fast growing area of
pharmaceutical research and development. Therapeutics affecting the activity of the MC family of receptors may
have the potential to treat a variety of conditions and diseases, including sexual dysfunction, obesity and
related disorders, cachexia (extreme wasting, generally secondary to a chronic disease), skin pigmentation and
inflammation.

In August
2004, we entered into a collaborative development and marketing agreement with King Pharmaceuticals, Inc.
(King), a specialty pharmaceutical company, to jointly develop and commercialize bremelanotide (formerly
known as PT-141), our nasally administered MC-based peptide presently in Phase 2 clinical development for two
distinct indications, treatment of male erectile dysfunction (ED) and treatment of female sexual dysfunction
(FSD). Pursuant to the terms of the agreement, Palatin and King share all collaboration development costs,
marketing costs and net profits derived from net sales of bremelanotide in North America based on an agreed
percentage. Palatin and King currently plan to seek a commercialization partner for bremelanotide for
territories outside of North America. We have the option to create, with King, a urology specialty sales force
to co-promote the product in the United States if the product is successfully developed and commercialized.

We
are in the process of identifying clinical candidate MC therapeutic small molecules for
treatment of obesity and related disorders, with programs for both oral and non-oral drug
delivery. We are also in the process of identifying natriuretic peptide receptor clinical
candidate compounds for two indications, the treatment of chronic congestive heart failure
(CHF) and acutely decompensated CHF.

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

Key
elements of our business strategy include: entering into alliances and partnerships with
pharmaceutical companies to facilitate the development, manufacture, marketing, sale and
distribution of product candidates we are investigating; expanding our pipeline through
the utilization of our MC expertise and patented drug discovery platform; acquiring
synergistic products and technologies; and partially funding our development and discovery
programs with the cash flow from our NeutroSpec and bremelanotide collaboration
agreements.

We
incorporated in Delaware in 1986 and commenced operations in the biopharmaceutical area in
1996. Our corporate offices and research and development facility are located at 4C Cedar
Brook Drive, Cranbury, New Jersey 08512 and our telephone number is (609) 495-2200. We
maintain an Internet site at http://www.palatin.com, where among other things, we make
available free of charge on and through this website our Forms 3, 4 and 5, annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) and Section 16 of
the Exchange Act as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. Our website and the

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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

We
are concentrating our efforts on the following products and development programs:

ED and
FSD  Bremelanotide. Bremelanotide, our lead therapeutic drug candidate, is a patented, nasally
administered peptide in clinical development for the treatment of both male and female sexual dysfunction.
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 multi-factorial 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 greater 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 significant safety and 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 are
conducting 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 studies and Phase
2A and Phase 2B efficacy studies in male subjects and patients. We are reviewing clinical trial data on two
recently completed Phase 2B studies, with results anticipated in the fourth quarter of calendar 2006. Both
recently completed 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
completed Phase 1 safety studies in female subjects and a Phase 2A efficacy study in female patients with FSD.
The Phase 2A study included both pre-menopausal and post-menopausal FSD patients, with a total of 44 patients
studied. The study 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. We have an ongoing Phase
2B at home clinical trial of bremelanotide in female patients with FSD, scheduled to conclude in the first
half of calendar 2007.

We
also have ongoing Phase 1 safety studies, designed to evaluate particular safety
parameters, including FDA required studies. We anticipate having an end of Phase 2 meeting
with the FDA in the first half of calendar 2007, and, depending on results of completed
trials for which data is being compiled and ongoing trials, as well as comments and
determinations by the FDA, initiating pivotal Phase 3 trials shortly thereafter.

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 share
all collaboration development and marketing costs and all collaboration net profits derived from net sales of
bremelanotide in North America based on an agreed percentage. Palatin and King currently plan to seek a
commercialization partner for bremelanotide for territories outside of North America. However, there can be no
assurance that we will be able to enter into any such arrangement on terms acceptable to us or at all.

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Under
the agreement, King may make future potential milestone payments to us totaling up to
$90.0 million for achieving certain ED and FSD development and regulatory approval
targets. After regulatory approval and commercialization of bremelanotide, King may also
pay milestone payments to us totaling up to an additional $130.0 million upon achieving
specified annual North American net sales thresholds. A portion of the milestone payments
may be in the form of purchases of our common stock.

Obesity. We have an
active development program for MC receptor-targeted small molecule compounds for the treatment of obesity and related disorders.
Obesity is a multi-factorial condition with significant biochemical components relating to satiety (feeling full) and 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 a role of MC receptors in feeding
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 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 treatment of obesity and which are also reported to not induce a sexual response.

We have
developed a class of small molecule compounds targeting MC receptors which are effective in treatment of
obesity in animal models but which do not induce a sexual response. 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.

We have a
program to develop and identify clinical candidate drugs for the treatment of obesity, including candidate
drugs for oral and non-oral delivery programs. We anticipate initiating preclinical studies on at least one
clinical candidate drug in the second half of calendar 2007 in preparation for human clinical trials.

We
have held preliminary discussions with several major pharmaceutical companies relating to
our obesity program, and depending on results in our program to develop and identify
clinical candidate drugs, intend to continue discussions on partnering or other
collaborative relationships.

Congestive
Heart Failure. We have a development program for compounds that mimic natural peptides
(peptidomimetic) for treatment of CHF. Heart failure 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, 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.

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

We
are developing novel peptidomimetic natriuretic agonists that 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
are in the process of identifying two clinical candidate drugs for treatment of CHF, an
intravenous form for acutely decompensated CHF, which is designed to be highly potent,
fast acting and fast clearing, and a subcutaneous form for chronic CHF, designed to
produce therapeutic effects over a longer period. 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 anticipate initiating
preclinical studies on at least one clinical candidate drug in the second half of calendar
2007 in preparation for human clinical trials.

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MIDAS
Drug Development Platform. Both our obesity and CHF 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. We intend to seek to enter into
strategic alliances or collaborative arrangements to provide additional financial and
technical resources for MIDAS development.

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, with Mallinckrodt, we 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 first 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, there
can be no assurance that NeutroSpec will be reintroduced to the market or that development
or sales objectives will be met.

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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. Many of these competitors have
substantially greater financial and technological resources than we do. 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, 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.

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 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 beyond early stage clinical trials without entering into an alliance or
partnership with a pharmaceutical company.

One
natriuretic peptide product is approved by the FDA and is marketed by a major
pharmaceutical company. There are a number of other FDA-approved products for 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, selectively,dsf
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

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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.

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 money 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 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

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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 currently have agreements in place for the
commercial manufacture of NeutroSpec. 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 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.

We
are 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.

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 at acceptable
costs. Additionally, scaling up to commercial quantities may involve production, purification, formulation and
other problems not present in the small-scale manufacturing done to date. We currently contract with
third-party manufacturers for the production of peptides and have identified a commercial-scale manufacturer.

Our
obesity program utilizes small molecules and 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 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.

If
bremelanotide is successfully developed and approved for marketing, we will be highly
dependent on King, our strategic collaboration partner, for certain marketing and sales
activities.

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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 NeutroSpec and our other proposed products.
We have liability insurance providing up to $10.0 million coverage in the aggregate as to
product and to certain clinical trial risks.

Employees

As
of September 1, 2006, we employed 85 persons full time, of whom 69 are engaged in research
and development activities and 16 are engaged in administration and management.
Twenty-five of our employees hold Ph.D. degrees. We have been successful in attracting
skilled and experienced scientific personnel, however, 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.

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 our existing 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 organizing and staffing our Company,
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 product;
| | 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.

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

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

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

|  |                                                                              
|- | -----------------------------------------------------------------------------
| | the research, 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 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 trial and
     formulation studies;                                                       
| | submission to the FDA of an investigational new drug application, or
     IND, which must becomeeffective before clinical trials may begin;         
| | performance of adequate and well-controlled human clinical trials to
     establish the safety andefficacy of the drug for each proposed indication;
| | the submission of a new drug application, or NDA, to the FDA; and                                                                                   
| | FDA review and approval of the NDA 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 a NDA. The NDA 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 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

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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 delay or
prevent marketing of potential products for a considerable period of time and impose
costly procedures upon our activities. 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 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 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, or 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.

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.

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

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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, this may adversely affect our ability to develop our product candidates and
obtain regulatory approval on a timely basis if at all.

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 bremelanotide and NeutroSpec
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 limited or no experience in
marketing, distributing and selling products and will substantially rely on our marketing
partners to provide these capabilities.

If
the FDA approves bremelanotide for marketing and sale, we will depend on our arrangements
with King for the marketing, distribution and sale of bremelanotide. If King fails to
market bremelanotide or devote enough resources to bremelanotide, our potential revenues
from the sale of bremelanotide will be adversely affected. If these arrangements fail, we
may have difficulty establishing new marketing relationships, and in any event, we will
have limited control over these activities.

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 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 erectile
dysfunction. 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.

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
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 health care 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 health
care 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:

|  |                                                                                                                                                                                          
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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;                                                                                                                                                      

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

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 party to various arrangements with academic, governmental and 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 continue 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.

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

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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.

Shareholders may experience dilution
from the exercise of outstanding options and warrants.

As
of June 30, 2006, options and warrants to purchase 15,568,859 shares of common stock were
outstanding at various exercise prices ranging from $1.00 per share to $8.00 per share.
The issuance or potential issuance and sale of common stock upon the exercise of these
options and warrants may adversely affect the market price of our common stock or result
in substantial dilution to our existing stockholders.

Our management and principal
stockholders together control approximately 20% of our voting securities and such
concentration of ownership could delay or prevent a change in control.

