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, 2009 or [   ]
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934  For the transition period from ___________ to
__________ Commission file number 001-15543 _____________________________  PALATIN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter) Delaware
     95-4078884(State or other jurisdiction of
     incorporation or organization)
     (I.R.S. Employer Identification
     No.)4C Cedar Brook DriveCranbury, New Jersey
     08512(Address of principal executive
     offices)
     (Zip Code) (609) 495-2200
(Registrant's telephone number, including area code)


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

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

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
        o
                
        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
        o
                
        No
        x

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|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------
|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
        o

|                                                                                                                                                                                                                                                                                                                                                                                                     |                                                    
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------
|Indicate
by check mark whether the  registrant  has  submitted  electronically  and posted on its
corporate Web site, if any, every  Interactive  Data File required to be submitted and
posted  pursuant to Rule 405 of Regulation S-T (§ 232.405 of this  chapter)  during
the  preceding 12 months (or for such shorter  period that the  registrant was required
to submit and post such files).
|                                                                                                                                                                                                                                                                                                                                                                                                     | Yes
        o
                
        No
        o

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

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

| |                                               |  |                                      
| | --------------------------------------------- |  | -------------------------------------
| | Large accelerated filer
          o           |  | Accelerated filer
          o        
|
| | Non-accelerated filer
          o             |  | Smaller reporting company
          x
| | (Do not check if a smaller reporting company) |  |                                      

|                                                                                                                 |                                                    
|---------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------
|Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
|                                                                                                                 | Yes
        o
                
        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 equity 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, 2008): $8,643,861.

Indicate the number of shares
outstanding of each of the registrants classes of common stock, as of the latest
practicable date (September 25, 2009): 96,155,249.

DOCUMENTS
INCORPORATED BY REFERENCE

Certain portions of the
registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 are
incorporated into Part I of this Form 10-K.



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PALATIN TECHNOLOGIES, INC.TABLE OF
CONTENTS

|            |                                                                                                                 |     
|----------- | --------------------------------------------------------------------------------------------------------------- | ----
|            |                                                                                                                 | Page
|            | PART I                                                                                                          |     
|Item 1.     | Business                                                                                                        | 2   
|Item 1A.    | Risk Factors                                                                                                    | 11  
|Item 2.     | Properties                                                                                                      | 19  
|Item 3.     | Legal Proceedings                                                                                               | 19  
|Item 4.     | Submission of Matters to a Vote of
   Security Holders                                                          | 19  
|            | PART II                                                                                                         |     
|Item 5.     | Market for Registrant's Common Equity,
   Related Stockholder Matters and Issuer Purchases of Equity Securities | 20  
|Item 7.     | Management's Discussion and Analysis of
   Financial Condition and Results of Operations                        | 20  
|Item 8.     | Financial Statements and Supplementary
   Data                                                                  | 25  
|Item 9.     | Changes In and Disagreements With
   Accountants on Accounting and Financial Disclosure                         | 43  
|Item 9A(T). | Controls and Procedures                                                                                         | 43  
|Item 9B.    | Other Information                                                                                               | 43  
|PART III   
|Item 10.    | Directors, Executive Officers and Corporate
   Governance                                                       | 44  
|Item 11.    | Executive Compensation                                                                                          | 48  
|Item 12.    | Security Ownership of Certain Beneficial
   Owners and Management and Related Stockholder Matters               | 55  
|Item 13.    | Certain Relationships and Related
   Transactions, and Director Independence                                    | 58  
|Item 14.    | Principal Accountant Fees and
   Services                                                                       | 58  
|PART IV    
|Item 15.    | Exhibits and Financial Statement Schedules                                                                      | 60  

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 (this Annual Report), 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 do not
constitute guarantees of future performance. Investors are cautioned that statements which
are not strictly historical statements contained in this Annual Report, 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.

In
this Annual Report, references to we, our, us or
Palatin means Palatin Technologies, Inc.

Overview

We
are a biopharmaceutical company dedicated to the development of peptide, peptide mimetic
and small molecule agonist compounds with a focus on melanocortin and natriuretic peptide
receptor systems. We have a diverse pipeline of active development programs targeting
melanocortin and natriuretic receptors, including development of proposed products for
treatment of heart failure, sexual dysfunction, obesity, diabetes and metabolic syndrome.

We
currently have the following active drug development programs:

| |  |  | Bremelanotide,
a peptide melanocortin receptor agonist, for treatment of sexual dysfunction, targeting
female sexual dysfunction (FSD) and erectile dysfunction (ED) in patients non-responsive
to current therapies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | PL-6983,
a peptide melanocortin receptor agonist, for treatment of sexual dysfunction.
| | - |  | --------------------------------------------------------------------------------------

| |  |  | PL-3994,
a peptide mimetic natriuretic peptide receptor A (NPRA) agonist, for treatment of heart
failure (HF).
| | - |  | --------------------------------------------------------------------------------------------------------------

| |  |  | Melanocortin
receptor-based compounds for treatment of obesity, diabetes and related metabolic
syndrome pursuant to an ongoing research collaboration and global license with
AstraZeneca AB (AstraZeneca).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Key
elements of our business strategy include: using our technology and expertise to develop
and commercialize therapeutic products; entering into alliances and partnerships with
pharmaceutical companies to facilitate the development, manufacture, marketing, sale and
distribution of product candidates we are developing; partially funding our development
and discovery programs with the cash flow from our AstraZeneca collaboration agreement and
any future agreements with other companies; and, depending on the availability of
sufficient funding, expanding our pipeline by using our expertise in drug discovery
technologies for melanocortin and natriuretic peptide receptor systems and acquiring
synergistic products and technologies.

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

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Melanocortin
Receptor-Specific Programs

The
melanocortin system is involved in a large and diverse number of physiologic functions,
and therapeutic agents modulating this system may have the potential to treat a variety of
conditions and diseases, including sexual dysfunction, obesity and related disorders,
ischemiareperfusion injury (injury resulting from inadequate blood flow or
reintroduction of blood flow), hemorrhagic shock and inflammation-related diseases.

Bremelanotide
for Sexual Dysfunction. We are developing subcutaneously administered bremelanotide for
the treatment of ED and FSD. Bremelanotide, a melanocortin agonist (which promotes a
biologic function response) drug candidate, is a synthetic peptide analog of the naturally
occurring hormone alpha-MSH (melanocyte-stimulating hormone).

Medical
Need  ED and FSD. 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.

Phosphodiesterase-5
(PDE-5) inhibitors such as sildenafil (Viagra®), vardenafil (Levitra®) and
tadalafil (Cialis®) are used to treat ED, but an estimated 35% of ED patients are
non-responsive to PDE-5 inhibitor therapy. There are limited therapeutic options for ED
patients non-responsive to PDE-5 inhibitor therapy, including alprostadil for direct penis
injection or urethral suppositories, surgical penile implants and various devices.

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

There
are no drugs in the United States approved for FSD indications.

Mechanisms
of Action with Bremelanotide. Bremelanotide is believed to act through activation of
melanocortin receptors in the central nervous system, which is a different mechanism of
action from currently marketed PDE-5 inhibitor ED therapies that act directly on the
vascular system. Studies have demonstrated efficacy with bremelanotide in patients
non-responsive to PDE-5 inhibitor therapies. Studies have also demonstrated an additive
effect in patients co-administered both bremelanotide and a PDE-5 inhibitor.

Clinical
Trials with Intranasal Formulations. We extensively studied bremelanotide for sexual
dysfunction in nasal formulations, administered as a single spray in one nostril.
Increases in blood pressure were observed in some patients receiving nasally administered
bremelanotide, and this observed increase was a significant factor leading us to
discontinue work on nasally administered bremelanotide as a first-line therapy for sexual
dysfunction. We believe that increases in blood pressure, as well as the rate of nausea
and emesis (vomiting), were due, at least partially, to variability in drug uptake with
nasal administration. Studies showed significant variation in plasma levels of
bremelanotide in patients receiving nasally administered bremelanotide.

While
we are no longer developing intranasal formulations of bremelanotide for
commercialization, trials with intranasal formulations of bremelanotide did demonstrate
potential utility of bremelanotide. Phase 2B double blind, placebo-controlled, parallel
doses clinical trials evaluating nasal bremelanotide for ED, conducted in 726 non-diabetic
and 294 diabetic patients, showed that over 30% of ED patients were restored to a normal
level of function. Phase 2A clinical trials of post-menopausal FSD patients showed a
statistically significant increase in the level of sexual desire and genital arousal in
subjects receiving bremelanotide compared to subjects receiving placebo and, in
pre-menopausal FSD patents, a trend to increases in the level of sexual desire and genital
arousal in subjects receiving bremelanotide compared to subjects receiving placebo. In
trials conducted to date, almost 2,000 patients received at least one dose of
bremelanotide, with about 1,500 receiving multiple doses.

Subcutaneous
Administration of Bremelanotide. In a recently completed Phase 1 clinical trial
designed to evaluate the blood pressure effects of subcutaneously administered
bremelanotide, no statistically significant difference in mean changes in blood pressure
was seen in subjects receiving bremelanotide compared to placebo. No subject discontinued
participation in the study as a result of protocol stopping rules based on blood pressure
changes. In addition, there was no difference in the incidence of emesis in subjects
receiving bremelanotide compared to placebo. This Phase 1 trial was a two-week,
randomized, double-blind, placebo-controlled study in subjects who received 45 repeat
doses of bremelanotide or placebo subcutaneously. Each administered dose of

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bremelanotide achieved plasma
levels shown to be efficacious for improving erectile function in multiple previous Phase
1 and Phase 2 erectile dysfunction studies.

With
subcutaneous administration of bremelanotide variability in plasma exposure was
significantly decreased. This study supports the hypothesis that increases in blood
pressure seen with nasally administered bremelanotide were due, at least partially, to
variability in drug uptake, with increases in blood pressure in patients with greater
uptake. With subcutaneous administration of bremelanotide, variability in plasma exposure
is controlled.

We
have met with the U.S. Food and Drug Administration (FDA) to discuss data from our
recently completed Phase 1 bremelanotide study supporting the switch to subcutaneous
administration and our development program for subcutaneously administered bremelanotide
in ED patients non-responsive to PDE-5 inhibitors. Our clinical program is commencing
this year, and is planned, depending on program results, concurrence of the FDA and the
availability of sufficient funding, to lead to initiation of at-home Phase 2 clinical
studies in the first half of calendar 2010.

We
are exploring various delivery devices for subcutaneous administration of bremelanotide.
Injection sites for subcutaneous injection include the abdomen, thigh and upper arms. We
believe that fine needle devices, pen injectors and needle-free injector systems can be
used for subcutaneous administration of bremelanotide, and we are evaluating various delivery
devices for potential commercialization. If Phase 2 clinical trials are successful, we
anticipate that Phase 3 clinical trials will be conducted with a delivery device intended
for commercialization.

PL-6983
for Treatment of Sexual Dysfunction. PL-6983 is our lead compound in a new series of
melanocortin receptor-specific peptides we have developed. We have demonstrated efficacy
of PL-6983 in inducing erections in animal models and in inducing sexual behavior in an
animal model of FSD.

In
developing PL-6983, we used a novel screening platform that examined the effectiveness of
peptides in animal models of sexual response and also determined cardiovascular effects,
primarily looking at changes in blood pressure. In these animal models, PL-6983 resulted
in significantly smaller increases in blood pressure at doses effective for a sexual
response than blood pressure increases in the same models seen with bremelanotide.

We
are planning preclinical toxicology and other studies required by the FDA prior to
initiating human clinical trials. Initial human clinical trials will be designed to
measure safety parameters, including changes in blood pressure following administration.

Obesity.In 2007, we entered into an exclusive global licensing and research collaboration
agreement with AstraZeneca to discover, develop and commercialize compounds that target
melanocortin receptors for the treatment of obesity, diabetes and related metabolic
syndrome. In June and December 2008, the collaboration agreement was amended to include
additional compounds and associated intellectual property we developed. On September 24,
2009, the collaboration agreement was amended to provide additional payments to us
totaling $5 million and to modify terms of the agreement.

Obesity
is a multifactorial condition with significant biochemical components relating to satiety
(feeling full), energy utilization and homeostasis. A number of different metabolic and
hormonal pathways are being evaluated by companies around the world in efforts to develop
better treatments for obesity. Scientific research has established that melanocortin
receptors have a role in eating behavior and energy homeostasis, and that some
melanocortin receptor agonists 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. More than 1.1 billion adults and over 150 million
children worldwide are overweight, with over 300 million adults categorized as obese.
According to the American Obesity Association, obesity is the second leading cause of
preventable death after smoking and nearly one-third of adults in the United States are
obese. Increased mortality, high blood pressure, diabetes and other substantial health
risks are associated with being overweight and obese. Over 2.6 million deaths are
attributed to diabetes each year worldwide and almost $120 billion is spent on related
costs of obesity, according to the U.S. Surgeon General.

We
have developed classes of small molecule and peptide compounds targeting melanocortin
receptors which are effective in the treatment of obesity in animal models. Certain of
these compounds have been demonstrated to be effective in normal diet-induced obese and
genetically obese animal models for decreasing food intake and body weight, without an
increase in sexual response in normal animals at the same or higher dose levels. During
2009, pursuant to an agreement with AstraZeneca we conducted a proof-of-principle clinical
study on the effects of a melanocortin receptor-specific compound on food intake, obesity
and other metabolic parameters.

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Pursuant
to the terms of the agreement with AstraZeneca, we received up-front payments totaling
$10.0 million. Effective with the September 2009 amendment, we are eligible for milestone
payments totaling up to $145.2 million, with up to $85.2 million contingent upon
development and regulatory milestones and the balance on achievement of sales targets,
plus royalties on sales of approved products. AstraZeneca has responsibility for product
commercialization, product discovery and development costs. We are providing certain
scientific expertise in the research collaboration at a negotiated rate through January
2010, and agreed in the September 2009 amendment to conduct additional clinical studies.

Other
Melanocortin Programs. We have early stage research and discovery programs exploring
additional indications and targets. These programs include development of highly-selective
melanocortin-1 and melanocortin-3 receptor agonists for treatment of inflammation-related
diseases and disorders, melanocortin-4 receptor antagonists for treatment of cachexia and
melanocortin-4 receptor agonists for prevention of organ damage, particularly kidney
damage. We do not anticipate that any of these programs will advance to clinical trials
during the next twelve months.

Natriuretic Peptide
Receptor-Specific Programs

The
natriuretic peptide receptor system has numerous cardiovascular functions, and therapeutic
agents modulating this system may be useful in treatment of heart failure, hypertension
and other cardiovascular diseases.

PL-3994
for Heart Failure Indications. PL-3994 is an NPRA agonist compound in development for
treatment of HF. Heart failure is an illness in which the heart is unable to pump blood
efficiently, and includes acutely decompensated HF with dyspnea (shortness of breath) at
rest or with minimal activity. Endogenous (naturally produced) natriuretic peptides have a
number of beneficial effects, including vasodilation (relaxation of blood vessels),
natriuresis (excretion of sodium), and diuresis (excretion of fluids).

Patients
who have been admitted to the hospital with an episode of worsening HF have an increased
risk of either death or hospital readmission in the three months following discharge. Up
to 15% of patients die in this period and as many as 30% need to be readmitted to the
hospital. We believe that decreasing mortality and hospital readmission in patients
discharged following hospitalization for worsening HF is a large unmet medical need for
which PL-3994 may be effective. PL-3994 would be utilized as an adjunct to existing HF
medications, and may, if successfully developed, be self-administered by patients as a
subcutaneous injection following hospital discharge.