As
of June 30, 2006, our executive officers and directors beneficially own approximately 5%
of our voting securities and our 5% or greater stockholders beneficially own approximately
15% of our voting securities. These stockholders, acting together, may be able to
significantly influence any matters submitted for approval by our stockholders, including
the election of directors, delaying or preventing a change of control, and the
consideration of transactions in which stockholders might otherwise receive a premium for
their shares over then current market prices.

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.

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;                                                              

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

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.

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 on June 6, 2006 before the American Arbitration
Association with us alleging 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 also alleges 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. 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 license agreement provides for binding
arbitration as the

16

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remedy for dispute resolution. We have not yet been required to respond to CTI's
arbitration demand. We intend to strenuously dispute CTIs assertions, including that we materially breached
the license agreement, and intend to defend ourselves vigorously. CTI also initiated litigation against us on
September 16, 2005 by suit in Connecticut Superior Court for breach of a settlement agreement of an earlier
arbitration between CTI and us, asserting that we failed to timely register for resale shares of our common
stock valued at approximately $300,000 issued to them in the settlement. A motion by CTI to amend the
complaint to add claims asserting fraud is still pending. We have not yet been required to answer the
complaint or file counterclaims, and intend to strenuously dispute CTIs assertions, including that we
materially breached the settlement agreement and intend to defend ourselves vigorously. We 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, we do not believe
that the resolution of this matter will have a material adverse effect on our financial position, results of
operations or liquidity.

There
are no other material legal proceedings pending against us.

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

None.

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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, 2004.

|                                     |       |      
|------------------------------------ | ----- | -----
|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 
|                                     |       |      
|FISCAL YEAR
     ENDED JUNE 30, 2005 | HIGH  | LOW  
|Fourth Quarter                       | $2.24 | $1.70
|Third Quarter                        | 2.57  | 2.03 
|Second Quarter                       | 2.97  | 2.35 
|First Quarter                        | 4.25  | 2.52 

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 1, 2006, we had approximately 250 holders of record of
common stock. On September 1, 2006, the closing sales price of our common stock as
reported on the AMEX was $2.21 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 9,997 shares on
September 1, 2006, 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.

Securities
authorized for issuance under equity compensation plans.

|                                                                |  |                                                                                             |  |                                                                             |  |                                                                                                                                                 
|--------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                |  | EQUITY COMPENSATION PLAN
     INFORMATION                                                   |  |                                                                            
|                                                                |  | AS OF JUNE 30, 2006                                                                         |  |                                                                            
|Plan category                                                   |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights |  | Weighted-average exercise price of outstanding options, warrants and rights |  | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected
     in column (a))
|                                                                |  | (a)                                                                                         |  | (b)                                                                         |  | (c)                                                                                                                                             
|Equity compensation plans approved by security holders          |  | 5,636,470                                                                                   |  | $3.11                                                                       |  | 3,957,881                                                                                                                                       
|                                                               
|Equity compensation plans not approved by security
     holders |  | 1,175,678                                                                                   |  | 2.28                                                                        |  | 0                                                                                                                                               
|Total                                                           |  | 6,812,148                                                                                   |  |                                                                             |  | 3,957,881                                                                                                                                       

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

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1997 Executive
     Officers Stock Option Agreement, dated June 3, 1997: provided common stock purchase
     options to three executive officers. Options to purchase 26,766 shares at $4.96 per
     share remain outstanding with an expiration date of June 3, 2007.                                                                                                                                                
| 
| | Richard J. Murphy Stock
     Option Agreement, dated December 4, 1997: provided common stock purchase 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.                                                                                                                                                                 
| 
| | Cedar Brook II Corporate
     Center, L.P. warrants, dated December 17, 2001: provided common stock purchase
     warrants to the lessor of our office and laboratory facility to purchase 25,000
     shares at $3.65 per share with an expiration date of December 17, 2006.                                                                                                                                         
| 
| | 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 1,012,846 shares. These warrants have
     the following share amounts, prices (rounded to the nearest cent) and expiration
     dates:                                                                                                                 

| |           |  |                   |  |               |  |                | 
| | --------- |  | ----------------- |  | ------------- |  | -------------- | 
| | Offering  |  | SharesPurchasable |  | ExercisePrice |  | ExpirationDate | 
| | Fall 2001 |  | 132,688           |  | $2.66         |  | 10-29-06       | 
| | Fall 2001 |  | 221,872           |  | $2.70         |  | 10-29-06       | 
| | June 2002 |  | 109,510           |  | $2.75         |  | 06-13-07       | 
| | July 2002 |  | 51,502            |  | $1.46         |  | 07-29-07       | 
| | July 2002 |  | 38,627            |  | $1.37         |  | 07-29-07       | 
| | Fall 2002 |  | 458,647           |  | $1.54         |  | 11-15-07       | 

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Item 6. Selected Consolidated
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,                  
|                                             |                                       | 2006 (1) |       | 2005 (1) |       | 2004    |       | 2003    |       | 2002    |  
|Statement of Operations Data:                |                                      
|REVENUES                                     |                                      
|Royalties                                    | $                                     | 1,509    | $     | 1,586    | $     | -       | $     | -       | $     | -       |  
|Product sales                                |                                       | -        |       | 2,474    |       | -       |       | -       |       | -       |  
|Licenses, grants and contracts               |                                       | 18,240   |       | 13,897   |       | 2,315   |       | 1,270   |       | 281     |  
|                                             |                                       |          |       |          |       |         |       |         |       |        
|Total revenues                               |                                       | 19,749   |       | 17,957   |       | 2,315   |       | 1,270   |       | 281     |  
|                                             |                                       |          |       |          |       |         |       |         |       |        
|OPERATING EXPENSES                           |                                      
|Cost of product sales                        |                                       | 2,041    |       | 535      |       | -       |       | -       |       | -       |  
|Royalties                                    |                                       | 300      |       | 328      |       | -       |       | -       |       | -       |  
|Research and development                     |                                       | 41,014   |       | 25,045   |       | 23,333  |       | 17,439  |       | 12,117  |  
|General and administrative                   |                                       | 6,844    |       | 7,461    |       | 5,740   |       | 4,867   |       | 5,004   |  
|                                             |                                       |          |       |          |       |         |       |         |       |        
|Total operating expenses                     |                                       | 50,199   |       | 33,369   |       | 29,073  |       | 22,306  |       | 17,121  |  
|                                             |                                       |          |       |          |       |         |       |         |       |        
|OTHER INCOME (EXPENSE)                       |                                      
|Investment income                            |                                       | 856      |       | 488      |       | 222     |       | 248     |       | 312     |  
|Interest expense                             |                                       | (31      | )     | (14      | )     | (23     | )     | (22     | )     | (3      | )
|                                             |                                       |          |       |          |       |         |       |         |       |        
|Total other income, net                      |                                       | 825      |       | 474      |       | 199     |       | 226     |       | 309     |  
|                                             |                                       |          |       |          |       |         |       |         |       |        
|Loss before income taxes                     |                                       | (29,625  | )     | (14,938  | )     | (26,559 | )     | (20,810 | )     | (16,531 | )
|Income tax benefit                           |                                       | 666      |       | 580      |       | 241     |       | 245     |       | 392     |  
|                                             |                                       |          |       |          |       |         |       |         |       |        
|NET LOSS                                     |                                       | (28,959  | )     | (14,358  | )     | (26,318 | )     | (20,565 | )     | (16,139 | )
|DEEMED DIVIDEND                              |                                       | -        |       | -        |       | -       |       | (203    | )     | (297    | )
|                                             |                                       |          |       |          |       |         |       |         |       |        
|NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | $                                     | (28,959  | )   $ | (14,358  | )   $ | (26,318 | )   $ | (20,768 | )   $ | (16,436 | )
|                                             |                                       |          |       |          |       |         |       |         |       |        
|Basic and diluted net loss attributable to   |                                      
|common stockholders per common share         | $                                     | (0.48    | )   $ | (0.27    | )   $ | (0.55   | )   $ | (0.73   | )   $ | (1.16   | )
|                                             |                                       |          |       |          |       |         |       |         |       |        
|Weighted average common shares outstanding   |                                       | 60,357   |       | 53,861   |       | 47,688  |       | 28,362  |       | 14,195  |  
|                                             |                                       |          |       |          |       |         |       |         |       |        
|Balance Sheet Data (at period end):          |                                      
|Cash, cash equivalents and investments       | $                                     | 30,664   | $     | 18,106   | $     | 20,412  | $     | 18,383  | $     | 9,105   |  
|Property and equipment, net                  |                                       | 6,348    |       | 6,464    |       | 6,356   |       | 7,246   |       | 2,416   |  
|Working capital                              |                                       | 19,742   |       | 13,772   |       | 15,485  |       | 14,742  |       | 5,783   |  
|Total assets                                 |                                       | 40,047   |       | 35,166   |       | 27,800  |       | 26,568  |       | 12,358  |  
|Long term debt, net of current portion       |                                       | 230      |       | 19       |       | 30      |       | 76      |       | -       |  
|Stockholders' equity                         |                                       | 18,300   |       | 9,225    |       | 19,387  |       | 18,657  |       | 8,687   |  

|(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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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 over the related performance period. Due to the uncertainty
inherent in our development programs, including the possibility that a program is
terminated prior to completion, we recognize such revenue on a straight-line basis, as we
believe that no other basis is more reflective of the pattern over which such revenue is
earned. We consider our performance period under the King collaboration to be the period
in which we perform development activities during the initial research term, which is
currently estimated to be five years from the inception of the agreement. Specific
performance periods are not stated in the agreement and are estimated by management based
on detailed development programs agreed upon by the parties. Management monitors the
progress and results of these development activities and adjusts its estimated performance
period accordingly. The actual performance period may vary based on the results of the
related development activities, changes in development plans agreed to by the parties,
regulatory requirements and other factors. Increases in the estimated performance period
would result in increases in the period over which such deferred revenue is to be
recognized and corresponding decreases in the amount of revenue recognized each period. As
of June 30, 2006, a one-year increase in the estimated period of performance would result
in a decrease in the amount of deferred revenue recognized per quarter of approximately
$190,000.

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.

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

Stock-based Compensation

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

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

Results of Operations

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

Royalties
 For the years ended June 30, 2006 and 2005 (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

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our collaboration
agreement. The Company received FDA approval to market NeutroSpec in July 2004 and
suspended sales in December 2005. 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. We will not earn future royalty
revenues from NeutroSpec unless and until NeutroSpec sales resume.

Product
sales  Prior to the suspension of sales and marketing activities, we earned 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 the Company was
subject to certain minimum quantities, resulting in a limited number of product shipments
by the Company. Accordingly, the Companys 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

Licenses,
grants and contracts  For the year ended June 30, 2006, we recognized $18.2 million
of revenue from licenses, grants and contracts compared to $13.9 million for the year
ended June 30, 2005. In the years ended June 30, 2006 and June 30, 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 the years ended June 30, 2006 and June 30, 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 million 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. Future
contract revenue from King and Mallinckrodt, in the form of reimbursement of shared
development costs and the recognition of deferred license fees, will fluctuate based on
development activities for bremelanotide and NeutroSpec. The Company may also earn
contract revenue from Mallinckrodt and King based on the attainment of certain development
milestones. The future amount of recorded reimbursement revenue from King is also
dependent upon the apportionment of development responsibilities between us and King, as
determined by a steering committee of the collaboration.

Cost
of product sales and royalties  As noted above, there were no sales of NeutroSpec to
Mallinckrodt in the year ended June 30, 2006. In fiscal 2006, cost of product sales
represents our inventory write-off related to the suspension of sales of NeutroSpec. For
the year ended June 30, 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 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
the year ended June 30, 2006 compared to $25.0 million for the year ended June 30, 2005.
In the year ended June 30, 2006, development spending directly associated with
bremelanotide increased approximately $11.2 million, as 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.
Associated costs include fees to clinicians, laboratory expenses and study monitoring and
management. In the years ended June 30, 2006, 2005 and 2004 and cumulatively to date, we
have incurred approximately $33.2 million, $18.3 million, $11.7 million and $85.3 million,
respectively, in research and development (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. We
expect to spend approximately $15 million to $20 million of additional direct costs
(excluding allocated general expenses) on bremelanotide to conduct these and other
clinical studies for ED and FSD and continue related process and development activities
prior to initiating Phase 3 clinical trials. A majority of the additional direct costs
will be reimbursed by our collaboration partner, King.

Research
and development expenses directly related to our obesity, CHF and other MIDAS programs
increased from $1.3 million to $2.6 million from fiscal 2005 to fiscal 2006, primarily as
a result of additional

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contract services for assistance with the optimization of lead
compounds. In the years ended June 30, 2006, 2005 and 2004 and cumulatively to date, we
have incurred approximately $5.1 million, $3.7 million, $3.4 million and $21.9 million,
respectively, in R&D expenses on MIDAS programs, including an allocated portion of
general R&D expenses. Spending to date has been primarily related to the
identification of lead compounds for various therapeutic indications, primarily
melanocortin therapeutic small molecules for treatment of obesity and compounds for
treatment of CHF. We expect to spend approximately $4 million to $6 million of direct
costs during the year ending June 30, 2007 (fiscal 2007) to continue
laboratory research on various compounds in preparation for filing an Investigational New
Drug Application and commencing clinical trials. The amount of such spending and the
nature of future development activities are dependent on a number of factors, including
primarily the success of our discovery programs, preclinical studies, our ability to
progress a compound into human clinical trials and discussions with potential development
partners.

In
the year ended June 30, 2006, research and development spending directly related to
NeutroSpec decreased slightly from $1.2 million to $1.1 million compared to the year ended
June 30, 2005, primarily as a result of lower costs related to clinical trials. We have
suspended ongoing clinical trials and plans for future trials, including studies to
evaluate NeutroSpecs market potential as an imaging agent for other indications such
as osteomyelitis, fever of unknown origin, post surgical infection, inflammatory bowel
disease and pulmonary imaging. In the years ended June 30, 2006, 2005 and 2004 and
cumulatively to date, we have incurred approximately $2.7 million, $3.1 million, $8.2
million and $54.6 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. We expect to spend
approximately $0.2 million to $0.5 million of direct costs on NeutroSpec during the fiscal
2007 to perform certain studies, review the safety of NeutroSpec and explore other
indications, a significant portion of which will be shared 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.

Total
general R&D expenses, allocated among the programs above, 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 the year ended June 30, 2006
from $0.5 million for the year ended June 30, 2005, primarily reflecting income on greater
invested cash balances maintained during the period as a result of our sales of common
stock and warrants.

Income
tax benefit  During the years ended June 30, 2006 and 2005, the Company sold New
Jersey state net operating loss carryforwards and research and development credits, which
resulted in the recognition of $0.7 million and $0.6 million of income tax benefits,
respectively. Assuming the state of New Jersey continues to fund this program, which is
uncertain, 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, 2005 Compared to
the Year Ended June 30, 2004:

Royalties
and product sales  For the year ended June 30, 2005, we recognized product sales of
$2.5 million and royalty revenues of $1.6 million, related to NeutroSpec, from
Mallinckrodt pursuant to our collaboration agreement. The Company received FDA approval to
market NeutroSpec in July 2004. Accordingly, there was no product revenue or royalty
revenue recognized for the year ended June 30, 2004 (fiscal 2004).

Licenses,
grants and contracts  For the year ended June 30, 2005, we recognized $13.9 million
of revenue from licenses, grants and contracts compared to $2.3 million for the year ended
June 30, 2004. In the year ended June 30, 2005, we recognized $11.5 million of revenue
related to our collaboration agreement with King related to bremelanotide, which commenced
in August 2004. The revenue consisted of $8.1 million of reimbursements for Kings
share of bremelanotide development expenses and $3.4 million of license fees, representing
a portion of Kings August 2004 up-front payment recognized as revenue during the
year. There was no revenue from King during the year ended June 30, 2004. In the year
ended June 30, 2005, we recognized approximately $2.3 million of revenue under
collaboration agreements with Mallinckrodt for the development of NeutroSpec compared with
$2.2 million in the year ended June 30, 2004. Revenue in fiscal 2005 included a $2.0
million milestone payment upon obtaining FDA approval for equivocal appendicitis and $0.3
million of reimbursements for Mallinckrodts share of development expenses for other
indications of NeutroSpec. Revenue in fiscal 2004 consisted of a $2.0 million

23

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milestone
payment and $0.2 million of deferred license fee revenue from up-front payments received
in 1999 and 2002. In addition, in fiscal 2004, the Company recognized approximately $0.1
million in grant revenue from the Department of Health and Human Services.

Cost
of product sales and royalties  For the year ended June 30, 2005, we recognized $0.5
million and $0.3 million, respectively, in cost of product sales and royalties related to
NeutroSpec, which was approved by the FDA in July 2004. There was no corresponding cost of
product sales or royalties for the year ended June 30, 2004.

Research
and development  Research and development expenses increased to $25.0 million for
the year ended June 30, 2005 compared to $23.3 million for the year ended June 30, 2004.
In the year ended June 30, 2005, development spending directly associated with
bremelanotide increased approximately $4.4 million, as costs related to processing drug
product, including manufacturing, analytical and process development and equipment costs,
were partially offset by lower spending on clinical studies. Increased spending on the
development of bremelanotide was largely offset by a $4.2 million decrease in spending on
NeutroSpec development. The year ended June 30, 2004 included greater nonclinical spending
on NeutroSpec prior to FDA approval in July 2004, primarily related to processes for the
manufacturing of drug product. In the year ended June 30, 2005, development expenses of
the MIDAS program were comparable to the prior year. Indirect research and development
costs, including personnel costs and certain license fees, increased $1.5 million in the
year ended June 30, 2005.

General
and administrative  General and administrative expenses increased to $7.5 million
for the year ended June 30, 2005 compared to $5.7 million for the year ended June 30,
2004. Personnel, consulting, legal and insurance expenses increased, reflecting the
general expansion of the Companys business activities, its licensing activities, the
July 2004 approval of NeutroSpec and additional accounting and regulatory requirements.

Investment
income  Investment income increased to $0.5 million for the year ended June 30, 2005
from $0.2 million for the year ended June 30, 2004, primarily reflecting income on greater
invested cash balances maintained during the period, which was partially offset by
recognized losses on securities.

Income
tax benefit  During the years ended June 30, 2005 and 2004, the Company sold New
Jersey state net operating loss carryforwards and research and development credits, which
resulted in the recognition of $0.6 million and $0.2 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.

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

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

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 2006, we used $23.4 million of cash for our operating activities, compared to $5.1
million in fiscal 2005 and $23.7 million in fiscal 2004. Lower net cash outflows from
operations in fiscal 2005 resulted from amounts received from King under our collaboration
agreement, which was completed in August 2004. In fiscal

24

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2006, our accounts receivable
balance decreased $5.4 million due primarily to the timing of the receipt of
reimbursements from King for bremelanotide costs. Our periodic accounts receivable
balances will continue to be highly dependent on the timing of such receipts.

During
fiscal 2006, net cash provided by financing activities was $36.9 million reflecting
proceeds from the sale to common stock and warrants to King in September 2005 and the sale
of common stock and warrants in our April 2006 offering. Net cash provided by financing
activities in fiscal 2005 of $3.8 million represents primarily proceeds from the issuance
of common stock and warrants to King in connection with the August 2004 collaboration
agreement. In fiscal 2004, net cash provided by financing activities of $26.2 million
resulted from our January 2004 private placement, in which we raised $21.0 million, and
the exercise of outstanding options and warrants.