Medical
Need in Heart Failure. Over 5.7 million Americans suffer from HF, with 670,000 new cases
of HF diagnosed each year, with disease incidence expected to increase with the aging of
the American population. Despite the treatment of HF with multiple drugs, almost all HF
patients will experience at least one episode of acute HF that requires treatment with
intravenous medications in the hospital. Heart failure has tremendous human and financial
costs. Estimated direct costs in the U.S. for HF are $37.2 billion in 2009, with HF
constituting the leading cause of hospitalization in people over 65 years of age, with
over 1.1 million hospital discharges for HF in 2006. Heart failure is also a high
mortality disease, with approximately one-half of HF patients dying within five years of
initial diagnosis.

Mechanisms
of Action with PL-3994. PL-3994 activates NPRA, a receptor known to play a role in
cardiovascular homeostasis. We believe that PL-3994, through activation of NPRA, will
reduce cardiac hypertrophy, which is an independent risk factor for cardiovascular
morbidity and mortality. PL-3994 increases plasma cyclic guanosine monophosphate (cGMP)
levels, a pharmacological response consistent with the effects of endogenous natriuretic
peptides on cardiovascular function. PL-3994 also decreases activity of the
renin-angiotensin-aldosterone system (RAAS), a hormone system that regulates blood
pressure and fluid balance. The RAAS system is frequently over-activated in HF patients,
leading to worsening of cardiovascular function.

PL-3994
is one of a number of natriuretic peptide receptor agonist compounds we have developed.
PL-3994 is a synthetic molecule incorporating a novel and proprietary amino acid mimetic
structure. It has an extended half-life, with reduced affinity for endogenous natriuretic
peptide clearance receptors and significantly increased resistance to neutral
endopeptidase, an endogenous enzyme that degrades natriuretic peptides.

Clinical
Studies with PL-3994. Preclinical studies in animals established a dose-dependent effect
on blood pressure and diuresis, and in animal models of HF showed improved kidney function
and prevention of cardiac hypertrophy (increase in heart size due to disease). Safety
toxicology studies were conducted in animals prior to filing an Investigational New Drug
(IND) application with the FDA.

Human
clinical studies of PL-3994 commenced with a Phase 1 trial which concluded in the first
quarter of calendar year 2008. This was a randomized, double-blind, placebo-controlled,
study in 26 healthy volunteers who received either PL-3994 or a placebo subcutaneously.
The evaluations included safety, tolerability, pharmacokinetics and several
pharmacodynamic endpoints, including levels of cGMP, a natural messenger

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nucleotide. Dosing concluded with
the successful achievement of the primary endpoint of the study, a prespecified reduction
in systemic blood pressure. No volunteer experienced a serious or severe adverse event.
Elevations in plasma cGMP levels, increased diuresis and increased natriuresis were all
observed for several hours after single subcutaneous doses.

In
the second quarter of calendar year 2008, we conducted a Phase 2A trial in volunteers with
controlled hypertension who were receiving one or more conventional antihypertensive
medications. In this trial, which was a randomized, double-blind, placebo-controlled,
single ascending dose study in 21 volunteers, the objective was to demonstrate that
PL-3994 can be given safely to patients taking antihypertensive medications commonly used
in HF and hypertension patients. Dosing concluded with the successful achievement of the
primary endpoint of the study, a prespecified reduction in systemic blood pressure. No
volunteer experienced a serious or severe adverse event. Elevations in plasma cGMP levels
were observed for several hours after single subcutaneous doses.

We
have planned a repeat dose Phase 2B clinical trial in patients hospitalized with HF, which
will evaluate safety profiles in patients given repeat doses of PL-3994 as well as
pharmacokinetic and pharmacodynamic endpoints. This trial is projected
to commence, depending on sufficient funding, during the first half of calendar year
2010.

PL-3994
is being developed as a subcutaneously administered drug, and is well absorbed through
this route of administration. In human studies, the pharmacokinetic (period to metabolize
or excrete the drug) and pharmacodynamic (period of action or effect of the drug)
half-lives were on the order of hours, significantly longer than the comparable half-lives
of endogenous natriuretic peptides. We believe that PL-3994, if successful, will be
amenable to self-administration by patients, similar to insulin and other
self-administered drugs.

Other
Natriuretic Peptide Receptor-Specific Programs. We have early stage discovery and
development programs in the natriuretic peptide receptor field, including compounds with
varied pharmacology, including compounds with increased diuretic effect and decreased
effect on blood pressure, and compounds effective at more than one natriuretic peptide
receptor.

Other Programs

We
previously marketed NeutroSpec®, a radiolabeled monoclonal antibody product for
imaging and diagnosing infection, which is the subject of a strategic collaboration
agreement with the Mallinckrodt division of Covidien Ltd. In 2005, we suspended marketing,
clinical trials and securing regulatory approvals of NeutroSpec, and do not anticipate
conducting any substantive work or incurring substantial expenditures on NeutroSpec over
the next twelve months.

Technologies We Use

We
use a rational drug design approach to discover and develop proprietary peptide, peptide
mimetic and small molecule agonist compounds, focusing on melanocortin and natriuretic
peptide receptor systems. Computer-aided drug design models of receptors are optimized
based on experimental results obtained with peptides and small molecules we develop,
supported by conformational analyses of peptides in solution utilizing nuclear magnetic
resonance spectroscopy. By integrating both technologies, we believe we are developing an
advanced understanding of the factors which drive agonism.

We
have developed a series of proprietary technologies used in our drug development programs.
One technology employs novel amino acid mimetics in place of selected amino acids. These
mimetics provide the receptor-binding functions of conventional amino acids, while
providing structural, functional and physiochemical advantages. The amino acid mimetic
technology is employed in PL-3994, our compound in development for treatment of HF.

We
maintain expertise in both peptide and small molecule chemistries, and have developed a
series of drug selection technologies for selecting compounds with desired pharmacological
profiles, particularly in the melanocortin receptor field. The drug selection technologies
are used to develop and select melanocortin receptor-specific small molecules and peptides
with novel properties, including compounds that are effective in the treatment of obesity
in animal models but which induce a limited or no sexual response.

Some
compound series have been derived using our proprietary and patented platform technology,
called MIDAS (Metal Ion-induced Distinctive Array of Structures). This technology
employs metal ions to fix the three-dimensional configuration of peptides, forming
conformationally rigid molecules that remain folded specifically in their active state.
These MIDAS molecules are generally simple to synthesize, are chemically and proteolytically stable,
and have the potential to be orally bioavailable. In addition, MIDAS molecules are
information-rich and provide data on structure-activity relationships that may be used to
design small molecule, non-peptide drugs.

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Estimate of Amount Spent
on Research and Development Activities

Research
and development expenses were $13.4 million for the fiscal year ended June 30, 2009
(fiscal 2009) and $21.2 million for the fiscal year ended June 30, 2008 (fiscal 2008). In
fiscal 2009, $4.7 million of the foregoing was borne by AstraZeneca pursuant to the
collaboration agreement, and in fiscal 2008, $2.5 million of the

foregoing was borne by AstraZeneca
and other pharmaceutical companies pursuant to collaboration or license agreements.

Competition

Our
products under development will compete on the basis of quality, performance, cost
effectiveness and application suitability with numerous established products and
technologies. We have many competitors, including pharmaceutical, biopharmaceutical and
biotechnology companies. Furthermore, there are several well-established products in our
target markets that we will have to compete against. Products using new technologies which
may be competitive with our proposed products may also be introduced by others. Most of
the companies selling or developing competitive products have financial, technological,
manufacturing and distribution resources significantly greater than ours and may represent
significant competition for us.

The
pharmaceutical and biotechnology industry is characterized by extensive research efforts
and rapid technological change. Many biopharmaceutical companies have developed or are
working to develop products similar to ours or that address the same markets. 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.

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.

Bremelanotide
and PL-6983 for Treatment of Sexual Dysfunction. There is competition and financial
incentive to develop, market and sell drugs for the treatment of ED and FSD. Leading drugs
approved for ED indications are PDE-5 inhibitors which target the vascular system, such as
sildenafil (sold under the trade name Viagra®), vardenafil (sold under the trade name
Levitra®) and tadalafil (sold under the trade name Cialis®). In addition, we are
aware of other PDE-5 inhibitors under development. Other drugs approved for ED indications
include alprostadil for injection (sold under the trade name Caverject Impulse®),
which is injected directly into the penis, and alprostadil in urethral suppository format
(sold under the trade name MUSE®). In addition, a variety of devices, including vacuum
devices and surgical penile implants, have been approved for ED indications. We are aware
of a number of companies developing new drugs for ED indications, some of which are in
clinical trials in the United States and elsewhere. We are not aware of any company
actively developing a melanocortin receptor-agonist drug for ED.

There
are no products specifically approved for an FSD indication in the United States. A number
of hormonal therapies have been commercialized for other indications, including progestin,
androgen and localized estrogen therapies, but none have been approved by the FDA for FSD
indications. A number of drugs are in various stages of research or development for FSD.
We are not aware of any company actively developing a melanocortin receptor-agonist drug
for FSD.

PL-3994
for Heart Failure Indications. Nesiritide (sold under the trade name Natrecor®), a
recombinant human B-type natriuretic peptide drug, is marketed in the United States by
Scios Inc., a Johnson & Johnson company. Nesiritide is approved for treatment of
acutely decompensated congestive HF patients who have dyspnea at rest or with minimal
activity. Carperitide, a recombinant human atrial natriuretic peptide drug, is marketed in
Japan and is reported to be available for licensing in other countries. Both nesiritide
and carperitide are administered by intravenous infusion. Because of the very short
half-life of nesiritide, we believe it is unlikely to be suitable for subcutaneous
administration or for long-term treatment of HF. We are aware of at least two companies
developing intravenously administered natriuretic peptide drugs reported to be in Phase 2
clinical trials for acute HF. In addition, there are a number of approved drugs and drugs
in development for treatment of HF through mechanisms or pathways other than agonism of
NPRA.

Obesity.There are several FDA-approved drugs for the treatment of obesity, and a large number
of products in clinical development by other companies, including products which target
melanocortin receptors. Clinical trials for obesity are lengthy, time-consuming and
expensive, and we may not be able to proceed if AstraZeneca discontinues work under or
terminates our January 2007 license agreement. See the discussion under the heading We
do not control the development of compounds licensed to third parties and, as a result,
we may not

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realize a significant portion of the
potential value of any such license arrangements in Item 1A, Risk Factors in
this Annual Report.

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 own a number
of issued United States patents and have pending United States patent applications, many
with issued or pending counterpart patents in selected foreign countries. We seek patent
protection for our technologies and products in the United States and those foreign
countries where we believe patent protection is commercially important.

We
own issued United States and foreign patents claiming the bremelanotide substance. The
issued United States patents have a term until 2020, which term may be subject to
extension for a maximum period of up to five years as compensation for patent term lost
during drug development and the FDA regulatory review process, pursuant to the Drug Price
Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Amendments). Whether
we will be able to obtain patent term extensions under the Hatch-Waxman Amendments and the
length of the extension to which we may be entitled cannot be determined until the FDA
approves for marketing, if ever, a product in which bremelanotide is the active
ingredient. In addition, the claims of issued patents covering bremelanotide may not
provide meaningful protection. Further, third parties may challenge the validity or scope
of any issued patent.

We
have patent applications pending in the United States and foreign countries claiming the
PL-3994 substance and other natriuretic peptide receptor agonist compounds we have
developed. One United States patent application claiming PL-3994 has been allowed, but
other patent applications have not yet been examined, and in any event we do not know the
full scope of patent coverage we will obtain, or whether any patents will issue other
than the allowed application claiming PL-3994. The allowed patent application will have a
term, assuming the patent issues in due course, until 2027, which term may be subject to
extension for a maximum period of up to five years as compensation for patent term lost
during drug development and the FDA regulatory review process, pursuant to the
Hatch-Waxman Amendments. Whether we will be able to obtain patent term extensions under
the Hatch-Waxman Amendments and the length of the extension to which we may be entitled
cannot be determined until the FDA approves for marketing, if ever, a product in which
PL-3994 is the active ingredient.

We
have filed patent applications on melanocortin receptor-specific peptides including
PL-6983. Until these applications are examined, we do not know the scope of patent claims
that will be allowed, or whether any patents will issue.

We
have a number of United States and foreign patent applications claiming compounds included
in our agreement with AstraZeneca relating to our obesity program. However, many of 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 patents will issue. Additionally, until one or
more compounds are selected for commercialization, which may never occur, we cannot
evaluate the duration of patents or their effect on the program.

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 requiring us 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, PL-3994 or PL-6983 or by our methods of making the foregoing, 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 such patents are valid and we do not obtain a license
under any such patents, or we are found liable for infringement, we may be liable for
significant monetary damages, may encounter significant delays in bringing products to
market, or may be precluded from participating in the manufacture, use or sale of products
or methods of treatment covered by such patents.

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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, collaborators or licensees develop inventions or processes independently
that may be applicable to our product candidates, disputes may arise about the ownership
of proprietary rights to those inventions and processes. Such inventions and processes
will not necessarily become our property, but may remain the property of those persons or
their employers. Protracted and costly litigation could be necessary to enforce and
determine the scope of our proprietary rights.

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

Governmental Regulation

The
FDA, comparable agencies in other 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, marketing and distribution 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.

Before
a drug product is approved by the FDA for commercial marketing, three phases of human
clinical trials are usually conducted to test the safety and effectiveness of the product.
Phase 1 clinical trials most typically involve testing the drug on a small number of
healthy volunteers to assess the safety profile of the drug at different dosage
levels. Phase 2 clinical trials, which may also enroll a relatively small number of
patient volunteers, are designed to further evaluate the drugs safety profile and to
provide preliminary data as to the drugs effectiveness in humans. Phase 3 clinical
trials consist of larger, well-controlled studies that may involve several hundred or
thousand patient volunteers representing the drugs targeted population. During any
of these phases, the clinical trial can be placed on clinical hold, or temporarily or
permanently stopped for a variety of reasons, principally for safety concerns.

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. The failure to comply with applicable regulatory requirements in the
U.S. and in other countries in which we conduct development activities could result in a
variety of fines and sanctions, such as warning letters, product recalls, product
seizures, suspension of operations, fines and civil penalties or criminal prosecution.

In
addition to obtaining approval of a New Drug Application (an NDA) from the FDA for any of
our proposed products, any facility that manufactures such a product must comply with
current good manufacturing practices (GMPs). 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 GMPs and are subject to
periodic inspection by the FDA or by corresponding regulatory agencies in such other
countries under reciprocal agreements with the FDA. In complying with standards
established by the FDA, manufacturing establishments must continue to expend time, money
and effort in the areas of production and quality control to ensure full technical
compliance. We will use contract manufacturing establishments, in the United States or in
foreign countries, to manufacture our proposed products, and will depend on those
establishments to comply with GMPs and other regulatory requirements.

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, health maintenance organizations (HMOs) 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, that it is neither experimental nor
investigational, and that the use of the product is safe and efficacious, 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

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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 FSD
and ED. 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 GMPs prescribed by the FDA and at acceptable costs. We do not have the facilities to
manufacture any of our proposed products under GMPs. We intend to rely on collaborators,
licensees or contract manufacturers for the commercial manufacture of our proposed
products.

Our
bremelanotide product candidate is a synthetic peptide. While the production process
involves well-established technology, there are few manufacturers capable of scaling up to
commercial quantities under GMPs at acceptable costs. We have identified and contracted
with a third-party manufacturer for the production of bremelanotide, and have validated
manufacturing of the bremelanotide drug substance under GMPs. However, we have not
negotiated a long-term supply agreement with the third-party manufacturer, and may not be
able to enter into a supply agreement on acceptable terms, if at all.