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

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

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

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,
2006:

|                              |                        |             |  |                  |  |             |  |             |  |               | 
|----------------------------- | ---------------------- | ----------- |  | ---------------- |  | ----------- |  | ----------- |  | ------------- | 
|                              | Payments due by Period
|                              |                        | Total       |  | Less than 1 Year |  | 1 - 3 Years |  | 4 - 5 Years |  | After 5 Years | 
|Facility operating leases     |                        | $11,322,844 |  | $2,386,899       |  | $3,584,017  |  | $3,054,494  |  | $2,297,434    | 
|Capital lease obligations     |                        | 365,292     |  | 109,819          |  | 199,315     |  | 56,158      |  | -             | 
|License agreements            |                        | 1,400,000   |  | 175,000          |  | 350,000     |  | 350,000     |  | 525,000       | 
|Total contractual obligations |                        | $13,088,136 |  | $2,671,718       |  | $4,133,332  |  | $3,460,652  |  | $2,822,434    | 

The
Companys license agreements also include royalty and other contingent payment
obligations and may be terminated by the Company 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

25

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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, 2006, our cash and cash equivalents were $28.3
million and investments, which consisted of mutual funds, were $2.3 million. As of June
30, 2005, our cash and cash equivalents were $15.7 million and investments, which
consisted primarily of mutual funds, were $2.4 million. Due to the average maturity and
conservative nature of our investment portfolio, we do not believe that short term
fluctuations in interest rates would materially affect the value of our securities.

Foreign
Currency Risk. A significant portion of the cost of manufacturing NeutroSpec is
denominated in Euros. Therefore, if manufacturing of NeutroSpec resumes, a fluctuation in
exchange rates between the Euro and the U.S. dollar would affect the Companys future
cost of product revenues. The impact on the Companys future results of operations of
any such fluctuation will be dependent on the volume and timing of the Companys
future purchases. In addition, the Company incurs certain research and development costs
denominated in foreign currency, which fluctuate from period to period.

As
of June 30, 2006 and 2005, the amount of accounts payable and accrued expenses denominated
in Euros was approximately $0.2 million and $0.8 million, respectively. Percentage
increases in the U.S. dollar cost of Euros would result in corresponding increases in such
liabilities. The Company has not hedged its exposures to foreign exchange fluctuations.
However, the Company monitors its 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, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the results of their operations and their
cash flows for each of the years in the three-year period ended June 30, 2006, 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, 2006, 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, 2006 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, 2006

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.

Consolidated Balance Sheets

|                                                                          |               |                   |   |                   |  
|------------------------------------------------------------------------- | ------------- | ----------------- | - | ----------------- | -
|                                                                          | June 30, 2006 | June 30, 2005    
|                                                                          |               |                   |   |                  
|ASSETS                                                                    |               |                   |   |                   |  
|Current assets:                                                           |              
|Cash and cash equivalents                                                 |               | $   28,333,211    |   | $   15,720,364    |  
|Available-for-sale investments                                            |               | 2,330,834         |   | 2,385,570         |  
|Accounts receivable                                                       |               | 69,591            |   | 5,441,425         |  
|Inventories                                                               |               | -                 |   | 1,382,160         |  
|Prepaid expenses and other current assets                                 |               | 1,453,650         |   | 1,889,269         |  
|                                                                          |               |                   |   |                  
|Total current assets                                                      |               | 32,187,286        |   | 26,818,788        |  
|Property and equipment, net                                               |               | 6,347,705         |   | 6,464,324         |  
|Restricted cash                                                           |               | 475,000           |   | 475,000           |  
|Other assets                                                              |               | 1,037,296         |   | 1,408,158         |  
|                                                                          |               |                   |   |                  
|Total assets                                                              |               | $   40,047,287    |   | $   35,166,270    |  
|                                                                          |               |                   |   |                  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                      |              
|Current liabilities:                                                      |              
|Capital lease obligations, current portion                                |               | $          86,564 |   | $          11,269 |  
|Accounts payable                                                          |               | 3,092,962         |   | 4,773,297         |  
|Accrued expenses                                                          |               | 4,466,428         |   | 3,925,406         |  
|Accrued compensation                                                      |               | 803,900           |   | 545,870           |  
|Deferred revenue, current portion                                         |               | 3,995,575         |   | 3,790,828         |  
|                                                                          |               |                   |   |                  
|Total current
     liabilities                                            |               | 12,445,429        |   | 13,046,670        |  
|Capital lease obligations, net of current portion                         |               | 229,585           |   | 18,934            |  
|Deferred rent, net of current portion                                     |               | 2,358,550         |   | 3,001,980         |  
|Deferred revenue, net of current portion                                  |               | 6,713,942         |   | 9,873,438         |  
|                                                                          |               |                   |   |                  
|Total liabilities                                                         |               | 21,747,506        |   | 25,941,022        |  
|                                                                          |               |                   |   |                  
|Commitments and contingencies (Note 8)                                    |              
|Stockholders' equity:                                                     |              
|Preferred stock of $.01 par value -
     authorized 10,000,000 shares;    |              
|Series A Convertible; issued
     and outstanding 9,997 and 11,447 shares |              
|as of June 30, 2006 and 2005,
     respectively                           |               | 100               |   | 114               |  
|Common stock of $.01 par value - authorized
     150,000,000 shares;      |              
|issued and outstanding
     70,878,521 and 54,236,544 shares as of        |              
|June 30, 2006 and
     2005, respectively                                 |               | 708,785           |   | 542,365           |  
|Additional paid-in capital                                                |               | 178,089,176       |   | 140,167,431       |  
|Accumulated other comprehensive loss                                      |               | (54,736           | ) | -                 |  
|Accumulated deficit                                                       |               | (160,443,544      | ) | (131,484,662      | )
|                                                                          |               |                   |   |                  
|Total stockholders'
     equity                                           |               | 18,299,781        |   | 9,225,248         |  
|                                                                          |               |                   |   |                  
|Total liabilities
     and stockholders' equity                           |               | $   40,047,287    |   | $   35,166,270    |  
|                                                                          |               |                   |   |                  

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,
|                                                             |                     |                   
|                                                             | 2006                |                    | 2005 |                    | 2004 |                       
|                                                             |                     |                    |      |                    |      |                       
|REVENUES:                                                    |                     |                    |      |                    |      |                        |  
|Royalties                                                    |                     | $      1,508,862   |      | $      1,586,050   |      | $                    - |  
|Product sales                                                |                     | -                  |      | 2,474,325          |      | -                      |  
|Licenses, grants and contracts                               |                     | 18,239,783         |      | 13,896,818         |      | 2,315,158              |  
|                                                             |                     |                    |      |                    |      |                       
|Total revenues                                               |                     | 19,748,645         |      | 17,957,193         |      | 2,315,158              |  
|                                                             |                     |                    |      |                    |      |                       
|OPERATING EXPENSES:                                          |                    
|Cost of product sales                                        |                     | 2,041,175          |      | 534,932            |      | -                      |  
|Royalties                                                    |                     | 299,995            |      | 328,401            |      | -                      |  
|Research and development                                     |                     | 41,013,894         |      | 25,045,279         |      | 23,333,329             |  
|General and administrative                                   |                     | 6,843,817          |      | 7,460,607          |      | 5,739,519              |  
|                                                             |                     |                    |      |                    |      |                       
|Total operating expenses                                     |                     | 50,198,881         |      | 33,369,219         |      | 29,072,848             |  
|                                                             |                     |                    |      |                    |      |                       
|Loss from operations                                         |                     | (30,450,236        | )    | (15,412,026        | )    | (26,757,690            | )
|                                                             |                     |                    |      |                    |      |                       
|OTHER INCOME (EXPENSE):                                      |                    
|Investment income                                            |                     | 855,601            |      | 488,262            |      | 221,644                |  
|Interest expense                                             |                     | (30,522            | )    | (14,487            | )    | (22,649                | )
|                                                             |                     |                    |      |                    |      |                       
|Total other income, net                                      |                     | 825,079            |      | 473,775            |      | 198,995                |  
|                                                             |                     |                    |      |                    |      |                       
|Loss before income taxes                                     |                     | (29,625,157        | )    | (14,938,251        | )    | (26,558,695            | )
|Income tax benefit                                           |                     | 666,275            |      | 580,275            |      | 240,836                |  
|                                                             |                     |                    |      |                    |      |                       
|NET LOSS                                                     |                     | $ (28,958,882      | )    | $ (14,357,976      | )    | $ (26,317,859          | )
|                                                             |                     |                    |      |                    |      |                       
|Basic and diluted net loss per common share                  |                     | $            (0.48 | )    | $            (0.27 | )    | $            (0.55     | )
|                                                             |                     |                    |      |                    |      |                       
|Weighted average number of common shares outstanding used in |                    
|computing basic and diluted net loss per common share        |                     | 60,356,610         |      | 53,861,182         |      | 47,687,679             |  
|                                                             |                     |                    |      |                    |      |                       