Our
PL-3994 product candidate is a peptide mimetic molecule, incorporating a proprietary
amino acid mimetic structure and amino acids. We have identified a manufacturer which
made the product in quantities sufficient for Phase 1 and some anticipated Phase 2
clinical trials, and are in the process of evaluating commercial-scale manufacturers.
Scaling up to commercial quantities may involve production, purification, formulation and
other problems not present in the scale of manufacturing done to date.

Our
PL-6983 product candidate is also a synthetic peptide. We have manufactured PL-6983
in-house, but have not contracted with a third-party manufacturer to produce the product
for either clinical trials or commercial purposes. While the production process involves
well-established technology, there are few manufacturers capable of scaling up to
commercial quantities under GMPs at acceptable costs. Additionally, scaling up to
commercial quantities may involve production, purification, formulation and other
problems not present in the scale of manufacturing done to date.

The
failure of any manufacturer or supplier to comply with FDA GMPs or to supply the drug
substance and services as agreed, would force us to seek alternative sources of supply and
could interfere with our ability to deliver product on a timely and cost effective basis or at all.
Establishing relationships with new manufacturers or suppliers, any of whom must be
FDA-approved, is a time-consuming and costly process.

Product Liability and
Insurance

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

Employees

As
of September 25, 2009, we employed 43 persons full time, of whom 30 are engaged in research
and development activities and 13 are engaged in administration and management. Of our
employees, 15 hold Ph.D. or M.D. degrees. While we have been successful in attracting skilled
and experienced scientific personnel, competition for personnel in our industry is
intense. None of our employees are covered by a collective bargaining agreement. All of
our employees have executed confidentiality and intellectual property agreements. We
consider relations with our employees to be good.

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

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Item 1A. Risk Factors.

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

We
have never been profitable and we may never become profitable. As of June 30, 2009, we
had an accumulated deficit of $207.4 million. We expect to incur additional losses as we
continue our development of bremelanotide, PL-3994 and PL-6983. Unless and until we
receive approval from the FDA or other equivalent regulatory authorities outside the
United States, we cannot sell our products and will not have product revenues from them.
Therefore, for the foreseeable future, we will have to fund all of our operations and
capital expenditures from reimbursements and other contract revenue under collaborative
development agreements, existing cash balances and outside sources of financing, which
may not be available on acceptable terms, if at all.

We expect that we will need to
continue to raise funds in the future, and funds may not be available on acceptable terms,
or at all.

As
of June 30, 2009, we had cash and cash equivalents of $4.4 million and available-for-sale
investments of $3.4 million, with current liabilities of $1.7 million excluding the
current portion of deferred revenues of $2.7 million. In August 2009, we received net
proceeds of $2.8 million resulting from a registered direct offering of units consisting
of our common stock and warrants. In September 2009, we signed an amendment to our
collaboration agreement with AstraZeneca providing for $5 million in payments to us, with
an initial payment of $2.5 million and the balance in the first quarter of calendar 2010.
While we believe that the foregoing is adequate to fund operations through at least
September 30, 2010, we will need additional funds to continue development of
bremelanotide, PL-3994 and PL-6983, as well as our early stage research and discovery
programs, and to fund operations after that date.

We
may raise additional funds through public or private equity financings, collaborative
arrangements on our product candidates or other sources. However, additional funding may
not be available on acceptable terms or at all. If adequate funds are not available when needed, we
will need to further curtail operations significantly, including the delay, modification
or cancelation of operations and plans, including preclinical studies and clinical
trials, related to bremelanotide, PL-3994 and PL-6983. To obtain additional funding, we
may need to enter into arrangements that require us to develop only certain of our
product candidates or relinquish rights to certain technologies, product candidates
and/or potential markets.

Based upon the recent price of our
common stock on the NYSE Amex LLC (the NYSE Amex), even if we are able to raise additional
capital it is likely that our existing stockholders will experience substantial dilution.

In
order to raise any meaningful amount of capital, as we intend, based upon our recent
stock price we will almost certainly need to sell a significant amount of equity
securities, either in the form of new shares of common stock or some other form of
convertible security. Any significant sale of equity securities in any form at these
prices will result in significant dilution to our existing stockholders. The prospect of
this dilution is likely to continue to have a negative effect on the market price and
trading volume of our common stock until such time as an actual financing occurs.

Our common stock may be delisted from
the NYSE Amex, making it difficult to trade shares of our common stock.

On
December 23, 2008, we received notice from the exchange now known as NYSE Amex notifying
us that NYSE Amex had determined that we did not meet continued listing standards based on
a review of our Form 10-Q for the fiscal quarter ended September 30, 2008. In a letter to
us, NYSE Amex stated that Palatin was not in compliance with Section 1003(a)(ii) of NYSE
Amexs Company Guide (the Company Guide) because our stockholders equity was
less than the required $4,000,000 and we had losses from continuing operations and net
losses in three of our four most recent fiscal years and not in compliance with Section
1003(a)(iii) of the Company Guide because our stockholders equity was less than the
required $6,000,000 and we had losses from continuing operations and net losses in our
five most recent fiscal years. The letter from NYSE Amex also stated that because our
stock had been trading below $0.25 per share over the previous seven months, NYSE Amex
deemed it appropriate for us to effect a reverse stock split in accordance with Section
1003(f)(v) of the Company Guide.

In
order to maintain our NYSE Amex listing, we submitted a plan on January 23, 2009 advising
NYSE Amex what we intend to do to bring us into compliance with the continued listing
standards identified above by June 23, 2010. On February 27, 2009, NYSE Amex notified us
that it had accepted our plan for regaining compliance, and that our listing on NYSE Amex
was being continued pursuant to an extension. We may be able to continue our listing
during the plan period through June 23, 2010, subject to periodic review by NYSE Amex to
determine if we are making progress consistent with the plan. If we do not regain
compliance with Sections 1003(a)(ii) and (iii) by

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June 23, 2010, or if we do not make
progress consistent with the plan during the plan period, NYSE Amex may initiate
delisting procedures.

If
we are delisted from NYSE Amex then our common stock will trade, if at all, only on the
over-the-counter market, such as the OTC Bulletin Board securities market, and then only
if one or more registered broker-dealer market makers comply with quotation requirements.
In addition, delisting of our common stock could further depress our stock price,
substantially limit liquidity of our common stock and materially adversely affect our
ability to raise capital on terms acceptable to us, or at all. Delisting from NYSE Amex
could also have other negative results, including the potential loss of confidence by
suppliers and employees, the loss of institutional investor interest and fewer business
development opportunities.

We may implement a reverse stock
split, which will reduce our trading volume and may result in a decrease in our market
capitalization.

As
discussed in the risk factor above, NYSE Amex deems it appropriate for us to implement a
reverse stock split because our stock had been trading below $0.25 per share over a seven
month period. At the annual meeting of stockholders held on May 13, 2009, the stockholders
authorized a reverse stock split which, if implemented, will combine between two and fifteen shares of
outstanding common stock into one share of new common stock. The reverse stock split may
be implemented at any time until May 13, 2010 upon a determination by our board of
directors that the reverse stock split is in the best interests of the company and its
stockholders. If the board decides to proceed with the reverse split, the board will
determine the exact reverse split ratio and effective date. If we do not complete a
reverse stock split within a reasonable amount of time, NYSE Amex may consider suspending
dealings in our common stock or initiate delisting procedures. In determining whether to
proceed with the reverse split and setting the exact ratio of the split, the board will
consider a number of factors, including additional funding requirements, the amount of our
authorized but unissued common stock, market conditions, existing and expected trading
prices of our common stock and NYSE Amex listing requirements. We anticipate that the
reverse split, if the board determines to proceed with the reverse split, will be
implemented in conjunction with an equity financing or other transaction. We believe it is
likely that the per share market price of our common stock will increase after a reverse
split. However, we cannot guarantee that our common stock price will increase, and even if
it does, we cannot guarantee that the price increase:

| |  |  | will
be proportionate to the reverse split ratio;
| | - |  | -------------------------------------------------

| |  |  | will
last in the marketplace for any length of time;
| | - |  | ----------------------------------------------------

| |  |  | will
be sufficient to meet the listing requirements of NYSE Amex; or
| | - |  | --------------------------------------------------------------------

| |  |  | will
be sufficient to facilitate raising capital.
| | - |  | -------------------------------------------------

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

Our
operations to date have been primarily focused on acquiring, developing and securing our
proprietary technology, conducting preclinical and clinical studies and formulating and
manufacturing on a small-scale basis our principal product candidates. These operations
provide a limited basis for stockholders 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 current product candidates. The successful
commercialization of our product candidates will require us to perform a variety of
functions, including:

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

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

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

| |  |  | post-approval
pharmacovigilance;
| | - |  | --------------------------------

| |  |  | 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, to
successfully commercialize any products for which we receive regulatory approval or to
obtain additional capital, we may not be able to recover our investment in our development
efforts.

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Development and commercialization of
our product candidates 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
product candidates will require significant further research, development and testing
before we can seek regulatory approval to market and sell them.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

| |  |  | completion
of non-clinical tests including preclinical laboratory and formulation studies and animal
testing and toxicology;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------

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

| |  |  | performance
of adequate and well-controlled Phase 1, 2 and 3 human clinical trials to establish the
safety and efficacy of the drug for each proposed indication;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | submission
to the FDA of an NDA; and
| | - |  | ------------------------------------

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

Satisfaction
of FDA pre-market approval requirements for new drugs typically takes a number of years
and the actual time required for approval may vary substantially based upon the type,
complexity and novelty of the product or disease. The results of product development,
preclinical studies and clinical trials are submitted to the FDA as part of an 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.

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Success in early stage clinical
trials does not assure success in later stage clinical trials. Data obtained from
clinical trials is not always conclusive and may be susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. 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 the
advisory committee. The FDA may deny or delay approval of applications that do not meet
applicable regulatory criteria or if the FDA determines that the clinical data do not
adequately establish the safety and efficacy of the drug. Therefore, our proposed
products could take a significantly longer time than we expect or may never gain
approval. If regulatory approval is delayed or never obtained, our business and our
liquidity would be adversely affected.

Upon
approval, a product 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 regulatory requirements 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 approved products in a larger
number of patients than were required for product approval 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 seek
injunctions, levy fines and civil penalties, criminal prosecution, withdraw approvals
and seize products or request recalls.

If
regulatory approval of any of our product candidates is granted, it will be limited to
certain disease states or conditions. 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.

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

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

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

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

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

| |  |  | availability
of reimbursement for our products from third party payors such as health insurers, health
maintenance organizations and government programs such as Medicare and Medicaid; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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 and
non-clinical tests. There is competition for these relationships, and we may not be able
to maintain our relationships with them on acceptable terms. These outside collaborators
generally may terminate their engagements with us at any time. As a result, we can
control their activities only within certain limits, and they will devote only a certain
amount of their time to conduct research on our product candidates and develop them. If
they do not successfully carry out their duties under their agreements with us, fail to
inform us if these trials fail to

14

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comply with clinical trial protocols
or fail to meet expected deadlines, our ability to develop our product candidates and
obtain regulatory approval on a timely basis, if at all, may be adversely affected.

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

We
do not have the facilities to manufacture bremelanotide, PL-3994 or PL-6983 or our other
potential products. Our contract manufacturers must perform these manufacturing
activities in a manner that complies with FDA regulations. Our ability to control
third-party compliance with FDA requirements will be limited to contractual remedies and
rights of inspection. 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 GMPs regulations. Failure of third-party manufacturers to comply
with GMPs or other FDA requirements may result in enforcement action by the FDA. 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 or continue marketing if they are approved. 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 on us. We are also subject to numerous federal, state and
local laws relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. We may incur significant costs to comply with such laws and
regulations now or in the future.

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

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

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

We
are developing bremelanotide and PL-6983 for sexual dysfunction and PL-3994 for the
treatment of heart failure and related indications. We do not have marketing partners for
any of these products. If any of these products are approved by the FDA or other
regulatory authorities, we must either develop marketing, distribution and selling
capacity and expertise, which will be costly and time consuming, or enter into agreements
with other companies to provide these capabilities. We may not be able to enter into
suitable agreements on acceptable terms, if at all.

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

Under
our research collaboration and license agreement with AstraZeneca for our
melanocortin-based therapeutic compounds for obesity, diabetes and related metabolic
syndrome, we have no direct control over the development of compounds and have only
limited, if any, input on the direction of development efforts. If the results of
development efforts are negative or inconclusive, AstraZeneca may decide to abandon
further development of this program, including terminating the license agreement, by
giving us notice of termination. Because much of the potential value of the license
arrangement with AstraZeneca is contingent upon the successful development and
commercialization of the licensed technology, the ultimate value of this license will
depend on the efforts of AstraZeneca. If AstraZeneca does not succeed in developing the
licensed technology for any reason, or elects to discontinue the development of this
program, we may be unable to realize the potential value of this arrangement.

Competing products and technologies
may make our proposed products noncompetitive.

There
are a number of other products being developed for FSD and ED. In addition to three oral
FDA-approved PDE-5 inhibitor drugs for the treatment of ED, there are other approved
products and devices, and other

15

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products are being developed and are
in clinical trials. There is competition to develop drugs for ED in patients
non-responsive to PDE-5 inhibitor drugs, and to develop drugs for treatment of FSD.

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

The
biopharmaceutical industry is highly competitive. We are likely to encounter significant
competition with respect to bremelanotide, PL-3994 and PL-6983. Most 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 can. These competitive products or technologies may be more effective and
useful or less costly than bremelanotide, PL-3994 or PL-6983. 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 revenues from
the sale of our products in development will depend, in part, on our ability to obtain
adequate reimbursement from Medicare, Medicaid, private insurers and other healthcare
payers.

Our
ability to successfully commercialize our products in development will depend, in
significant part, on the extent to which we or our marketing partners can obtain
reimbursement for our products and also reimbursement at appropriate levels for the cost
of our products and related treatment. Obtaining reimbursement from governmental payers,
insurance companies, HMOs and other third-party payers of healthcare costs is a time
consuming and expensive process. There is no guarantee that our products will ultimately
be reimbursed. If we are able to obtain reimbursement, continuing efforts by governmental
and third party payers to contain or reduce costs of healthcare may adversely affect our
future revenues and ability to achieve profitability. Third-party payers are increasingly
challenging the prices charged for diagnostic and therapeutic products and related
services. Reimbursement from governmental payers is subject to statutory and regulatory
changes, retroactive rate adjustments, administrative rulings and other policy changes,
all of which could materially decrease the range of products for which we are reimbursed
or the rates of reimbursement by government payers. In addition, legislative proposals to
reform the healthcare system may result in lower prices or the actual inability of
prospective customers to purchase our products in development. 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.

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

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

16

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

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

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

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

We 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 liability insurance as to certain clinical
trial risks. We, or any corporate collaborators, may not in the future 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, senior research professionals and third-party contractors and
consultants, and the loss of their services could materially adversely affect our
business.

We
rely on our management team, our employees and various contractors and consultants to
provide critical services. Our ability to execute our preclinical and clinical programs
depends on our continued retention and motivation of our management and scientific
personnel, including executive officers and senior members of research, development and
management who possess significant technical expertise and experience and oversee our
development programs. Our success also depends on our ability to develop and maintain
relationships with contractors, consultants and scientific advisors. If we lose the
services of existing personnel or fail to attract new personnel, our development programs
could be adversely affected. Competition for personnel is intense. In addition, we may
need to hire additional personnel or consultants to increase our research and development
activities if we decide to expand research and development on new product opportunities.

As of September 25, 2009, there were
19,046,381 shares of common stock underlying outstanding options, warrants and restricted
stock units, and stockholders may experience dilution from the exercise of outstanding
options and warrants and the vesting of restricted stock units.

As of September 25, 2009, holders of
our outstanding dilutive securities had the right to acquire the following amounts of
underlying common stock:

| |  |  | 221,106
shares issuable on the conversion of immediately convertible Series A Convertible
preferred stock, subject to adjustment, for no further consideration;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 7,117,529
shares issuable on the exercise of warrants, at exercise prices ranging from $0.33 to
$4.00 per share;
| | - |  | ----------------------------------------------------------------------------------------------------------------

| |  |  | 10,203,852
shares issuable on the exercise of stock options, at exercise prices ranging from $0.13
to $5.13 per share; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------

| |  |  | 1,725,000
shares issuable under restricted stock units that vest no later than March 26, 2010,
subject to the fulfillment of service conditions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

If
the holders convert, exercise or receive those securities, or similar dilutive securities
we may issue in the future, stockholders may experience dilution in the net tangible book
value of their common stock. In addition, the sale or availability for sale of the
underlying shares in the marketplace could depress our stock price. We have registered or
agreed to register for resale substantially all of the underlying shares listed above.
Holders of registered

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underlying shares could resell the
shares immediately upon issuance, resulting in significant downward pressure on our
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 preclinical or clinical trials or
unsatisfactory designs or results of these trials;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | interim
decisions by regulatory agencies, including the FDA, as to clinical trial designs,
acceptable safety profiles and the benefit/risk ratio of products under development;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

For
the 12 month period ended August 31, 2009, the price of our stock has been volatile,
ranging from a high of $1.05 per share to a low of $0.06 per share.

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.

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 right, 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 and other stock rights granted under these plans in the event of a change of
control. If we accelerate the vesting of options or other stock rights, this action could
make an acquisition more costly.

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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.

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 future earnings, if any, 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 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 2012, respectively. The
10,000 square feet of additional office space is subleased to a third party under a
sublease that expires in 2012. The leased properties are in good condition.

Item 3. Legal Proceedings.

We
are involved, from time to time, in various claims and legal proceedings arising in the
ordinary course of our business. We are not currently a party to any such claims or
proceedings that, if decided adversely to us, would either individually or in the
aggregate have a material adverse effect on our business, financial condition or results
of operations.

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

Incorporated
by reference to Item 4, Part II of our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2009, filed with the SEC on May 15, 2009.

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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 NYSE Amex since July 1, 2007.

|                                     |       |      
|------------------------------------ | ----- | -----
|FISCAL YEAR
     ENDED JUNE 30, 2009 | HIGH  | LOW  
|Fourth Quarter                       | $0.37 | $0.10
|Third Quarter                        | 0.14  | 0.06 
|Second Quarter                       | 1.05  | 0.06 
|First Quarter                        | 0.34  | 0.11 
|                                     |       |      
|FISCAL YEAR
     ENDED JUNE 30, 2008 | HIGH  | LOW  
|Fourth Quarter                       | $0.29 | $0.17
|Third Quarter                        | 0.46  | 0.20 
|Second Quarter                       | 0.47  | 0.19 
|First Quarter                        | 2.09  | 0.39 

Our
common stock has been quoted on NYSE 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 25, 2009, we had approximately 237 holders of record of common
stock. On September 25, 2009, the closing sales price of our common stock as reported on the
NYSE Amex was $0.34 per share.

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

Dividend
restrictions. Our outstanding Series A Preferred Stock, consisting of 4,997 shares on
September 25, 2009, 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.

Equity
Compensation Plan Information. Reference is made to the information contained
in the Equity Compensation Plan table contained in Item 12 of this Annual Report, which is
incorporated here by reference.

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.

Critical Accounting
Policies.

Our
significant accounting policies are described in Note 2 to the consolidated financial
statements included in this Annual Report. We believe that our accounting policies and
estimates relating to revenue recognition, accrued expenses and stock-based compensation
charges are the most critical.

Revenue Recognition

Revenue
from corporate collaborations and licensing agreements consists of up-front fees, research
and development funding and milestone payments. Non-refundable up-front fees are deferred
and amortized to revenue on a straight-line basis over the related performance period. We
estimate the performance period as the period in which we perform certain development
activities under the applicable agreement. Reimbursements for research and development
activities are recorded in the period that we perform the related activities under the
terms of the applicable agreements. Revenue resulting from the achievement of milestone
events stipulated in the applicable agreements is recognized when the milestone is
achieved, provided that such milestone is substantive in nature.

The
$10.0 million upfront payment received in January 2007 under the AstraZeneca agreement has
been deferred and is being recognized as revenue on a straight-line basis over the maximum
period during which we may perform research services under the agreement. If our estimated
period of performance is reduced to less than the maximum, the amortization period for any
remaining deferred revenue will also be reduced.

In
2004, we entered into a collaborative development and marketing agreement with King
Pharmaceuticals, Inc. (King) to jointly develop and commercialize bremelanotide, which
agreement was terminated effective

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December 2007. Deferred revenue
related to the King agreement had been recognized as revenue over the estimated period of
our performance during the initial development term of this agreement. In connection with
the termination of the agreement, we recognized as revenue in our fiscal year ended June
30, 2008 all remaining deferred up-front license fees received from King, together with
associated deferred costs, in the amounts of $6.5 million and $0.8 million, respectively.

Accrued Expenses

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

Stock-based Compensation

The
fair value of stock options granted has been calculated using the Black-Scholes option pricing model,
which requires us to make estimates of expected volatility and expected option lives. We estimate
these factors at the time of grant based on our own prior experience, public sources of
information and information for comparable companies. The amount of recorded compensation
related to an option grant is not adjusted for subsequent changes in these estimates or
for actual experience. The amount of our recorded compensation is also dependent on our
estimates of future option forfeitures and the probability of achievement of performance
conditions. If we initially over-estimate future forfeitures, our reported expenses will
be understated until such time as we adjust our estimate. Changes in estimated forfeitures
will affect our reported expenses in the period of change and future periods.

The
amount and timing of compensation expense to be recorded in future periods related to
grants of restricted stock units may be affected by employment terminations. As a result,
stock-based compensation charges may vary significantly from period to period.

Results of Operations

Year Ended June 30, 2009 Compared to
the Year Ended June 30, 2008:

Revenue
 For the fiscal year ended June 30, 2009 (fiscal 2009), we recognized $11.4 million
in revenue compared to $11.5 million for the fiscal year ended June 30, 2008 (fiscal
2008). Revenue consisted of the following:

|              |  |              |  |                                                                                                                                      | 
|------------- |  | ------------ |  | ------------------------------------------------------------------------------------------------------------------------------------ | 
|Fiscal 2009   |  | Fiscal 2008  |  | Revenue related to:                                                                                                                  | 
|             
|$11.4 million |  | $3.0 million |  | our license agreement with AstraZeneca                                                                                               | 
|             
|-             |  | $8.2 million |  | bremelanotide for ED and FSD pursuant to our
        collaboration agreement with King, which was terminated effective December 2007 | 
|             
|-             |  | $0.3 million |  | NeutroSpec, pursuant to our collaboration
        agreement with Mallinckrodt.                                                       | 

Revenue
from AstraZeneca for fiscal 2009 and fiscal 2008 consists of $9.7 million and $1.3
million, respectively, of revenue related to our research services performed during those
periods, and $1.7 million and $1.7 million, respectively, of revenue related to
AstraZenecas up-front license fee. Currently, the research services obligation under
our agreement with AstraZeneca expires in January 2010, subject to renewal. The
fluctuation in revenue related to King reflects the recognition in fiscal 2008
of the remaining deferred license revenue pursuant to Kings up-front payment, based
on the termination of our collaboration agreement with King. Contract revenue from
Mallinckrodt, with whom we have a strategic collaboration agreement to develop NeutroSpec,
primarily reflects Mallinckrodts share of the costs incurred in NeutroSpec
development activities. There were no substantive development activities on NeutroSpec in
fiscal 2009, and we do not anticipate any substantive development activities on NeutroSpec
in the fiscal year ending June 30, 2010, though the agreement with Mallinckrodt has not
been terminated. Future contract revenue from AstraZeneca and Mallinckrodt, in the form of
reimbursement of shared development costs or the recognition of deferred license fees,
will fluctuate based on development activities in our obesity and NeutroSpec programs. We
may also earn contract revenue based on the attainment of development milestones.

Research
and Development  Research and development expenses decreased to $13.4 million for
fiscal 2009 compared to $21.2 million for fiscal 2008. The decrease is the result of the
restructuring of our clinical-stage product portfolio and development programs and the
reduction in workforce initiated in May 2008.

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Research
and development expenses related solely to bremelanotide for ED and FSD decreased
approximately $3.0 million, from $3.2 million in fiscal 2008 to $0.2 million for fiscal
2009. Similar to the recognition of license revenue explained above, we recognized $0.8
million in fiscal 2008 of recorded deferred costs based on the termination of our
collaboration agreement with King.

Research
and development expenses related to our bremelanotide, PL-3994, PL-6983, obesity,
NeutroSpec and other preclinical programs were $3.9 million for both fiscal 2009 and
fiscal 2008. Spending to date has been primarily related to the identification and
optimization of lead compounds, and secondarily to a study of the effects of melanocortin
receptor-specific compounds on food intake, obesity and other metabolic parameters and
preclinical studies, a Phase 1 and a Phase 2A trial with PL-3994 and additional
preclinical studies and a Phase 1 trial with subcutaneously administered bremelanotide.
The amount of such spending and the nature of future development activities are dependent
on a number of factors, including primarily the availability of funds to support future
development activities, success of our clinical trial, preclinical and discovery programs,
and our ability to progress compounds in addition to bremelanotide and PL-3994 into human
clinical trials.

The
historical amounts of project spending above exclude general research and development
spending, which decreased to $9.3 million for fiscal 2009 compared to $14.1 million for
fiscal 2008. The decrease is primarily related to the reduction in workforce initiated in
May 2008.

Cumulative
spending from inception to June 30, 2009 on our bremelanotide, NeutroSpec and other
programs (which includes PL-3994, PL-6983, obesity and other discovery programs) amounts
to approximately $126.8 million, $55.5 million and $51.0 million, respectively. Due to
various risk factors described in this Annual Report, including the difficulty in
currently estimating the costs and timing of future Phase 1 clinical trials and
larger-scale Phase 2 and Phase 3 clinical trials for any product under development, we
cannot predict with reasonable certainty when, if ever, a program will advance to the next
stage of development or be successfully completed, or when, if ever, related net cash
inflows will be generated. See Item 1A  Risk Factors.

General
and Administrative  General and administrative expenses decreased to $5.3 million
for fiscal 2009 compared to $6.9 million for fiscal 2008. The decrease is primarily
related to the reduction in workforce initiated in May 2008.

Income
Tax Benefit  Income tax benefits of $1.7 million in fiscal 2009 and $1.3 million in
fiscal 2008 relate to the sale of New Jersey state net operating loss carryforwards. The
amount of such losses and tax credits that we are able to sell depends on annual pools and
allocations established by the state of New Jersey.

Liquidity and Capital
Resources

Since
inception, we have incurred net operating losses, primarily related to spending on our
research and development programs. We have financed our net operating losses primarily
through equity financings and amounts received under collaborative agreements.

Our
product candidates are at various stages of development and will require significant
further research, development and testing and some may never be successfully developed or
commercialized. We may experience uncertainties, delays, difficulties and expenses
commonly experienced by early stage biopharmaceutical companies, which may include
unanticipated problems and additional costs relating to:

| |  |  | the
development and testing of products in animals and humans;
| | - |  | --------------------------------------------------------------

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

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

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

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

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

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

| |  |  | obtaining
sufficient capital.
| | - |  | -----------------------------

Failure to obtain timely regulatory
approval for our 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 and require us to curtail or cease certain programs.

22

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Table of Contents

During
fiscal 2009, we used $5.4 million of cash for our operating activities, compared to $20.6
million used in fiscal 2008 and $22.1 million used in fiscal 2007. Net cash outflows from
operations in fiscal 2009 were favorably impacted by the decrease in research and
development expenses and the receipt of $6.6 million in additional payments from
AstraZeneca. Net cash outflows from operations in fiscal 2007 were favorably impacted by
the receipt of an up-front license payment of $10.0 million from AstraZeneca in January
2007. Our periodic accounts receivable balances will continue to be highly dependent on
the timing of receipts from collaboration partners and the division of development
responsibilities between us and our collaboration partners.

In
fiscal 2009, net cash provided by investing activities was $0.7 million,
consisting mainly of the sale of property and equipment. In fiscal 2008, net cash used in
investing activities was $1.3 million, consisting of $0.3 million used for the
acquisition of capital equipment and $1.0 million used to purchase available-for-sale
investments, compared to $0.9 million used for the acquisition of capital equipment during
fiscal 2007.

For
fiscal 2009, net cash used in financing activities was $0.3 million, consisting
entirely of payments on capital lease obligations. During fiscal 2008, net cash used in
financing activities was $0.2 million, consisting of $0.3 million in payments on
capital lease obligations partially offset by $0.1 million in proceeds from the exercise
of common stock warrants. During fiscal 2007, net cash provided by financing activities
was $26.0 million, primarily reflecting proceeds from the sale of common stock in
a registered offering in February 2007.

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. As of June 30, 2009, our cash and cash
equivalents were $4.4 million and our available-for-sale investments were $3.4 million.

In
August 2009, we sold 9,484,848 units in a registered direct offering for gross proceeds of
$3.1 million. Each unit consisted of one share of common stock and a five-year warrant to
purchase 0.35 shares of common stock at an exercise price of $0.33 per share. Net proceeds
to us, after offering costs, amounted to approximately $2.8 million.

In
September 2009, we signed an amendment to our collaboration agreement with AstraZeneca
which provides for $5 million in payments to us, with an initial payment of $2.5 million
payable on signing and the balance payable in the first quarter of calendar 2010.

We
believe that our cash, cash equivalents and available-for-sale investments as of June 30,
2009, together with proceeds from the August 2009 registered direct offering, expected
receipts from the September 2009 amendment to our AstraZeneca agreement and other income,
are adequate to fund operations through at least September 30, 2010. We will need
additional funds to continue development of bremelanotide, PL-3994 and PL-6983, as well
as our early stage research and discovery programs, and to fund operations after that
date.

We
intend to seek additional capital through public or private equity financings,
collaborative arrangements on our product candidates, milestone payments or other
sources. However, additional funding may not be available on acceptable terms or at all.
If adequate funds are not available, we will further curtail operations significantly,
including the delay, modification or cancelation of product candidate development plans
and further decreases in staffing levels. We may also be required to seek collaborators
for our product candidates at an earlier stage than otherwise would be desirable and on
terms that are less favorable than might otherwise be available, and relinquish, license
or otherwise dispose of rights on unfavorable terms to technologies and product
candidates that we would otherwise seek to develop or commercialize ourselves.

The
nature and timing of our development activities are highly dependent on our financing
activities. No assurance can be given that we will earn future milestone payments that are
contingent on specified events or that we will not consume a significant amount of our
available resources before that time. We plan to continue to monitor the progress of our
development programs and the timing and amount of related expenditures and potential
milestone receipts, refine our operations, control expenses, evaluate alternative methods
to conduct our business and seek additional financing and sharing of development costs
through strategic collaboration agreements or other resources.

We
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 preclinical 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.

23

---

Table of Contents

Off-Balance Sheet Arrangements

None.