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,
|                                                     |                     |                  
|                                                     | 2006                |                   | 2005 |                   | 2004 |                  
|                                                     |                     |                   |      |                   |      |                  
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                     |                   |      |                   |      |                   |  
|Net loss                                             |                     | $ (28,958,882     | )    | $ (14,357,976     | )    | $ (26,317,859     | )
|Adjustments to reconcile net loss to net cash        |                    
|used in operating activities:                        |                    
|Depreciation and amortization                        |                     | 1,263,899         |      | 1,075,306         |      | 1,097,442         |  
|Realized loss on investments                         |                     | -                 |      | 114,551           |      | 129,355           |  
|Stock-based compensation                             |                     | 1,167,177         |      | 983               |      | 748,582           |  
|Changes in certain operating assets and liabilities: |                    
|Accounts receivable                                  |                     | 5,371,834         |      | (5,441,425        | )    | -                 |  
|Inventories                                          |                     | 1,382,160         |      | (1,382,160        | )    | -                 |  
|Prepaid expenses and other                           |                     | 805,368           |      | (2,422,621        | )    | (102,962          | )
|Accounts payable                                     |                     | (1,680,335        | )    | 2,753,327         |      | 675,181           |  
|Accrued expenses and other                           |                     | 155,622           |      | 1,174,199         |      | 193,448           |  
|Deferred revenues                                    |                     | (2,954,749        | )    | 13,422,266        |      | (165,420          | )
|                                                     |                     |                   |      |                   |      |                  
|Net cash used in operating activities                |                     | (23,447,906       | )    | (5,063,550        | )    | (23,742,233       | )
|                                                     |                     |                   |      |                   |      |                  
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                    
|Sale or maturity of investments                      |                     | -                 |      | 50,000            |      | 1,420,712         |  
|Purchases of property and equipment                  |                     | (819,953          | )    | (968,001          | )    | (197,541          | )
|                                                     |                     |                   |      |                   |      |                  
|Net  cash  (used  in)  provided  by  investing       |                    
|activities                                           |                     | (819,953          | )    | (918,001          | )    | 1,223,171         |  
|                                                     |                     |                   |      |                   |      |                  
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                    
|Payments on capital lease obligations                |                     | (40,268           | )    | (33,491           | )    | (200,753          | )
|Proceeds from common stock, stock option             |                    
|and warrant issuances, net                           |                     | 36,920,974        |      | 3,788,330         |      | 26,372,288        |  
|                                                     |                     |                   |      |                   |      |                  
|Net cash provided by financing activities            |                     | 36,880,706        |      | 3,754,839         |      | 26,171,535        |  
|                                                     |                     |                   |      |                   |      |                  
|NET INCREASE (DECREASE) IN CASH                      |                    
|AND CASH EQUIVALENTS                                 |                     | 12,612,847        |      | (2,226,712        | )    | 3,652,473         |  
|                                                    
|CASH AND CASH EQUIVALENTS, beginning                 |                    
|of year                                              |                     | 15,720,364        |      | 17,947,076        |      | 14,294,603        |  
|                                                     |                     |                   |      |                   |      |                  
|CASH AND CASH EQUIVALENTS, end of year               |                     | $   28,333,211    |      | $   15,720,364    |      | $   17,947,076    |  
|                                                     |                     |                   |      |                   |      |                  
|SUPPLEMENTAL CASH FLOW INFORMATION:                  |                    
|Cash paid for interest                               |                     | $          30,522 |      | $          14,171 |      | $          22,649 |  
|Assets acquired by capital lease                     |                     | 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, 2003                      |             | 14,867          |   | $             149 |       | 42,994,050 |  | $        429,941 |  | $ 109,085,115 |   | $ (37,977      | ) | $ (11,805 | ) | $ (90,808,827  | ) | $ 18,656,596 |  
|Issuance of common shares, net of expenses |             | -               |   | -                 |       | 6,992,500  |  | 69,925           |  | 20,889,594    |   | -              |   | -         |   | -              |   | 20,959,519   |  
|Issuance of common shares upon conversion  |            
|of preferred shares                        |             | (3,170          | ) | (32               | )     | 120,465    |  | 1,205            |  | (1,173        | ) | -              |   | -         |   | -              |   | -            |  
|Issuance of common shares upon exercise    |            
|of options and warrants                    |             | -               |   | -                 |       | 2,683,574  |  | 26,835           |  | 5,385,934     |   | -              |   | -         |   | -              |   | 5,412,769    |  
|Stock-based compensation                   |             | -               |   | -                 |       | -          |  | -                |  | 789,012       |   | (86,157        | ) | -         |   | -              |   | 702,855      |  
|Amortization of deferred compensation      |             | -               |   | -                 |       | -          |  | -                |  | -             |   | 45,727         |   | -         |   | -              |   | 45,727       |  
|Unrealized loss on investments             |             | -               |   | -                 |       | -          |  | -                |  | -             |   | -              |   | (72,967   | ) | -              |   | (72,967      | )
|Net loss                                   |             | -               |   | -                 |       | -          |  | -                |  | -             |   | -              |   | -         |   | (26,317,859    | ) | (26,317,859  | )
|                                           |            
|Balance, June 30, 2004                     |             | 11,697          |   | 117               |       | 52,790,589 |  | 527,906          |  | 136,148,482   |   | (78,407        | ) | (84,772   | ) | (117,126,686   | ) | 19,386,640   |  
|Issuance of common shares, net of expenses |             | -               |   | -                 |       | 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      |  
|Issuance of common shares upon conversion  |            
|of preferred shares                        |             | (250            | ) | (3                | )     | 9,505      |  | 95               |  | (92           | ) | -              |   | -         |   | -              |   | -            |  
|Issuance of common shares upon 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       |  
|Loss on investments                        |             | -               |   | -                 |       | -          |  | -                |  | -             |   | -              |   | 84,772    |   | -              |   | 84,772       |  
|Net loss                                   |             | -               |   | -                 |       | -          |  | -                |  | -             |   | -              |   | -         |   | (14,357,976    | ) | (14,357,976  | )
|                                           |            
|Balance, June 30, 2005                     |             | 11,447          |   | 114               |       | 54,236,544 |  | 542,365          |  | 140,167,431   |   | -              |   | -         |   | (131,484,662   | ) | 9,225,248    |  
|Issuance of common shares, net of expenses |             | -               |   | -                 |       | 15,478,013 |  | 154,780          |  | 34,669,275    |   | -              |   | -         |   | -              |   | 34,824,055   |  
|Issuance  of common shares upon conversion |            
|of preferred shares                        |             | (1,450          | ) | (14               | )     | 55,723     |  | 557              |  | (543          | ) | -              |   | -         |   | -              |   | -            |  
|Issuance of common shares upon 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    |  
|Unrealized loss on investments             |             | -               |   | -                 |       | -          |  | -                |  | -             |   | -              |   | (54,736   | ) | -              |   | (54,736      | )
|Net loss                                   |             | -               |   | -                 |       | -          |  | -                |  | -             |   | -              |   | -         |   | (28,958,882    | ) | (28,958,882  | )
|                                           |            
|Balance, June 30, 2006                     |             | 9,997           |   | $             100 |       | 70,878,521 |  | $        708,785 |  | $ 178,089,176 |   | $            - |   | $ (54,736 | ) | $ (160,443,544 | ) | $ 18,299,781 |  
|                                           |            

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 and inflammation. The Company is exploring other
receptor-specific therapeutics using its patented drug discovery platform, including a congestive heart
failure therapy.

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

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

NeutroSpec
is a radiolabeled monoclonal antibody product for imaging and diagnosing infection and is
the subject of a strategic collaboration agreement with Tyco Healthcare Mallinckrodt
(Mallinckrodt). In July 2004, the Company received approval from the U.S. Food
and Drug Administration (FDA) 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 and recalled all existing
customer inventories. The Company and Mallinckrodt reported to the FDA the occurrence of
several serious adverse events, including two deaths, involving patients who received
NeutroSpec. All ongoing clinical trials and regulatory approvals of NeutroSpec have been
suspended. The Company and Mallinckrodt are evaluating future development and marketing
activities involving NeutroSpec.

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

Business
Risk and Liquidity  The Company has incurred negative cash flows from operations
since its inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts. As shown in the
accompanying consolidated financial statements, the Company has an accumulated deficit as
of June 30, 2006 and incurred a net loss for the year ended June 30, 2006. The Company
anticipates incurring additional losses in the future as a result of spending on its
development programs. To achieve profitability, the Company, alone or with others, must
successfully develop and commercialize its technologies and proposed products, conduct
successful pre-clinical studies and clinical trials, obtain required regulatory approvals
and successfully manufacture and market such technologies and proposed products. The time
required to reach profitability is highly uncertain, and there can be no assurance that
the Company will be able to achieve profitability on a sustained basis, if at all.

The
Company expects that its cash, cash equivalents and available-for-sale investments as of
June 30, 2006 will be adequate to fund the Companys operations for at least the next
twelve months. Management plans to continue to refine its operations, control expenses,
evaluate alternative methods to conduct its business, and seek available and attractive
sources of financing and sharing of development costs through strategic collaboration
agreements or other resources. Should appropriate sources of

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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.

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

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

|             |                     |     |      |     |      |     | 
|------------ | ------------------- | --- | ---- | --- | ---- | --- | 
|             | Year Ended June 30, |    
|             | 2006                |     | 2005 |     | 2004 |    
|King         |                     | 91% |      | 64% |      | 0%  | 
|Mallinckrodt |                     | 9%  |      | 36% |      | 94% | 

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

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

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

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improvements. The
Companys leasehold improvements primarily relate to a lease that expires in July
2012. Amortization of assets acquired under capital leases is included in depreciation.
Maintenance and repairs are expensed as incurred while expenditures that extend the useful
life of an asset are capitalized.

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

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

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

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

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

Revenue
from corporate collaborations and licensing agreements consists of up-front fees, research
and development funding, and milestone payments. Non-refundable up-front fees are deferred
and amortized to revenue over the related performance period. Due to the uncertainty
inherent in its development programs, including the possibility that a program is
terminated prior to completion, the Company recognizes such revenue on a straight-line
basis, as it believes that no other basis is more reflective of the pattern over which
such revenue is earned. The Company considers its performance period under the King
collaboration to be the period in which it performs development activities during the
initial research term, which is currently estimated to be five years from the inception of
the agreement. Specific performance periods are not stated in the agreement and are
estimated by management based on detailed development programs agreed upon by the parties.
Management monitors the progress and results of these development activities and adjusts
its estimated performance period accordingly. The actual performance period may vary based
on the results of the related development activities, changes in development plans agreed
by the parties, regulatory requirements and other factors. Increases in the estimated
performance period would result in increases in the period over which such deferred
revenue is to be recognized and corresponding decreases in the amount of revenue
recognized each period. In the fourth quarter of the year ended June 30, 2005, the Company
increased its estimate for its period of performance under the King collaboration and,
accordingly, reduced the amount of deferred revenue recognized per quarter by
approximately $235,000.

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

Stock
Options  Effective July 1, 2005, the Company adopted Statement of Financial
Accounting Standards (SFAS) 123(R), Share-Based Payment, using the
modified prospective method. SFAS

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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 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 years ended June 30,
2005 and 2004 is as follows:

|                                                                  |  |                    |   |                   |  
|----------------------------------------------------------------- |  | ------------------ | - | ----------------- | -
|                                                                  |  | Year Ended June 30
|                                                                  |  |                   
|                                                                  |  | 2005               |   | 2004              |  
|                                                                  |  |                    |   |                  
|As reported                                                       |  | $ (14,357,976      | ) | $ (26,317,859     | )
|Stock-based employee compensation expense included in the         | 
|determination of net loss as reported                             |  | (15,879            | ) | 626,639           |  
|Impact of total stock-based compensation expense determined under | 
|fair-value-based method                                           |  | (1,067,519         | ) | (1,801,218        | )
|                                                                  |  |                    |   |                  
|Pro forma                                                         |  | $ (15,441,374      | ) | $ (27,492,438     | )
|                                                                  |  |                    |   |                  
|Basic and diluted net loss per common share:                      | 
|As reported                                                       |  | $           (0.27  | ) | $           (0.55 | )
|                                                                  |  |                    |   |                  
|Pro forma                                                         |  | $           (0.29  | ) | $           (0.58 | )
|                                                                  |  |                    |   |                  
|Weighted average valuation assumptions:                           | 
|Expected life of options in years                                 |  | 7                  |   | 7                 |  
|Risk-free interest rate                                           |  | 3.9%               |   | 3.7%              |  
|Expected volatility                                               |  | 87%                |   | 91%               |  
|Expected dividend yield                                           |  | 0%                 |   | 0%                |  

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

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

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

In
accordance with SFAS 109 Accounting for Income Taxes, the Company has recorded
a valuation allowance against its deferred tax assets. The valuation allowance is based on
managements

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estimates and analysis, which includes provisions of tax laws that may
limit the Companys ability to utilize its net operating loss carryforwards.

Net
Loss per Common Share  Basic earnings per share (EPS) is computed by
dividing net loss by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options and warrants. For the years ended June
30, 2006, 2005 and 2004 there were no dilutive effects of stock options or warrants as the
Company incurred a net loss in each period. Common shares issuable upon conversion of
Series A Convertible Preferred Stock and the exercise of outstanding options and warrants
amounted to an aggregate of 15,954,843, 13,384,915, and 12,837,094 as of June 30, 2006,
2005 and 2004, respectively.

(3)    AGREEMENT WITH
KING PHARMACEUTICALS, INC.

In
August 2004, the Company entered into a Collaborative Development and Marketing Agreement
with King, a specialty pharmaceutical company, to jointly develop and commercialize
bremelanotide. Pursuant to the terms of the agreement, King and Palatin will share all
collaboration development and marketing costs and all collaboration net profits derived
from net sales of bremelanotide in North America based on an agreed percentage. King and
Palatin currently plan to seek a partner for bremelanotide for territories outside of
North America and will jointly share in collaboration development and marketing costs and
all collaboration revenues generated from those territories. Palatin has the option to
create, with King, a urology specialty sales force to co-promote the product in the U.S.
if the product is successfully developed and commercialized.

In August
2004, King paid the Company $20,000,000 at the closing of the agreement, purchased Company common stock and
warrants for an aggregate of $10,000,000 in September 2005, as describe in note 9, and may make future
milestone payments to the Company totaling up to $90,000,000 for achieving certain male erectile dysfunction
(ED) and female sexual dysfunction (FSD) development and regulatory approval targets.
After regulatory approval and commercialization of bremelanotide, King may also make milestone payments to the
Company totaling up to an additional $130,000,000 upon achieving specified annual North American net sales
thresholds. A portion of the above milestones may be in the form of purchases of the Company's common stock.

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 to be recognized as revenue over the period
of the Companys performance during the initial development term of this agreement.
For the years ended June 30, 2006 and 2005, the Company recognized $3,159,496 and
$3,360,394, respectively, of the deferred revenue.

(4)   
          OTHER COMPREHENSIVE LOSS

Other
comprehensive loss consists of the following:

|                                     |                     |               |      |               |      |               |  
|------------------------------------ | ------------------- | ------------- | ---- | ------------- | ---- | ------------- | -
|                                     | Year Ended June 30, |              
|                                     |                     |              
|                                     | 2006                |               | 2005 |               | 2004 |              
|                                     |                     |               |      |               |      |              
|Net loss                             |                     | $ (28,958,882 | )    | $ (14,357,976 | )    | $ (26,317,859 | )
|Unrealized loss on investments       |                     | (54,736       | )    | (29,779       | )    | (72,967       | )
|Reclassification adjustment for      |                    
|realized losses included in net loss |                     | -             |      | 114,551       |      | -             |  
|                                     |                     |               |      |               |      |              
|Comprehensive loss                   |                     | $ (29,013,618 | )    | $ (14,273,204 | )    | $ (26,390,826 | )
|                                     |                     |               |      |               |      |              

(5)   INVESTMENTS

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

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|                        |  |              |   |              | 
|----------------------- |  | ------------ | - | ------------ | 
|                        |  | June 30,2006 |   | June 30,2005 | 
|                        |  |              |   |             
|Cost                    |  | $ 2,385,570  |   | $ 2,385,570  | 
|Gross unrealized losses |  | (54,736      | ) | -            | 
|                        |  |              |   |             
|Fair value              |  | $ 2,330,834  |   | $ 2,385,570  | 
|                        |  |              |   |             

The
Company determined that certain unrealized losses as of June 30, 2005 were other than
temporary. Accordingly, the Company reduced the cost basis of the underlying security and
recorded a realized loss of $114,551 in its statement of operations for the year ended
June 30, 2005. The unrealized loss as of June 30, 2006 pertains to investments that have
been in a continuous loss position since June 30, 2005.

(6)   PROPERTY AND EQUIPMENT, NET

Property
and equipment, net, consists of the following:

|                                                |  |               |   |               |  
|----------------------------------------------- |  | ------------- | - | ------------- | -
|                                                |  | June 30,2006  |   | June 30,2005  |  
|                                                |  |               |   |              
|Office equipment                                |  | $   1,758,232 |   | $   1,508,402 |  
|Laboratory equipment                            |  | 3,041,209     |   | 2,393,236     |  
|Leasehold improvements                          |  | 6,766,782     |   | 6,518,418     |  
|                                                |  |               |   |              
|                                                |  | 11,566,223    |   | 10,420,056    |  
|Less: Accumulated depreciation and amortization |  | (5,218,518    | ) | (3,955,732    | )
|                                                |  |               |   |              
|                                                |  | $   6,347,705 |   | $   6,464,324 |  
|                                                |  |               |   |              

The
cost of assets acquired under capital leases amounted to $438,250 and $54,292 as of June
30, 2006 and 2005, respectively, with accumulated amortization of $79,115 and $29,861 as
of June 30, 2006 and 2005, respectively.

(7)   ACCRUED EXPENSES

Accrued
expenses consist of the following:

|                               |  |              |  |              | 
|------------------------------ |  | ------------ |  | ------------ | 
|                               |  | June 30,2006 |  | June 30,2005 | 
|                               |  |              |  |             
|Product development costs      |  | $3,039,676   |  | $2,035,670   | 
|Deferred rent, current portion |  | 852,546      |  | 437,053      | 
|Inventory production costs     |  | -            |  | 653,656      | 
|Other                          |  | 574,206      |  | 799,027      | 
|                               |  |              |  |             
|                               |  | $4,466,428   |  | $3,925,406   | 
|                               |  |              |  |             

(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,
| | 2007                 |  | $     2,386,899 | 
| | 2008                 |  | 2,072,281       | 
| | 2009                 |  | 1,511,736       | 
| | 2010                 |  | 1,514,346       | 
| | 2011                 |  | 1,540,148       | 
| | Thereafter           |  | 2,297,434       | 

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For
the years ended June 30, 2006, 2005 and 2004, rent expense was $1,630,165, $897,856 and
$906,989, respectively.

Capital
Leases  The Company leases certain of its laboratory equipment under agreements
classified as capital leases. Scheduled future payments related to capital leases at June
30, 2006 are as follows:

| |                              |  |               |   | 
| | ---------------------------- |  | ------------- | - | 
| | Year Ending June 30,        
| | 2007                         |  | $     109,819 |   | 
| | 2008                         |  | 103,045       |   | 
| | 2009                         |  | 96,270        |   | 
| | 2010                         |  | 56,158        |   | 
| | Total                        |  | 365,292       |   | 
| | Amount representing interest |  | (49,143       | ) | 
| | Net                          |  | $     316,149 |   | 

Employment
Agreements  The Company has employment agreements with four executives, 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. 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
upfront 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
contingent on the achievement of specified cumulative net margins on sales by
Mallinckrodt. No contingent amounts will be payable related to NeutroSpec 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.

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, 2006, 2005 and 2004, Company
contributions amounted to $180,248, $149,236 and $109,015, 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 reduction in expense in a future accounting period. As of June
30, 2006, the Company is not aware of any claims for which a loss is probable and,
accordingly, has not accrued any loss provisions. The Company records legal expenses
associated with such contingencies as incurred.