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,
2009:

|                              |  |  |   |                        |  |   |                 |  |   |             |  |   |             |  |   |                  | 
|----------------------------- |  |  | - | ---------------------- |  | - | --------------- |  | - | ----------- |  | - | ----------- |  | - | ---------------- | 
|                              |  |  |   | Payments due by Period
|                              |  |  |   | Total                  |  |   | Less than 1Year |  |   | 1 - 3 Years |  |   | 3 - 5 Years |  |   | More than 5Years | 
|                             
|Facility operating leases     |  |  | $ | 7,092,802              |  | $ | 2,144,401       |  | $ | 4,192,515   |  | $ | 530,711     |  | $ | 225,175          | 
|Capital lease obligations     |  |  |   | 130,913                |  |   | 93,806          |  |   | 37,107      |  |   | -           |  |   | -                | 
|License agreements            |  |  |   | 225,000                |  |   | 15,000          |  |   | 30,000      |  |   | 30,000      |  |   | 150,000          | 
|                             
|Total contractual obligations |  |  | $ | 7,448,715              |  | $ | 2,253,207       |  | $ | 4,259,622   |  | $ | 560,711     |  | $ | 375,175          | 

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

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

24

---

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 Annual Report:

| |                                                                           |     
| | ------------------------------------------------------------------------- | ----
| |                                                                           | Page
|
| | Report of Independent Registered Public
   Accounting Firm                | 26  
|
| | Consolidated Balance Sheets                                               | 27  
|
| | Consolidated Statements of
   Operations                                  | 28  
|
| | Consolidated Statements of Stockholders'
   Equity and Comprehensive Loss | 29  
|
| | Consolidated Statements of Cash Flows                                     | 30  
|
| | Notes to Consolidated Financial
   Statements                             | 31  

25

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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 (the Company) as of June 30, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity and comprehensive
loss, and cash flows for each of the years in the three-year period ended June 30, 2009. 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, 2009 and 2008, and the results of their operations and their cash flows for
each of the years in the three-year period ended June 30, 2009, in conformity with U.S.
generally accepted accounting principles.

/s/ KPMG LLP

Philadelphia, PennsylvaniaSeptember
28, 2009

26

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.and Subsidiary

Consolidated Balance Sheets

|                                                                             |  |               |   |               |   |  |   |              |  
|---------------------------------------------------------------------------- |  | ------------- | - | ------------- | - |  | - | ------------ | -
|                                                                             |  | June 30, 2009 |   | June 30, 2008
|ASSETS                                                                       |  |               |   |               |   |  |   |             
|Current assets:                                                              |  |              
|Cash and cash equivalents                                                    |  |               | $ | 4,378,662     |   |  | $ | 9,421,770    |  
|Available-for-sale investments                                               |  |               |   | 3,439,650     |   |  |   | 3,352,771    |  
|Accounts receivable                                                          |  |               |   | 508,528       |   |  |   | 5,747        |  
|Prepaid expenses and
        other current assets                            |  |               |   | 492,824       |   |  |   | 484,362      |  
|Total
        current assets                                                 |  |               |   | 8,819,664     |   |  |   | 13,264,650   |  
|                                                                            
|Property and equipment, net                                                  |  |               |   | 3,650,783     |   |  |   | 5,128,076    |  
|Restricted cash                                                              |  |               |   | 475,000       |   |  |   | 475,000      |  
|Other assets                                                                 |  |               |   | 254,364       |   |  |   | 257,198      |  
|Total
        assets                                                         |  |               | $ | 13,199,811    |   |  | $ | 19,124,924   |  
|                                                                            
|LIABILITIES AND STOCKHOLDERS' EQUITY                                         |  |              
|Current liabilities:                                                         |  |              
|Capital lease obligations                                                    |  |               | $ | 87,675        |   |  | $ | 263,128      |  
|Accounts payable                                                             |  |               |   | 206,363       |   |  |   | 635,183      |  
|Accrued expenses                                                             |  |               |   | 1,420,741     |   |  |   | 1,666,628    |  
|Accrued compensation                                                         |  |               |   | -             |   |  |   | 767,509      |  
|Deferred revenue                                                             |  |               |   | 6,995,553     |   |  |   | 1,666,669    |  
|Total
        current liabilities                                            |  |               |   | 8,670,332     |   |  |   | 4,999,117    |  
|                                                                            
|Capital lease obligations                                                    |  |               |   | 33,954        |   |  |   | 121,629      |  
|Deferred rent                                                                |  |               |   | 1,182,026     |   |  |   | 1,479,794    |  
|Deferred revenue                                                             |  |               |   | -             |   |  |   | 5,972,220    |  
|Total
        liabilities                                                    |  |               |   | 9,886,312     |   |  |   | 12,572,760   |  
|                                                                            
|Commitments and contingencies (Note 8)                                       |  |              
|                                                                            
|Stockholders' equity:                                                        |  |              
|Preferred stock
        of $0.01 par value - authorized 10,000,000 shares;   |  |              
|Series A
        Convertible; issued and outstanding 4,997 shares as of June |  |              
|30, 2009
        and 2008, respectively                                      |  |               |   | 50            |   |  |   | 50           |  
|Common stock
        of $0.01 par value - authorized 150,000,000 shares;     |  |              
|issued
        and outstanding 86,662,901 and 85,524,077 shares as of June   |  |              
|30, 2009
        and 2008, respectively                                      |  |               |   | 866,629       |   |  |   | 855,241      |  
|Additional paid-in capital                                                   |  |               |   | 209,712,379   |   |  |   | 208,247,194  |  
|Accumulated other
        comprehensive income                               |  |               |   | 116,111       |   |  |   | 29,117       |  
|Accumulated deficit                                                          |  |               |   | (207,381,670  | ) |  |   | (202,579,438 | )
|Total
        stockholders' equity                                           |  |               |   | 3,313,499     |   |  |   | 6,552,164    |  
|Total
        liabilities and stockholders' equity                           |  |               | $ | 13,199,811    |   |  | $ | 19,124,924   |  

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

27

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.and Subsidiary

Consolidated Statements of
Operations

|                                                                      |  |                     |            |      |  |      |             |   |  |   |             |  
|--------------------------------------------------------------------- |  | ------------------- | ---------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                                      |  | Year Ended June 30,
|                                                                      |  | 2009                |            | 2008 |  | 2007
|                                                                     
|REVENUES:                                                             |  | $                   | 11,351,774 |      |  | $    | 11,483,287  |   |  | $ | 14,405,665  |  
|                                                                     
|OPERATING EXPENSES:                                                   |  |                    
|Research
        and development                                      |  |                     | 13,356,751 |      |  |      | 21,187,762  |   |  |   | 36,913,739  |  
|General
        and administrative                                    |  |                     | 5,296,859  |      |  |      | 6,928,295   |   |  |   | 7,293,091   |  
|Total operating expenses                                              |  |                     | 18,653,610 |      |  |      | 28,116,057  |   |  |   | 44,206,830  |  
|                                                                     
|Loss from operations                                                  |  |                     | (7,301,836 | )    |  |      | (16,632,770 | ) |  |   | (29,801,165 | )
|                                                                     
|OTHER INCOME (EXPENSE):                                               |  |                    
|Investment
        income                                             |  |                     | 233,319    |      |  |      | 1,030,452   |   |  |   | 1,324,671   |  
|Interest
        expense                                              |  |                     | (26,159    | )    |  |      | (73,495     | ) |  |   | (53,339     | )
|Gain on
        sale of property and equipment                        |  |                     | 550,968    |      |  |      | -           |   |  |   | -           |  
|Total other income, net                                               |  |                     | 758,128    |      |  |      | 956,957     |   |  |   | 1,271,332   |  
|                                                                     
|Loss before income taxes                                              |  |                     | (6,543,708 | )    |  |      | (15,675,813 | ) |  |   | (28,529,833 | )
|Income tax benefit                                                    |  |                     | 1,741,476  |      |  |      | 1,291,444   |   |  |   | 778,308     |  
|                                                                     
|NET LOSS                                                              |  | $                   | (4,802,232 | )    |  | $    | (14,384,369 | ) |  | $ | (27,751,525 | )
|                                                                     
|Basic and diluted net loss per common
        share                   |  | $                   | (0.06      | )    |  | $    | (0.17       | ) |  | $ | (0.36       | )
|                                                                     
|Weighted average number of common
        shares  outstanding used in |  |                    
|computing basic and diluted net loss
        per common share         |  |                     | 86,370,306 |      |  |      | 85,220,575  |   |  |   | 76,204,160  |  

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

28

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.and Subsidiary

Consolidated Statements of Stockholders Equity
and Comprehensive Loss

|                                         |                 |              |         |               |             |               |         |       |  |            |  |   |         |  |   |             |   |   |         |   |   |              |   |   |             |  
|---------------------------------------- | --------------- | ------------ | ------- | ------------- | ----------- | ------------- | ------- | ----- |  | ---------- |  | - | ------- |  | - | ----------- | - | - | ------- | - | - | ------------ | - | - | ----------- | -
|                                         | Accumulated     |             
|                                         | Additional      | Other        |        
|                                         | Preferred Stock | Common Stock | Paid-in | Comprehensive | Accumulated |              
|                                         | Shares          | Amount       | Shares  | Amount        | Capital     | Income (Loss) | Deficit | Total
|Balance, July 1, 2006                    |                 |              |         | 9,997         |             | $             | 100     |       |  | 70,878,521 |  | $ | 708,785 |  | $ | 178,089,176 |   | $ | (54,736 | ) | $ | (160,443,544 | ) | $ | 18,299,781  |  
|Sale of common shares, net of costs      |                 |              |         | -             |             |               | -       |       |  | 13,750,000 |  |   | 137,500 |  |   | 25,372,402  |   |   | -       |   |   | -            |   |   | 25,509,902  |  
|Conversion of preferred shares           |                 |              |         | (5,000        | )           |               | (50     | )     |  | 199,203    |  |   | 1,992   |  |   | (1,942      | ) |   | -       |   |   | -            |   |   | -           |  
|Exercise of options and warrants         |                 |              |         | -             |             |               | -       |       |  | 299,191    |  |   | 2,992   |  |   | 688,976     |   |   | -       |   |   | -            |   |   | 691,969     |  
|Stock-based compensation                 |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | 1,726,825   |   |   | -       |   |   | -            |   |   | 1,726,825   |  
|Comprehensive loss:                      |                 |             
|Unrealized loss on investments           |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | -           |   |   | (7,192  | ) |   | -            |   |   | (7,192      | )
|Reclassification adjustment for realized |                 |             
|losses included in net loss              |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | -           |   |   | 61,928  |   |   | -            |   |   | 61,928      |  
|Net loss                                 |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | -           |   |   | -       |   |   | (27,751,525  | ) |   | (27,751,525 | )
|Total comprehensive loss                 |                 |              |         |               | (27,696,789 | )            
|Balance, June 30, 2007                   |                 |              |         | 4,997         |             |               | 50      |       |  | 85,126,915 |  |   | 851,269 |  |   | 205,875,438 |   |   | -       |   |   | (188,195,069 | ) |   | 18,531,688  |  
|Exercise of options and warrants         |                 |              |         | -             |             |               | -       |       |  | 77,254     |  |   | 773     |  |   | 109,456     |   |   | -       |   |   | -            |   |   | 110,229     |  
|Stock-based compensation                 |                 |              |         | -             |             |               | -       |       |  | 319,908    |  |   | 3,199   |  |   | 2,262,300   |   |   | -       |   |   | -            |   |   | 2,265,499   |  
|Comprehensive loss:                      |                 |             
|Unrealized gain on investments           |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | -           |   |   | 29,117  |   |   | -            |   |   | 29,117      |  
|Net loss                                 |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | -           |   |   | -       |   |   | (14,384,369  | ) |   | (14,384,369 | )
|Total comprehensive loss                 |                 |              |         |               | (14,355,252 | )            
|Balance, June 30, 2008                   |                 |              |         | 4,997         |             |               | 50      |       |  | 85,524,077 |  |   | 855,241 |  |   | 208,247,194 |   |   | 29,117  |   |   | (202,579,438 | ) |   | 6,552,164   |  
|Stock-based compensation                 |                 |              |         | -             |             |               | -       |       |  | 1,138,824  |  |   | 11,388  |  |   | 1,465,185   |   |   | -       |   |   | -            |   |   | 1,476,573   |  
|Comprehensive loss:                      |                 |             
|Unrealized gain on investments           |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | -           |   |   | 86,994  |   |   | -            |   |   | 86,994      |  
|Net loss                                 |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | -           |   |   | -       |   |   | (4,802,232   | ) |   | (4,802,232  | )
|Total comprehensive loss                 |                 |              |         |               | (4,715,238  | )            
|Balance, June 30, 2009                   |                 |              |         | 4,997         |             | $             | 50      |       |  | 86,662,901 |  | $ | 866,629 |  | $ | 209,712,379 |   | $ | 116,111 |   | $ | (207,381,670 | ) | $ | 3,313,499   |  

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

29

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.and Subsidiary

Consolidated Statements of Cash Flows

|                                                        |  |                     |            |      |  |      |             |   |  |   |             |  
|------------------------------------------------------- |  | ------------------- | ---------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                        |  | Year Ended June 30,
|                                                        |  | 2009                |            | 2008 |  | 2007
|CASH FLOWS FROM OPERATING
        ACTIVITIES:           |  |                     |            |      |  |      |             |   |  |   |            
|Net loss                                                |  | $                   | (4,802,232 | )    |  | $    | (14,384,369 | ) |  | $ | (27,751,525 | )
|Adjustments to
        reconcile net loss to net cash   |  |                    
|used in
        operating activities:                   |  |                    
|Depreciation
        and amortization                   |  |                     | 1,364,644  |      |  |      | 1,393,077   |   |  |   | 1,449,577   |  
|Gain
        on sale of property and equipment          |  |                     | (550,968   | )    |  |      | -           |   |  |   | -           |  
|Realized
        loss on investments                    |  |                     | -          |      |  |      | -           |   |  |   | 61,928      |  
|Stock-based compensation                                |  |                     | 1,476,573  |      |  |      | 2,265,499   |   |  |   | 1,726,825   |  
|Changes in operating assets and liabilities:            |  |                    
|Accounts receivable                                     |  |                     | (502,781   | )    |  |      | 602,094     |   |  |   | (538,250    | )
|Prepaid expenses and other assets                       |  |                     | (5,513     | )    |  |      | 1,115,350   |   |  |   | 673,991     |  
|Accounts payable                                        |  |                     | (428,820   | )    |  |      | (485,711    | ) |  |   | (1,972,068  | )
|Accrued expenses and other liabilities                  |  |                     | (1,311,164 | )    |  |      | (1,414,834  | ) |  |   | (2,300,113  | )
|Deferred revenues                                       |  |                     | (683,336   | )    |  |      | (9,669,031  | ) |  |   | 6,598,403   |  
|Net cash used in operating activities                   |  |                     | (5,443,597 | )    |  |      | (20,577,925 | ) |  |   | (22,051,232 | )
|                                                       
|CASH FLOWS FROM INVESTING ACTIVITIES:                   |  |                    
|Purchase of available-for-sale investments              |  |                     | -          |      |  |      | (1,000,012  | ) |  |   | -           |  
|Sale of property and equipment                          |  |                     | 700,000    |      |  |      | -           |   |  |   | -           |  
|Purchases of property and equipment                     |  |                     | (36,383    | )    |  |      | (263,938    | ) |  |   | (862,471    | )
|Net cash provided by (used in) investing                |  |                    
|activities                                              |  |                     | 663,617    |      |  |      | (1,263,950  | ) |  |   | (862,471    | )
|                                                       
|CASH FLOWS FROM FINANCING ACTIVITIES:                   |  |                    
|Payments on capital lease obligations                   |  |                     | (263,128   | )    |  |      | (294,199    | ) |  |   | (173,764    | )
|Proceeds from common stock, stock option                |  |                    
|and warrant issuances                                   |  |                     | -          |      |  |      | 110,229     |   |  |   | 26,201,871  |  
|Net cash provided by (used in) financing                |  |                    
|activities                                              |  |                     | (263,128   | )    |  |      | (183,970    | ) |  |   | 26,028,107  |  
|                                                       
|NET INCREASE (DECREASE) IN CASH                         |  |                    
|AND CASH EQUIVALENTS                                    |  |                     | (5,043,108 | )    |  |      | (22,025,845 | ) |  |   | 3,114,404   |  
|                                                       
|CASH AND CASH EQUIVALENTS, beginning                    |  |                    
|of year                                                 |  |                     | 9,421,770  |      |  |      | 31,447,615  |   |  |   | 28,333,211  |  
|                                                       
|CASH AND CASH EQUIVALENTS, end of year                  |  | $                   | 4,378,662  |      |  | $    | 9,421,770   |   |  | $ | 31,447,615  |  
|                                                       
|SUPPLEMENTAL CASH FLOW INFORMATION:                     |  |                    
|Cash paid
        for interest                          |  | $                   | 36,959     |      |  | $    | 58,495      |   |  | $ | 53,339      |  
|Equipment
        acquired under financing arrangements |  |                     | -          |      |  |      | 186,989     |   |  |   | 316,862     |  
|Unrealized
        gain (loss) on available-for-sale    |  |                    
|investments                                             |  |                     | 86,994     |      |  |      | 29,117      |   |  |   | (7,192      | )