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

Competitive
Technologies, Inc. (CTI) has initiated arbitration proceedings with the Company for breach of
the terms of its license agreement for patent rights related to certain compounds and methods

39

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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 license agreement provides for binding arbitration as the remedy for
dispute resolution. The Company has not yet been required to respond to CTIs arbitration demand. The Company
intends to strenuously dispute CTIs assertions, including that the Company materially breached the license
agreement, and intends to defend itself vigorously. The Company cannot reasonably predict the outcome of the
dispute or reasonably estimate the range of potential loss, if any. Although the amount of any liability that
could arise with respect to this matter cannot be predicted, the Company does not believe that the resolution
of this matter will have a material adverse effect on its financial position, results of operations or
liquidity.

(9)    STOCKHOLDERS EQUITY

Series
A Convertible Preferred Stock  As of June 30, 2006, 9,997 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, 2006, the Series A Conversion Price is $2.59, so each share of Series A
Convertible Preferred Stock is currently convertible into approximately 39 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 $999,700 in the
aggregate as of June 30, 2006.

Common
Stock Transactions  In January 2004, the Company concluded a private placement of
common stock and warrants in which the Company sold 6,992,500 shares of its $.01 par value
common stock and 1,048,875 warrants, which equates to 15% warrant coverage on the number
of shares sold, at an offering price of $3.25 per share. Each five-year warrant entitles
the holder to purchase one share of common stock at an exercise price of $4.06 per share.
The gross proceeds were approximately $22,700,000 and the net proceeds were approximately
$21,000,000.

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 warrants to purchase 235,225 shares of common stock at $4.25 per share, which expire
in August 2007.

In
September 2005, the Company sold 4,499,336 shares of its common stock and warrants to
purchase 719,894 shares of its common stock in a private placement to King for a total
purchase price of $10,000,000. The warrants are exercisable for a three-year period
commencing September 26, 2005, at an exercise price of $2.22 per share. The sale of the
stock and warrants was made pursuant to the Companys collaborative development and
marketing agreement with King.

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

40

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Table of Contents (Financial)

Outstanding
Stock Purchase Warrants  As of June 30, 2006, the Company had the following warrants
outstanding (prices are rounded to the nearest cent).

| |           |  |           |             | 
| | --------- |  | --------- | ----------- | 
| | Common    |  | Exercise  | Latest      | 
| | Stock     |  | Price     | Termination | 
| | Shares    |  | per Share | Date        | 
| | 38,627    |  | $1.37     | 07/29/07    | 
| | 51,502    |  | 1.46      | 06/13/07    | 
| | 823,758   |  | 1.54      | 11/29/07    | 
| | 2,464,789 |  | 1.77      | 03/21/08    | 
| | 719,894   |  | 2.22      | 09/26/08    | 
| | 132,688   |  | 2.66      | 10/29/06    | 
| | 685,518   |  | 2.70      | 04/30/07    | 
| | 292,215   |  | 2.75      | 06/13/07    | 
| | 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    | 
| | 25,000    |  | 3.65      | 12/17/06    | 
| | 15,000    |  | 4.00      | 12/15/10    | 
| | 1,041,750 |  | 4.06      | 01/28/09    | 
| | 235,225   |  | 4.25      | 08/18/07    | 
| | 9,909,557 |  |           |             | 

In
November 2004, the Company issued warrants to purchase 75,000 shares 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 warrants of approximately $101,000, as calculated by the Black-Scholes
option pricing model, has been included in general and administrative expenses in the year
ended June 30, 2005.

Stock
Option Plan  The Companys 2005 Stock Plan was approved by the Companys
stockholders in June 2005 and provides for incentive and nonqualified stock option grants
for up to 5,000,000 shares of common stock to employees, non-employee directors and
consultants. The 2005 Stock Plan is administered under the direction of the Board of
Directors, which may specify grant terms and recipients. Options granted by the Company
generally expire ten years from the date of grant and generally vest over three to four
years. As of June 30, 2006, 3,791,787 shares were available for grant under the 2005 Stock
Plan.

As
of June 30, 2006, there were 166,094 options available for grant under the 1996 Stock
Option Plan, which expired in August 2006. The 1996 Stock Option Plan is administered
under the direction of the Board of Directors, which may specify grant terms and
recipients. Options granted by the Company generally expire ten years from the date of
grant and generally vest over three to four years.

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.

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Table of Contents (Financial)

The
following table summarizes option activity for the years ended June 30, 2006, 2005 and
2004:

|                 |  |                  |   |                                 |  |                  |   |                                 |  |                  |   |                                 | 
|---------------- |  | ---------------- | - | ------------------------------- |  | ---------------- | - | ------------------------------- |  | ---------------- | - | ------------------------------- | 
|                 |  | 2006             |   | 2005                            |  | 2004             |  
|                 |  | Number of Shares |   | Weighted Average Exercise Price |  | Number of Shares |   | Weighted Average Exercise Price |  | Number of Shares |   | Weighted Average Exercise Price | 
|Outstanding at   | 
|beginning of     | 
|year             |  | 4,688,152        |   | $3.41                           |  | 4,365,601        |   | $3.58                           |  | 4,136,237        |   | $3.79                           | 
|Granted          |  | 1,276,297        |   | 2.10                            |  | 661,933          |   | 2.45                            |  | 957,500          |   | 3.34                            | 
|Forfeited        |  | (149,527         | ) | 2.33                            |  | (69,134          | ) | 3.50                            |  | (257,983         | ) | 3.03                            | 
|Exercised        |  | (21,162          | ) | 1.64                            |  | (35,000          | ) | 1.69                            |  | (140,432         | ) | 2.77                            | 
|Expired          |  | (134,458         | ) | 4.23                            |  | (235,248         | ) | 4.15                            |  | (329,730         | ) | 6.32                            | 
|                 |  |                  |   |                                 |  |                  |   |                                 | 
|Outstanding at   | 
|end of year      |  | 5,659,302        |   | 3.12                            |  | 4,688,152        |   | 3.41                            |  | 4,365,601        |   | 3.58                            | 
|                 |  |                  |   |                                 |  |                  |   |                                 | 
|Exercisable at   | 
|end of year      |  | 4,267,879        |   | 3.41                            |  | 3,830,910        |   | 3.61                            |  | 3,353,207        |   | 3.76                            | 
|                 |  |                  |   |                                 |  |                  |   |                                 | 
|Weighted average | 
|fair value of    | 
|options granted  | 
|during the year  |  |                  |   | $1.38                           |  |                  |   | $1.92                           |  |                  |   | $2.68                           | 

The
following table summarizes options outstanding as of June 30, 2006:

|                               |  |                  |  |                                 |  |                                 |  |                           | 
|------------------------------ |  | ---------------- |  | ------------------------------- |  | ------------------------------- |  | ------------------------- | 
|                               |  | Number of Shares |  | Weighted Average Exercise Price |  | Weighted Average Remaining Term |  | Aggregate Intrinsic Value | 
|Options outstanding at end of  | 
|year                           |  | 5,659,302        |  | $3.12                           |  | 6.0                             |  | $448,051                  | 
|Options vested and exercisable | 
|at end of year                 |  | 4,267,879        |  | 3.41                            |  | 5.1                             |  | 298,249                   | 
|Unvested options expected to   | 
|vest                           |  | 1,057,097        |  | 2.31                            |  | 8.8                             |  | 122,142                   | 

The intrinsic
value of options exercised in the years ended June 30, 2006, 2005 and 2004 was $21,368,
$32,384 and $72,903, 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, 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 year ended June 30, 2006, the Company recorded share-based compensation of $1,167,177
representing approximately $0.02 per share, net of a provision for estimated forfeitures
of $109,991, which is included in the Companys net loss for the period. The Company
did not record a tax benefit related to share-based compensation expense. As of June 30,
2006, there was $1,137,184 of total unrecognized compensation cost related to unvested
options, which is expected to be recognized over a weighted-average period of 1.2 years.

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Table of Contents (Financial)

During
the year ended June 30, 2004, the Company made modifications to stock options held by an
employee and a director. As a result of these modifications, the Company recorded expenses
of ($84,212) and $156,239 during the years ended June 30, 2005 and 2004, respectively. In
addition, there were stock options granted to certain officers that included vesting
provisions which were contingent on achievement of certain performance objectives and one
of these objectives was met in September 2003. As a result, in the years ended June 30,
2005 and 2004, compensation expense in the amount of $68,333 and $470,400, respectively,
was recorded in connection with these performance based options. As of June 30, 2006,
options for 100,000 shares at an exercise price of $1.99 per share were subject to vesting
contingent on achievement of certain performance objectives.

(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, 2006, the Company had federal and state net operating loss carryforwards of
approximately $144,000,000 and $104,000,000, respectively, which expire between 2007 and
2026 if not utilized. As of June 30, 2006 the Company had federal research and development
credits of approximately $3,967,000 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, 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 income tax purposes.

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

|                                             |  |                     |   |                     |  
|-------------------------------------------- |  | ------------------- | - | ------------------- | -
|                                             |  | June 30,2006        |   | June 30,2005        |  
|                                             |  |                     |   |                    
|Net operating loss carryforwards             |  | $ 55,199,000        |   | $ 44,529,000        |  
|Research and development tax credits         |  | 3,967,000           |   | 3,373,000           |  
|Accrued expenses, deferred revenue and other |  | 5,091,000           |   | 5,094,000           |  
|                                             |  |                     |   |                    
|                                             |  | 64,257,000          |   | 52,996,000          |  
|Valuation allowances                         |  | (64,257,000         | ) | (52,996,000         | )
|                                             |  |                     |   |                    
|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, 2006 and 2005. The valuation
allowance for the years ended June 30, 2006, 2005 and 2004 increased by $11,261,000,
$6,468,000 and $11,279,000, 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, 2006, 2005 and 2004, the Company sold New Jersey state operating
loss carryforwards, which resulted in the recognition of $666,275, $580,275 and $240,836,
respectively, in tax benefits.