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

30

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.and Subsidiary
Notes to Consolidated Financial Statements

(1)   ORGANIZATION:

Nature
of Business - Palatin Technologies, Inc. (Palatin or the Company) is a biopharmaceutical
company dedicated to the development of peptide, peptide mimetic and small molecule
agonist compounds with a focus on melanocortin and natriuretic peptide receptor systems.
Palatin has a diverse pipeline of active development programs targeting melanocortin and
natriuretic receptors. The melanocortin system is involved in a large and diverse number
of physiologic functions, and therapeutic agents modulating this system may have the
potential to treat a variety of conditions and diseases, including sexual dysfunction,
obesity and related disorders, ischemia-reperfusion injury, hemorrhagic shock and
inflammation-related diseases. The natriuretic peptide receptor system has numerous
cardiovascular functions, and therapeutic agents modulating this system may be useful in
treatment of heart failure, hypertension and other cardiovascular diseases.

The
Company's products in development include bremelanotide and PL-6983, peptide melanocortin
receptor agonists for treatment of sexual dysfunction, and PL-3994, an agonist peptide
mimetic which binds to natriuretic peptide receptor A for treatment of heart failure. The
Company has a licensing and research collaboration agreement with AstraZeneca AB
(AstraZeneca) to discover, develop and commercialize compounds that target melanocortin
receptors for the treatment of obesity, diabetes and related metabolic syndrome.

Key
elements of the Companys business strategy include using its technology and
expertise to develop and commercialize therapeutic products; entering into alliances and
partnerships with pharmaceutical companies to facilitate the development, manufacture,
marketing, sale and distribution of product candidates the Company is developing;
partially funding its development and discovery programs with the cash flow from the
Companys AstraZeneca collaboration agreement and any future agreements with other
companies; and, depending on the availability of sufficient funding, expanding the
Companys pipeline by using its expertise in drug discovery technologies for
melanocortin and natriuretic peptide receptor systems and acquiring synergistic products
and technologies.

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, 2009 and incurred a net loss for fiscal 2009. 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
preclinical 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.

In
August 2009, the Company sold 9,484,848 units in a registered direct offering for gross
proceeds of $3,130,000. Each unit consisted of one share of common stock and a five-year
warrant to purchase 0.35 shares of common stock at an exercise price of $0.33 per share.
Net proceeds to the Company, after offering costs, were approximately $2,800,000. The
placement agent was also provided with a warrant to purchase 474,242 shares of common
stock at an exercise price of $0.41 per share through November 27, 2012.

In
September 2009, the Company and AstraZeneca amended the collaboration agreement, which
amended provides for $5 million in payments to the Company, with an initial payment of
$2.5 million payable on signing and the balance payable in the first quarter of calendar
2010.

The
Company believes that its cash, cash equivalents and available-for-sale investments as of
June 30, 2009, together with proceeds from the August 2009 registered direct offering and
expected receipts from its AstraZeneca collaboration agreement and other income, are
adequate to fund operations through at

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Table of Contents (Financial)

least September 30, 2010. The nature
and timing of the Companys development activities are highly dependent on its
financing activities. Management plans to continue to refine its operations, control
expenses, evaluate alternative methods to conduct its business, and seek available
sources of public or private financing and sharing of development costs through
collaborative agreements or other arrangements. Should appropriate sources of financing
not be available, management will curtail operations and delay clinical trials and
research activities until such time, if ever, as appropriate financing is available.
There can be no assurance that the Company will be able to obtain financing when
required, or that financing efforts will be successful.

Concentrations- Concentrations in the Company's assets and operations subject it to certain related
risks. Financial instruments that subject the Company to concentrations of credit risk
primarily consist of cash and cash equivalents, available-for-sale investments and
accounts receivable. The Company's cash and cash equivalents are primarily invested in
one money market fund sponsored by a large financial institution. The Company's accounts
receivable balance as of June 30, 2009 consists only of amounts due from AstraZeneca.
Revenues from collaboration partners as a percentage of total revenues were as follows:

|                           |                     |      |      |     |      |     | 
|-------------------------- | ------------------- | ---- | ---- | --- | ---- | --- | 
|                           | Year Ended June 30, |     
|                           | 2009                |      | 2008 |     | 2007 |    
|AstraZeneca                |                     | 100% |      | 26% |      | 9%  | 
|King Pharmaceuticals, Inc. |                     | -    |      | 71% |      | 90% | 
|Mallinckrodt               |                     | -    |      | 3%  |      | 1%  | 

(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 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 Cash Equivalents  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 carried at fair value based on quoted market prices. Unrealized
holding gains and losses, net of the related tax effect, if any, are generally excluded
from earnings and are reported in accumulated other comprehensive income/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 values of these assets and liabilities are representative of their respective
fair values based on quoted market prices for investments and the short-term nature of the
other instruments.

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

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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 are less than its carrying amount. If impairment is indicated, the long-lived asset
would be written down to its 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.

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

Revenue
Recognition  Revenue from corporate collaborations and licensing agreements consists
of up-front fees, research and development funding, and milestone payments. Non-refundable
up-front fees are deferred and amortized to revenue on a straight-line basis over the
related performance period. The Company estimates the performance period as the period in
which it performs certain development activities under the applicable agreement.
Reimbursements for research and development activities are recorded in the period that the
Company performs the related activities under the terms of the applicable agreements.
Revenue resulting from the achievement of milestone events stipulated in the applicable
agreements is recognized when the milestone is achieved, provided that such milestone is
substantive in nature.

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

Stock-Based
Compensation  The Company follows Statement of Financial Accounting Standards
(SFAS) 123(R), Share-Based Payment, which 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, based on the fair value of the equity
or liability instruments issued, adjusted for estimated forfeitures.

The
Company accounts for awards granted to consultants in accordance with Emerging Issues
Task Force (EITF) Issue 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services, and SFAS 123(R).

The
Company determines the value of stock options utilizing the Black-Scholes option pricing
model. Compensation costs for share-based awards with pro rata vesting are allocated to
periods on a straight-line basis.

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

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

Net
Loss per Common Share  Basic earnings per share (EPS) is computed by dividing net
loss by the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution from the exercise or conversion of securities into
common stock, including stock options and warrants, restricted stock units and shares of
Series A Convertible Preferred Stock. For the years ended

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June 30, 2009, 2008 and 2007, there
were no dilutive effects of such securities as the Company incurred a net loss in each
period. Common shares issuable upon conversion of Series A Convertible Preferred Stock,
the exercise of outstanding options and warrants and the vesting of restricted stock
units amounted to an aggregate of 14,076,609, 13,941,595 and 16,512,769 as of June 30,
2009, 2008 and 2007, respectively.

Recently
Issued Accounting Pronouncements  In December 2007, the Financial Accounting Standards Board (FASB)
issued EITF Issue 07-1, Accounting for Collaborative Arrangements, which
applies to collaborative arrangements that are conducted by the participants without the
creation of a separate legal entity for the arrangements and clarifies, among other
things, how to determine whether a collaborative agreement is within the scope of this
issue. EITF Issue 07-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The Company does not expect the adoption of EITF Issue
07-1 to have a material impact on its consolidated results of operations and financial
position.

In
May 2009, the FASB issued SFAS 165, Subsequent Events, which establishes
general standards of accounting for and disclosure of events that occur after the balance
sheet date but before financial statements are issued or are available to be issued. In
particular, SFAS 165 establishes that entities must evaluate subsequent events through the
date the financial statements are issued, the circumstances under which a subsequent event
should be recognized, and the circumstances for which a subsequent event should be
disclosed. The adoption of SFAS 165 did not have a material impact on the Companys
consolidated financial statements. The Company has evaluated subsequent events through
September 28, 2009.

In
June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles, which will be effective
for the Company beginning July 1, 2009. The Financial Accounting Standards Board
Accounting Standards Codification (the Codification) will officially become the single
source of authoritative nongovernmental generally accepted accounting principles (GAAP),
superseding existing FASB, American Institute of Certified Public Accountants, EITF and
related accounting literature. After that date, only one level of authoritative GAAP will
exist. All other accounting literature will be considered non-authoritative. The
Codification reorganizes the thousands of GAAP pronouncements into roughly 90 accounting
topics and displays them using a consistent structure. Also included in the Codification
is relevant SEC guidance organized using the same topical structure in separate sections
within the Codification. This will have an impact to the disclosures in the Companys
financial statements since all future references to authoritative accounting literature
will be through the Codification.

(3)   AGREEMENT
WITH ASTRAZENECA

In
January 2007, the Company entered into an exclusive global licensing and research
collaboration agreement with AstraZeneca to discover, develop and commercialize compounds
that target melanocortin receptors for the treatment of obesity, diabetes and related
metabolic syndrome. In June 2008, the collaboration agreement was amended to include
additional compounds and associated intellectual property developed by the Company. In
December 2008, the collaboration agreement was further amended to include additional
compounds and associated intellectual property developed by the Company and extended the
research collaboration for an additional year through January 2010. In September 2009, the
collaboration agreement was further amended to modify royalty rates and milestone
payments. The collaboration is based on the Companys melanocortin receptor obesity
program and includes access to compound libraries, core technologies and expertise in
melanocortin receptor drug discovery and development.

In
December 2008, the Company also entered into a clinical trial sponsored research agreement
with AstraZeneca, under which the Company agreed to conduct a study of the effects of
melanocortin receptor specific compounds on food intake, obesity and other metabolic
parameters. Under the terms of the clinical trial agreement, AstraZeneca will pay all
costs associated with the study plus an additional $5,000,000 on achieving certain
objectives. The Company recognized $7,632,136 as revenue in the year ended June 30, 2009
under the clinical trial sponsored research agreement. As part of the September 2009
amendment to the collaboration agreement, the Company agreed to conduct additional studies
on the effects of melanocortin receptor specific compounds on food intake, obesity and
other metabolic parameters.

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The
Company received an up-front payment of $10,000,000 from AstraZeneca upon execution of
the collaboration agreement, and under the September 2009 amendment is eligible for
milestone payments totaling up to $145,250,000, with up to $85,250,000 contingent on
development and regulatory milestones and the balance contingent on achievement of sales
targets. In addition, the Company will receive royalties on sales of any approved
products. AstraZeneca assumed responsibility for product commercialization, product
discovery and development costs, with both companies contributing scientific expertise in
the research collaboration. The Company is providing research services to AstraZeneca
through January 2010 at a contractual rate per full-time-equivalent employee.

The
Company has determined that the license agreement and research services should be
evaluated together as a single unit for purposes of revenue recognition pursuant to EITF
Issue 00-21, Revenue Arrangements with Multiple Deliverables. Accordingly, the
up-front payment of $10,000,000 received by the Company is being recognized as revenue on
a straight-line basis over the maximum period during which the Company may perform
research services under the agreement. For the years ended June 30, 2009, 2008 and 2007,
the Company recognized as revenue $1,666,667, $1,666,667 and $694,444, respectively,
related to the up-front payment. The Company must continually evaluate the estimated
remaining performance period, and has revised the estimated performance period based on
the September 2009 amendment. Per-employee compensation from AstraZeneca for research
services is recognized as earned at the contractual rate, which approximates the fair
value of such services. Revenue recognized for research services for the years ended June
30, 2009, 2008 and 2007 were $2,052,971, $1,250,000 and $520,833, respectively. Payments
received upon the attainment of substantive milestones are recognized as revenue when
earned.

(4)   AGREEMENT WITH KING

King
Pharmaceuticals, Inc. (King) terminated, effective December 2007, a collaborative
development and marketing agreement between the Company and King entered into in August
2004, relating to development and commercialization of bremelanotide for treatment of
sexual dysfunction. As a result of the termination, Palatin solely owns all rights to
bremelanotide. In connection with the termination of the agreement, for the year ended
June 30, 2008, the Company recognized as revenue all remaining deferred up-front license
fees received from King, together with associated deferred costs, in the amounts of
$6,499,796 and $815,561, respectively. Prior to termination, deferred revenue was being
recognized as revenue over the period of the Companys performance during the
anticipated development term of the agreement, with the Company recognizing for the year
ended June 30, 2007 as revenue $2,808,441 of the deferred revenue. King retains Company
common stock obtained upon entering into the agreement in August 2004 and pursuant to a
September 2005 agreement.

(5)   INVESTMENTS

The
following table summarizes investments at June 30, 2009 and 2008:

|                        |                                                 |  |   |           | 
|----------------------- | ----------------------------------------------- |  | - | --------- | 
|                        | Total carrying
        value as ofJune 30, 2009
|Cost                    |                                                 |  | $ | 3,323,539 | 
|Gross unrealized gains  |                                                 |  |   | 116,111   | 
|Gross unrealized losses |                                                 |  |   | -         | 
|Fair value              |                                                 |  | $ | 3,439,650 | 
|                       
|                        | Total carrying
        value as ofJune 30, 2008
|Cost                    |                                                 |  | $ | 3,323,654 | 
|Gross unrealized gains  |                                                 |  |   | 29,117    | 
|Gross unrealized losses |                                                 |  |   | -         | 
|Fair value              |                                                 |  | $ | 3,352,771 | 

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Table of Contents (Financial)

In
September 2006, the FASB issued SFAS 157, Fair Market Measurements, which
clarifies the definition of fair value, establishes a framework for measuring fair value
and expands disclosure on fair value measurement. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years; however, the FASB did provide a one-year deferral for the
implementation of SFAS 157 for certain non-financial assets and liabilities.

SFAS
157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to
measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1
inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities. Level 2 inputs include quoted prices for identical or similar assets and
liabilities that are not active, quoted prices for similar assets and liabilities in
active markets or inputs that are observable for the asset or liability, either directly
or indirectly through market corroboration, for substantially the full term of the
financial instrument. Level 3 inputs are unobservable inputs based on managements
own assumptions used to measure assets and liabilities at fair value. The classification
of a financial asset or liability within the hierarchy is determined based on the lowest
level input that is significant to the fair value measurement.

The
following table provides the Companys assets and liabilities carried at fair value as of
June 30, 2009:

|             |            |                                                  |                                                  |                                                  |  |   |           |  |   |   |  |   |   | 
|------------ | ---------- | ------------------------------------------------ | ------------------------------------------------ | ------------------------------------------------ |  | - | --------- |  | - | - |  | - | - | 
|             | Fair Value | Quoted prices in
        active markets(Level 1) | Quoted prices in
        active markets(Level 2) | Quoted prices in
        active markets(Level 3)
|            
|Mutual funds |            |                                                  | $                                                | 3,439,650                                        |  | $ | 3,439,650 |  | $ | - |  | $ | - | 

(6)   PROPERTY AND EQUIPMENT, NET

Property
and equipment, net, consists of the following:

|                                   |  |              |            |              |  |   |            |  
|---------------------------------- |  | ------------ | ---------- | ------------ |  | - | ---------- | -
|                                   |  | June 30,2009 |            | June 30,2008
|Office equipment                   |  | $            | 1,662,830  |              |  | $ | 1,941,620  |  
|Laboratory equipment               |  |              | 4,130,247  |              |  |   | 4,112,908  |  
|Leasehold improvements             |  |              | 7,088,462  |              |  |   | 7,086,305  |  
|                                   |  |              | 12,881,539 |              |  |   | 13,140,833 |  
|                                  
|Less: Accumulated depreciation and
|amortization                       |  |              | (9,230,756 | )            |  |   | (8,012,757 | )
|                                   |  | $            | 3,650,783  |              |  | $ | 5,128,076  |  

The
cost of assets acquired under capital leases was $941,974 as of June 30, 2009 and
2008, respectively. Accumulated amortization associated with assets acquired under capital
leases was $552,157 and $375,446 as of June 30, 2009 and 2008, respectively.

(7)   ACCRUED EXPENSES

Accrued
expenses consist of the following:

|                                |  |              |           |              |  |   |           | 
|------------------------------- |  | ------------ | --------- | ------------ |  | - | --------- | 
|                                |  | June 30,2009 |           | June 30,2008
|Clinical study costs            |  | $            | 300,776   |              |  | $ | 363,255   | 
|Other research related expenses |  |              | 263,731   |              |  |   | 465,412   | 
|Deferred rent, current portion  |  |              | 356,012   |              |  |   | 470,830   | 
|Other                           |  |              | 500,222   |              |  |   | 367,131   | 
|                                |  | $            | 1,420,741 |              |  | $ | 1,666,628 | 

(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:

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Table of Contents (Financial)

| |                      |  |                | 
| | -------------------- |  | -------------- | 
| | Year Ending June 30,
| | 2010                 |  | $    2,144,401 | 
| | 2011                 |  | 2,196,655      | 
| | 2012                 |  | 1,995,860      | 
| | 2013                 |  | 294,376       
| | 2014                 |  | 236,335        | 
| | Thereafter           |  | 225,175        | 
| |                      |  | $    7,092,802 | 

For
the years ended June 30, 2009, 2008 and 2007, rent expense was $1,613,534, $1,650,273 and
$1,657,842, respectively.

Capital
Leases  The Company has acquired certain of its laboratory equipment under leases
classified as capital leases. Scheduled future payments related to capital leases as of
June 30, 2009 are as follows:

| |                              |  |              |   | 
| | ---------------------------- |  | ------------ | - | 
| | Year Ending June 30,        
| | 2010                         |  | 93,806       |   | 
| | 2011                         |  | 22,264       |   | 
| | 2012                         |  | 14,843       |   | 
| |                              |  | 130,913      |  
| | Amount representing interest |  | (9,284       | ) | 
| | Net                          |  | $    121,629 |   | 

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

License
Agreements  The Company has license agreements related to NeutroSpec, a
radiolabeled monoclonal antibody product for which the Company has suspended marketing,
clinical trials and securing regulatory approvals, that require minimum annual payments
of $15,000, 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. No royalty
payments or other contingent amounts will be payable under these agreements unless the
Company recommences sales and marketing of NeutroSpec. The Company does not reasonably
expect to make any such contingent payments during the next twelve months.

Employee
Retirement Savings Plan  The Company maintains a defined contribution 401(k) plan
for the benefit of its employees. The Company currently matches a portion of employee
contributions to the plan. For the years ended June 30, 2009, 2008 and 2007, Company
contributions amounted to $254,127, $341,997 and $211,778, respectively.

Contingencies
 The Company accounts for litigation losses in accordance with SFAS 5,
Accounting for Contingencies. Under SFAS 5, loss contingency provisions are
recorded for probable losses when management is able to reasonably estimate the loss. Any
outcome upon settlement that deviates from the Companys best estimate may result in
additional expense or in a reduction in expense in a future accounting period. The Company
records legal expenses associated with such contingencies as incurred.

On
January 21, 2008, the Company entered into a settlement agreement and release with
Competitive Technologies, Inc. (CTI), resolving all outstanding disputes between the
Company and CTI. The license agreement between CTI and the Company was terminated, with
the Company retaining all rights to bremelanotide and CTI retaining all rights to a
peptide called variously MT-II or PT-14. The settlement agreement and release also
includes mutual covenants not to sue and releases of all claims by

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either party against the other based
on, arising out of or in any way involving the subject matter of the license agreement.
As part of the settlement, the Company remitted a one-time payment to CTI of $800,000
that was charged to general and administrative expense in the year ended June 30, 2008.

(9)   STOCKHOLDERS EQUITY

Series
A Convertible Preferred Stock  As of June 30, 2009, 4,997 shares of Series A
Convertible Preferred Stock were outstanding. Each share of Series A Convertible
Preferred Stock is convertible at any time, at the option of the holder, into the number
of shares of common stock equal to $100 divided by the Series A Conversion Price. As of
June 30, 2009, the Series A Conversion Price is $2.51, so each share of Series A
Convertible Preferred Stock is currently convertible into approximately 40 shares of
common stock. The Series A Conversion Price is subject to adjustment, under certain
circumstances, upon the sale or issuance of common stock for consideration per share less
than either (i) the Series A Conversion Price in effect on the date of such sale or
issuance, or (ii) the market price of the common stock as of the date of such sale or
issuance. The Series A Conversion Price is also subject to adjustment upon the occurrence
of a merger, reorganization, consolidation, reclassification, stock dividend or stock
split which will result in an increase or decrease in the number of shares of common
stock outstanding. Shares of Series A Convertible Preferred Stock have a preference in
liquidation, including certain merger transactions, of $100 per share, or $499,700 in the
aggregate as of June 30, 2009. Additionally, the Company may not pay a dividend or make
any distribution to holders of any class of stock unless the Company first pays a special
dividend or distribution of $100 per share to holders of the Series A Convertible
Preferred Stock.

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

Outstanding
Stock Purchase Warrants  As of June 30, 2009, the Company had outstanding warrants
exercisable for shares of common stock as follows:

|                      |                         |        |                        |                   | 
|--------------------- | ----------------------- | ------ | ---------------------- | ----------------- | 
|Shares of CommonStock | Exercise Price perShare |        | Latest TerminationDate |                  
|15,000                |                         | $ 2.82 |                        | December 11, 2012 | 
|3,293,591             |                         | 2.88   |                        | April 17, 2011    | 
|15,000                |                         | 4.00   |                        | December 15, 2010 | 
|3,323,591             |                        

Stock
Plan  The Companys 2005 Stock Plan was initially approved by the
Companys stockholders in June 2005 and provides for incentive and nonqualified stock
option grants and other stock-based awards to employees, non-employee directors and
consultants for up to 5,000,000 shares of common stock. On December 7, 2007, the Company
received stockholder approval to increase the number of authorized shares available for
grant to 10,000,000, and on May 13, 2009 the Company received stockholder approval to
increase the number of authorized shares available for grant to 15,000,000. 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, 2009,
6,001,285 shares were available for grant under the 2005 Stock Plan.

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

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Table of Contents (Financial)

The
following table summarizes option activity for the years ended June 30, 2009, 2008 and
2007:

|                   |  |      |  |                 |   |      |                              |  |  |                 |   |  |                              |  |  |                 |   |  |                              | 
|------------------ |  | ---- |  | --------------- | - | ---- | ---------------------------- |  |  | --------------- | - |  | ---------------------------- |  |  | --------------- | - |  | ---------------------------- | 
|                   |  | 2009 |  | 2008            |   | 2007
|                   |  |      |  | Number ofShares |   |      | WeightedAverageExercisePrice |  |  | Number ofShares |   |  | WeightedAverageExercisePrice |  |  | Number ofShares |   |  | WeightedAverageExercisePrice | 
|Outstanding at     |  |     
|beginning of       |  |     
|year               |  |      |  | 6,543,453       |   |      | $2.40                        |  |  | 6,394,720       |   |  | $2.89                        |  |  | 5,659,302       |   |  | $3.12                        | 
|Granted            |  |      |  | 2,874,550       |   |      | 0.17                         |  |  | 1,787,450       |   |  | 1.04                         |  |  | 1,406,975       |   |  | 2.10                         | 
|Forfeited          |  |      |  | (270,969        | ) |      | 1.97                         |  |  | (1,381,538      | ) |  | 2.32                         |  |  | (260,520        | ) |  | 1.99                         | 
|Exercised          |  |      |  | -               |   |      | -                            |  |  | -               |   |  | -                            |  |  | (78,460         | ) |  | 1.48                         | 
|Expired            |  |      |  | (318,407        | ) |      | 3.19                         |  |  | (257,179        | ) |  | 4.82                         |  |  | (332,577        | ) |  | 4.52                         | 
|Outstanding at end |  |     
|of year            |  |      |  | 8,828,627       |   |      | 1.66                         |  |  | 6,543,453       |   |  | 2.40                         |  |  | 6,394,720       |   |  | 2.89                         | 
|Exercisable at end |  |     
|of year            |  |      |  | 5,463,802       |   |      | 2.31                         |  |  | 4,392,852       |   |  | 2.93                         |  |  | 4,549,759       |   |  | 3.18                         | 
|Weighted           |  |     
|average grant-     |  |     
|date fair value    |  |     
|of options         |  |     
|granted during     |  |     
|the year           |  |      |  |                 |   |      | $0.14                        |  |  |                 |   |  | $0.73                        |  |  |                 |   |  | $1.52                        | 

The
following table summarizes options outstanding as of June 30, 2009:

|                           |  |                 |           |                              |  |                                      |       |                         |  |  |     |  |  |   |         | 
|-------------------------- |  | --------------- | --------- | ---------------------------- |  | ------------------------------------ | ----- | ----------------------- |  |  | --- |  |  | - | ------- | 
|                           |  | Number ofShares |           | WeightedAverageExercisePrice |  | WeightedAverageRemainingTerm inYears |       | AggregateIntrinsicValue
|Options outstanding at end |  |                
|of year                    |  |                 | 8,828,627 |                              |  |                                      | $1.66 |                         |  |  | 6.3 |  |  | $ | 215,220 | 
|Options vested and         |  |                
|exercisable at end of year |  |                 | 5,463,802 |                              |  |                                      | $2.31 |                         |  |  | 4.9 |  |  | $ | 61,360  | 
|Unvested options expected  |  |                
|to vest                    |  |                 | 3,176,220 |                              |  |                                      | $0.60 |                         |  |  | 8.6 |  |  | $ | 142,133 | 

The intrinsic
value of options exercised in the year ended June 30, 2007 was $64,395.

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, 2009, the Companys weighted average
assumptions for expected volatility, dividends, term and risk-free interest rate were 85%,
0%, 8.8 years and 3.8%, respectively. For grants during the year ended June 30, 2008, the
Companys weighted average assumptions for expected volatility, dividends, term and
risk-free interest rate were 80%, 0%, 6.2 years and 3.7%, respectively. For grants during
the year ended June 30, 2007, the Companys weighted average assumptions for expected
volatility, dividends, term and risk-free interest rate were 80%, 0%, 6.2 years and 4.9%,
respectively. Expected volatilities are based primarily on the Companys historical
volatility. The expected term of options is based upon the simplified method, which
represents the average of the vesting term and the contractual term. The risk-free
interest rate is based on U.S. Treasury yields for securities with terms approximating the
expected term of the option.

For
the years ended June 30, 2009, 2008 and 2007, the Company recorded stock-based
compensation related to stock options of $700,618, $1,016,579 and $1,223,481,
respectively. The Company did not record a tax benefit related to stock-based
compensation expense. As of June 30, 2009, there was $836,388 of total unrecognized
compensation cost related to unvested options, which is expected to be recognized over a
weighted-average period of 1.07 years.

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In
July 2009, the Company granted 1,633,975 options to its non-employee directors, executive
officers and employees.

Restricted
Stock Units  In October 2006, the Company made grants of restricted stock units to
three executive officers for an aggregate of 975,000 shares of common stock. Under the
original vesting conditions, 325,000 shares vested if the quoted market price of
Palatins common stock was $4.00 or more for twenty consecutive trading days, an
additional 325,000 shares vested if the quoted market price of Palatins common stock
was $6.00 or more for twenty consecutive trading days and the remaining 325,000 shares
vested if the quoted market price of Palatins common stock was $8.00 or more for
twenty consecutive trading days. The fair value of the restricted stock units was
estimated at the grant date using a lattice-type model. The Companys assumptions for
expected volatility, dividends and risk-free rate were 80%, 0% and 4.56%, respectively.
The expected volatility was based on the Companys historical volatility and the
risk-free rate was based on U.S. Treasury yields for securities with terms approximating
the contractual term of the units. The aggregate estimated fair value of the grants at the
date of grant was approximately $1,800,000, which was being recognized over a
weighted-average period of approximately three years. For the year ended June 30, 2007,
the Company recognized $503,344 of share-based compensation expense related to these
restrict stock units.

In
March 2008, the Companys Compensation Committee revised the vesting conditions of
the above restricted stock units granted to the three executive officers. Under the
revised conditions, the restricted stock units granted to each of the executive officers
will vest on March 26, 2010, provided that each officer remains employed by Palatin
through such date, subject to earlier vesting in the event of a change in control or
termination of employment other than voluntary or for cause. The restricted stock units
also require that each executive officer retain ownership of at least 33% of the vested
stock for the duration of the executives employment with the Company unless there is
a change in control or for hardship as determined by the Board of Directors. In addition
to the original grant-date fair value of this award, the Company will recognize the
incremental fair value adjustment to these restricted stock units, totaling $273,000, on a
straight-line basis through March 26, 2010, although the amount and timing may be affected
by employment terminations. For the years ended June 30, 2009 and 2008, the Company
recognized $606,531 and $705,250, respectively, of stock-based compensation expense
related to these restricted stock units.

In
December 2008, the Company issued 750,000 restricted stock units to its executive officers
under the Companys 2005 Stock Plan. The restricted stock units vest on December 31,
2009, provided that the officer remains employed by the Company through such date, subject
to earlier vesting in the event of a change in control or termination of employment other
than voluntary or for cause. The Company is recognizing the fair value of the restricted
stock units of $68,000 on a straight-line basis through December 31, 2009. For the year
ended June 30, 2009, the Company recognized $36,346 of stock-based compensation expense
related to these restricted stock units.

In
September 2007, the Company issued 1,573,915 restricted stock units under the
Companys 2005 Stock Plan as retention bonuses to its employees, other than the
executive officers, that were not affected by the September 2007 reduction in workforce.
On September 30, 2008, after adjusting for forfeitures and early vesting due to
involuntary position elimination, 1,138,824 shares of common stock vested. The Company
amortized the fair value of these restricted stock units of $676,748 on a straight-line
basis over a one-year period. For the years ended June 30, 2009 and 2008, the Company
recognized $133,078 and $543,670, respectively, of stock-based compensation expense
related to these restricted stock units.