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(11)    RELATED PARTY TRANSACTIONS

One
of the Companys directors is the president and sole stockholder of a company that
provided strategic and technology consulting services. The Company paid the consulting
firm $43,125 during the year ended June 30, 2004 for consulting services provided to the
Company.

(12)    CONSOLIDATED QUARTERLY FINANCIAL DATA 
UNAUDITED

The
following tables provide quarterly data for the years ended June 30, 2006 and 2005:

|                            |                                               |                  |               |                  |                  |                  |                   |                  |  
|--------------------------- | --------------------------------------------- | ---------------- | ------------- | ---------------- | ---------------- | ---------------- | ----------------- | ---------------- | -
|                            | 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       |  
|                            |                                               |                  |               |                  |                  |                  |                   |                 

|                            |                                               |                  |               |                  |                  |                  |                   |                  |  
|--------------------------- | --------------------------------------------- | ---------------- | ------------- | ---------------- | ---------------- | ---------------- | ----------------- | ---------------- | -
|                            | Three Months Ended                           
|                            | June 30,2005                                  |                  | March 31,2005 |                  | December 31,2004 |                  | September 30,2004 |                 
|                            | (amounts in thousands, except per share data)
|Total revenues              |                                               | $          5,845 |               | $          2,807 |                  | $          4,813 |                   | $          4,492 |  
|Cost of product sales       |                                               | 308              |               | 6                |                  | 133              |                   | 88               |  
|Royalties                   |                                               | 84               |               | 85               |                  | 87               |                   | 72               |  
|Other operating expenses    |                                               | 10,588           |               | 6,813            |                  | 7,623            |                   | 7,482            |  
|Total other income, net     |                                               | 44               |               | 157              |                  | 163              |                   | 110              |  
|                            |                                               |                  |               |                  |                  |                  |                   |                 
|Loss before income taxes    |                                               | (5,091           | )             | (3,940           | )                | (2,867           | )                 | (3,040           | )
|Income tax benefit          |                                               | -                |               | -                |                  | 580              |                   | -                |  
|                            |                                               |                  |               |                  |                  |                  |                   |                 
|Net loss                    |                                               | $       (5,091   | )             | $       (3,940   | )                | $       (2,287   | )                 | $       (3,040   | )
|                            |                                               |                  |               |                  |                  |                  |                   |                 
|Basic and diluted net loss  |                                              
|per common share            |                                               | $         (0.09  | )             | $         (0.07  | )                | $         (0.04  | )                 | $         (0.06  | )
|                            |                                               |                  |               |                  |                  |                  |                   |                 
|Weighted average number of  |                                              
|common shares outstanding   |                                              
|used in computing basic and |                                              
|diluted net loss per common |                                              
|share                       |                                               | 54,056,264       |               | 54,021,372       |                  | 53,997,547       |                   | 53,375,147       |  
|                            |                                               |                  |               |                  |                  |                  |                   |                 

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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, 2006,
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) under 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.

Palatins
management assessed the effectiveness of the Companys internal control over
financial reporting as of June 30, 2006. 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, 2006, the Companys internal control over
financial reporting is effective based on those criteria.

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
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, 2006, 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

45

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Table of Contents

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.

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, 2006, 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, 2006, based
on the 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, 2006 and 2005, 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, 2006, and our report dated September 12, 2006 expressed
an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Philadelphia, PennsylvaniaSeptember
12, 2006

Item 9B.  Other Information.

None.

46

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Table of Contents

PART III

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

| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Item 10  Directors and Executive Officers of
     the Registrant                                                                                                                                                                     
|
| |  | 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                                                                                                                                                                         
|
| |  | Item 14 - Principal Accountant Fees and Services                                                                                                                                                                                      

is incorporated by reference from our
definitive proxy statement relating to the 2006 Annual Meeting of Stockholders, which we
will file with the SEC within 120 days after our June 30, 2006 fiscal year end.

47

---

Table of Contents

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: The following exhibits are filed with this report, or incorporated by reference as noted.

|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 Form S-8
filed with the SEC on June 17, 1998. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------

|10.04 |  | Executive
Officers Stock Option Agreement. Incorporated by reference to Exhibit 4.18 of our Form
S-8 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.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | Form
of stock purchase agreement for our October 2001 private placement. Incorporated by
reference to Exhibit 10.1 of our quarterly report on Form 10-Q for the quarter ended
September 30, 2001, filed with the SEC on November 14, 2001.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Form
of warrant issued to purchasers in our October 2001 private placement. Incorporated by
reference to Exhibit 10.3 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.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

48

---

Table of Contents (Financial)

|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.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | Development
and Manufacturing Agreement between Palatin and DSM Biologics Company B.V. 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. 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.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.27 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.30 |  | Employment
Agreement dated as of May 1, 2005, between Palatin Technologies, Inc. and Trevor Hallam.

|----- |  | -----------------------------------------------------------------------------------------------------

|10.31 |  | 2005
Stock Plan. Incorporated by reference to Exhibit 10.01 of our 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

49

---

Table of Contents (Financial)

|10.33 |  | Employment Agreement
dated as of October 1, 2005 between Palatin and Carl Spana. Incorporated by reference to
Exhibit 10.33 of our quarterly report on Form 10-Q for the quarter ended September 30,
2005, filed with the SEC on November 8, 2005. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.34 |  | Employment Agreement
dated as of October 1, 2005 between Palatin and Stephen T. Wills. Incorporated by
reference to Exhibit 10.34 of our quarterly report on Form 10-Q for the quarter ended
September 30, 2005, filed with the SEC on November 8, 2005. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.35 |  | Employment Agreement
dated as of October 1, 2005 between Palatin and Shubh D. Sharma. Incorporated by reference
to Exhibit 10.35 of our quarterly report on Form 10-Q for the quarter ended September 30,
2005, filed with the SEC on November 8, 2005. 
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.36 |  | Form
of Option Certificate (incentive option) under the 2005 Stock Plan. Incorporated by
reference to Exhibit 10.1 of our 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 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 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 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 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 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 report on Form 8-K, filed with the SEC on April 12,
2006.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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.

50

---

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, 2006

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, 2006
|Carl Spana                | (principal executive officer)                        |                   
|                          |                                                      |                   
|/s/ Stephen T. Wills      | Executive Vice President and Chief Financial Officer | September 12, 2006
|Stephen T. Wills          | (principal financial and accounting officer)         |                   
|                          |                                                      |                   
|/s/ John K.A. Prendergast | Chairman and Director                                | September 12, 2006
|John K.A. Prendergast     |                                                      |                   
|                          |                                                      |                   
|/s/ Perry B. Molinoff     | Director                                             | September 12, 2006
|Perry B. Molinoff         |                                                      |                   
|                          |                                                      |                   
|/s/ Robert K. deVeer, Jr. | Director                                             | September 12, 2006
|Robert K. deVeer, Jr.     |                                                      |                   
|                          |                                                      |                   
|/s/ Zola P. Horovitz      | Director                                             | September 12, 2006
|Zola P. Horovitz          |                                                      |                   
|                          |                                                      |                   
|/s/ Robert I. Taber       | Director                                             | September 12, 2006
|Robert I. Taber           |                                                      |                   
|                          |                                                      |                   
|/s/ Errol DeSouza         | Director                                             | September 12, 2006
|Errol DeSouza             |                                                      |                   
|                          |                                                      |                   
|/s/ J. Stanley Hull       | Director                                             | September 12, 2006
|J. Stanley Hull           |                                                      |                   

51

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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 Form S-8
filed with the SEC on June 17, 1998. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------

|10.04 |  | Executive
Officers Stock Option Agreement. Incorporated by reference to Exhibit 4.18 of our Form
S-8 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.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | Form
of stock purchase agreement for our October 2001 private placement. Incorporated by
reference to Exhibit 10.1 of our quarterly report on Form 10-Q for the quarter ended
September 30, 2001, filed with the SEC on November 14, 2001.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Form
of warrant issued to purchasers in our October 2001 private placement. Incorporated by
reference to Exhibit 10.3 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.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | Development
and Manufacturing Agreement between Palatin and DSM Biologics Company B.V. 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. 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.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.27 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.30 |  | Employment
Agreement dated as of May 1, 2005, between Palatin Technologies, Inc. and Trevor Hallam.

|----- |  | -----------------------------------------------------------------------------------------------------

|10.31 |  | 2005
Stock Plan. Incorporated by reference to Exhibit 10.01 of our 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.33 |  | Employment Agreement
dated as of October 1, 2005 between Palatin and Carl Spana. Incorporated by reference to
Exhibit 10.33 of our quarterly report on Form 10-Q for the quarter ended September 30,
2005, filed with the SEC on November 8, 2005. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.34 |  | Employment Agreement
dated as of October 1, 2005 between Palatin and Stephen T. Wills. Incorporated by
reference to Exhibit 10.34 of our quarterly report on Form 10-Q for the quarter ended
September 30, 2005, filed with the SEC on November 8, 2005. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.35 |  | Employment Agreement
dated as of October 1, 2005 between Palatin and Shubh D. Sharma. Incorporated by reference
to Exhibit 10.35 of our quarterly report on Form 10-Q for the quarter ended September 30,
2005, filed with the SEC on November 8, 2005. 
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.36 |  | Form
of Option Certificate (incentive option) under the 2005 Stock Plan. Incorporated by
reference to Exhibit 10.1 of our 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 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 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 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 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 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 report on Form 8-K, filed with the SEC on April 12,
2006.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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.