(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 net operating loss
carryforwards. Deferred tax assets and liabilities are determined based on the estimated
future tax effect of differences between the financial statement and tax reporting basis
of assets and liabilities, as well as for net operating loss carryforwards and research
and development credit carryforwards, given the provisions of existing tax laws.

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As
of June 30, 2009, the Company had federal and state net operating loss carryforwards of
approximately $186,000,000 and $99,000,000, respectively, which expire between 2010 and
2029 if not utilized. As of June 30, 2009, the Company had federal research and
development credits of approximately $5,000,000 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 30,2009 |             | June 30,2008
|Net operating loss carryforwards             |  | $            | 70,810,000  |              |  | $ | 71,549,000  |  
|Research and development tax credits         |  |              | 5,288,000   |              |  |   | 4,997,000   |  
|Accrued expenses, deferred revenue and other |  |              | 5,768,000   |              |  |   | 5,075,000   |  
|                                             |  |              | 81,866,000  |              |  |   | 81,621,000  |  
|Valuation allowance                          |  |              | (81,866,000 | )            |  |   | (81,621,000 | )
|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, 2009 and 2008. The valuation
allowance for the years ended June 30, 2009, 2008 and 2007 increased by $245,000,
$4,929,000 and $12,435,000, 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, 2009, 2008 and 2007, the Company sold New Jersey state net
operating loss carryforwards, which resulted in the recognition of $1,741,476, $1,291,444
and $778,308, respectively, in tax benefits.

(11) CONSOLIDATED
QUARTERLY FINANCIAL DATA  UNAUDITED

The
following tables provide quarterly data for the years ended June 30, 2009 and 2008:

|                           |  |                                               |            |               |  |                  |            |                   |  |   |            |   |  |   |            |  
|-------------------------- |  | --------------------------------------------- | ---------- | ------------- |  | ---------------- | ---------- | ----------------- |  | - | ---------- | - |  | - | ---------- | -
|                           |  | Three Months Ended                           
|                           |  | June 30,2009                                  |            | March 31,2009 |  | December 31,2008 |            | September 30,2008
|                           |  | (amounts in thousands, except per share data)
|Total revenues             |  | $                                             | 4,228      |               |  | $                | 5,159      |                   |  | $ | 1,211      |   |  | $ | 754        |  
|Total operating expenses   |  |                                               | 4,461      |               |  |                  | 5,087      |                   |  |   | 3,991      |   |  |   | 5,115      |  
|Total other income, net    |  |                                               | 32         |               |  |                  | 26         |                   |  |   | 622        |   |  |   | 78         |  
|Loss before income taxes   |  |                                               | (201       | )             |  |                  | 98         |                   |  |   | (2,158     | ) |  |   | (4,283     | )
|Income tax benefit         |  |                                               | -          |               |  |                  | -          |                   |  |   | 1,741      |   |  |   | -          |  
|Net income (loss)          |  | $                                             | (201       | )             |  | $                | 98         |                   |  | $ | (417       | ) |  | $ | (4,283     | )
|Basic and diluted net loss |  |                                              
|per common share           |  | $                                             | 0.00       |               |  | $                | 0.00       |                   |  | $ | 0.00       |   |  | $ | (0.05      | )
|Weighted average number of |  |                                              
|common shares outstanding  |  |                                              
|used in computing basic    |  |                                              
|and diluted net loss per   |  |                                              
|common share               |  |                                               | 86,662,901 |               |  |                  | 86,662,901 |                   |  |   | 86,640,647 |   |  |   | 85,524,316 |  

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|                           |  |                                               |            |               |  |                  |            |                   |  |   |            |   |  |   |            |  
|-------------------------- |  | --------------------------------------------- | ---------- | ------------- |  | ---------------- | ---------- | ----------------- |  | - | ---------- | - |  | - | ---------- | -
|                           |  | Three Months Ended                           
|                           |  | June 30,2008                                  |            | March 31,2008 |  | December 31,2007 |            | September 30,2007
|                           |  | (amounts in thousands, except per share data)
|Total revenues             |  | $                                             | 1,015      |               |  | $                | 747        |                   |  | $ | 743        |   |  | $ | 8,978      |  
|Total operating expenses   |  |                                               | 6,351      |               |  |                  | 6,041      |                   |  |   | 6,120      |   |  |   | 9,603      |  
|Total other income, net    |  |                                               | 94         |               |  |                  | 183        |                   |  |   | 302        |   |  |   | 378        |  
|Loss before income taxes   |  |                                               | (5,242     | )             |  |                  | (5,111     | )                 |  |   | (5,075     | ) |  |   | (247       | )
|Income tax benefit         |  |                                               | -          |               |  |                  | -          |                   |  |   | 1,291      |   |  |   | -          |  
|Net loss                   |  | $                                             | (5,242     | )             |  | $                | (5,111     | )                 |  | $ | (3,784     | ) |  | $ | (247       | )
|Basic and diluted net loss |  |                                              
|per common share           |  | $                                             | (0.06      | )             |  | $                | (0.06      | )                 |  | $ | (0.04      | ) |  | $ | 0.00       |  
|Weighted average number of |  |                                              
|common shares outstanding  |  |                                              
|used in computing basic    |  |                                              
|and diluted net loss per   |  |                                              
|common share               |  |                                               | 85,297,321 |               |  |                  | 85,204,169 |                   |  |   | 85,204,169 |   |  |   | 85,177,298 |  

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

None.

Item 9A(T).  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, 2009, 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

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

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

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

Management
assessed the effectiveness of our internal control over financial reporting as of June 30,
2009. 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, 2009, our
internal control over financial reporting is effective based on those criteria.

This
Annual Report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting.

Item 9B.  Other Information.

None.

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PART III

Item 10. Directors, Executive
Officers and Corporate Governance.

Identification of Directors

The
following table sets forth the names, ages, positions and committee memberships of our
directors. All directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified. All current directors were elected
at our annual stockholders meeting on May 13, 2009.

|                                                                    |     |                                                  
|------------------------------------------------------------------- | --- | -------------------------------------------------
|Name                                                                | Age | Position with Palatin                            
|Carl Spana, Ph.D.                                                   | 47  | Chief executive officer, president and a director
|John K.A. Prendergast, Ph.D.                                        | 55  | Director, chairman of the board of directors     
|Perry B. Molinoff, M.D.                                             | 69  | Director                                         
|Robert K. deVeer, Jr. (1) (2) (3)                                   | 63  | Director                                         
|Zola P. Horovitz, Ph.D. (1) (2) (3)                                 | 74  | Director                                         
|Robert I. Taber, Ph.D. (1) (2)                                      | 73  | Director                                         
|Errol De Souza, Ph.D. (2) (3)                                       | 55  | Director                                         
|J. Stanley Hull                                                     | 57  | Director                                         
|(1)    Member of the Audit Committee.                              
|(2)    Member of the Compensation Committee.                       
|(3)    Member of the Nominating and Corporate Governance Committee.

CARL
SPANA, Ph.D., co-founder of Palatin, has been our chief executive officer and president
since June 14, 2000. He has been a director of Palatin since June 1996 and has been a
director of our wholly-owned subsidiary, RhoMed Incorporated, since July 1995. From June
1996 through June 14, 2000, Dr. Spana served as an executive vice president and our chief
technical officer. From June 1993 to June 1996, Dr. Spana was vice president of Paramount
Capital Investments, LLC, a biotechnology and biopharmaceutical merchant banking firm,
and of The Castle Group Ltd., a medical venture capital firm. Through his work at
Paramount Capital Investments and The Castle Group, Dr. Spana co-founded and acquired
several private biotechnology firms. From July 1991 to June 1993, Dr. Spana was a
Research Associate at Bristol-Myers Squibb, a publicly-held pharmaceutical company, where
he was involved in scientific research in the field of immunology. Dr. Spana is a
director of AVAX Technologies, Inc., a publicly-held life science company. Dr. Spana
received his Ph.D. in molecular biology from The Johns Hopkins University and his B.S. in
biochemistry from Rutgers University.

JOHN
K.A. PRENDERGAST, Ph.D., co-founder of Palatin, has been chairman of the board since June
14, 2000, and a director since August 1996. Dr. Prendergast has been president and sole
stockholder of Summercloud Bay, Inc., an independent consulting firm providing services
to the biotechnology industry, since 1993. He is a member of the board of the following
publicly-held life science companies: Avigen, Inc., AVAX Technologies, Inc. and
MediciNova, Inc. Currently he is the chairman of AVAX Technologies, Inc. and executive
chairman of the board of directors of Antyra, Inc., a privately-held biopharmaceutical
firm. From October 1991 through December 1997, Dr. Prendergast was a managing director of
The Castle Group Ltd., a medical venture capital firm. Dr. Prendergast received his M.Sc.
and Ph.D. from the University of New South Wales, Sydney, Australia and a C.S.S. in
administration and management from Harvard University.

PERRY
B. MOLINOFF, M.D. has been a director since November 2001. He served as our executive
vice president for research and development from September 2001 until November 3, 2003,
when he resigned to accept a position as Vice Provost for Research at the University of
Pennsylvania, which he held from November 2003 through September 2006. He is also a
director of Cypress Bioscience, Inc., a publicly-held life science company. Dr. Molinoff
has more than 30 years of experience in both the

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industrial and educational sectors.
From 1981 to 1994, he was a professor of pharmacology and chairman of the Department of
Pharmacology at the University of Pennsylvania School of Medicine in Philadelphia. From
January 1995 until March 2001, he was vice president of neuroscience and genitourinary
drug discovery for the Bristol-Myers Squibb Pharmaceutical Research Institute, where he
was responsible for directing and implementing the Institute's research efforts. Dr.
Molinoff earned his medical degree from Harvard Medical School.

ROBERT
K. deVEER, Jr. has been a director since November 1998. Since January 1997, Mr. deVeer
has been the president of deVeer Capital LLC, a private investment company. He is also a
director of Solutia Inc., a publicly-held chemical-based materials company. From 1995
until his retirement in 1996, Mr. deVeer served as Managing Director, Head of Industrial
Group, at New York-based Lehman Brothers. From 1973 to 1995, he held increasingly
responsible positions at New York-based CS First Boston, including Head of Project
Finance, Head of Industrials and Head of Natural Resources. He was a managing director,
member of the investment banking committee and a trustee of the First Boston Foundation.
He received a B.A. in economics from Yale University and an M.B.A. in finance from
Stanford Graduate School of Business.

ZOLA
P. HOROVITZ, Ph.D. has been a director since February 2001. Before he retired from
Bristol-Myers Squibb in 1994, Dr. Horovitz spent 34 years in various positions, including
associate director of the Squibb Institute for Medical Research, vice president of
development, vice president, scientific liaison, vice president of licensing, and vice
president of business development and planning for the pharmaceutical division of
Bristol-Myers Squibb. He held advisory positions at the University of Pittsburgh, Rutgers
College of Pharmacy and Princeton University. He is also currently a director of the
following publicly-held life science companies: BioCryst Pharmaceuticals, Inc., Avigen,
Inc., DOV Pharmaceutical, Inc. and GenVec, Inc. Dr. Horovitz earned his Ph.D. in
pharmacology from the University of Pittsburgh.

ROBERT
I. TABER, Ph.D. has been a director since May 2001. Dr. Taber began his career in the
pharmaceutical industry in 1962, holding a succession of positions within Schering
Corporation's biological research group before leaving in 1982 as director of biological
research. He has also held a number of increasingly important positions with DuPont
Pharmaceuticals and the DuPont Merck Pharmaceutical Company, including director of
pharmaceutical research, director of pharmaceutical and biotechnology research, vice
president of pharmaceutical research and vice president of extramural research and
development. From 1994 to 1998, Dr. Taber held the position of senior vice president of
research and development at Synaptic Pharmaceuticals Corporation before founding Message
Pharmaceuticals, Inc. in 1998, serving as president and chief executive officer until
2000. Dr. Taber earned his Ph.D. in pharmacology from the Medical College of Virginia.

ERROL
DE SOUZA, Ph.D. has been a director since April 2003. Dr. De Souza has nearly two decades
of experience in the field of drug discovery and development. From April 2003 to January
2009, Dr. De Souza was president and chief executive officer of Archemix Corporation, a
biopharmaceutical company focused on aptamer therapeutics. From September 2002 to March
2003, he was president and chief executive officer and a director of Synaptic
Pharmaceuticals. As a result of a merger effective March 2003, Synaptic Pharmaceuticals
became a wholly-owned subsidiary of H. Lundbeck A/S, an international pharmaceutical
company. Prior to that, Dr. De Souza held senior management positions with Aventis, and
its predecessor company Hoechst Marion Roussel Pharmaceuticals, and was co-founder of
Neurocrine Biosciences, Inc. He is currently a director of Archemix Corporation and
Targacept, Inc., publicly-held life sciences companies, and Bionomics Limited, an
Australian life science company publicly traded on the Australian Stock Exchange. Dr. De
Souza received his B.A. (Honors) in physiology and his Ph.D. in neuroendocrinology from
the University of Toronto and he received his postdoctoral fellowship in neuroscience
from The Johns Hopkins University School of Medicine.

J.
STANLEY HULL has been a director since September 2005. Mr. Hull has over three decades of
experience in the field of sales and marketing. Mr. Hull joined GlaxoSmithKline, a
research-based pharmaceutical company, in October 1987 and retired as Senior Vice
President, Pharmaceuticals in August 2009, having previously served in the R&D
organization of GlaxoSmithKline as Vice President and Worldwide Director of Therapeutic
Development and Product Strategy  Neurology and Psychiatry. Prior to that, he was
Vice President of Marketing  Infectious Diseases and Gastroenterology for Glaxo

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Wellcome Inc. Mr. Hull started his
career in the pharmaceutical industry with SmithKline and French Laboratories in 1978.
Mr. Hull received his B.S. in business administration from the University of North
Carolina at Greensboro.

Director Independence

The
board of directors has determined that all of the directors and nominees except for Dr.
Spana (our chief executive officer and president) are independent directors, as defined
in Section 121A of the NYSE Amex original listing requirements.

The Board and Its Committees

Committees
and meetings. The board has an Audit Committee, a Compensation Committee and a
Nominating and Corporate Governance Committee. During fiscal 2009, the board met four
times, the Audit Committee met four times, the Compensation Committee met twice and the
Nominating and Corporate Governance Committee met once. Each director attended at least
75% of the total number of meetings of the board and committees of the board on which he
served. With the exception of Drs. Prendergast and Spana, the directors did not attend
the annual meeting of stockholders held on May 13, 2009.

Audit
Committee. The Audit Committee reviews the engagement of the independent registered
public accounting firm and reviews the independence of the independent registered public
accounting firm. The Audit Committee also reviews the audit and non-audit fees of the
independent registered public accounting firm and the adequacy of our internal control
procedures. The Audit Committee is currently composed of three non-employee directors,
Mr. deVeer and Drs. Horovitz and Taber, all of whom are independent. The board has
determined that the members of the Audit Committee are independent, as defined in Section
803 of the NYSE Amex Company Guide, and satisfy the requirements of the NYSE Amex as to
financial literacy and expertise. The board has determined that at least one member of
the committee, Mr. deVeer, is an audit committee financial expert as defined by the SEC.
The responsibilities of the Audit Committee are set forth in a written charter adopted by
the board, a copy of which is available on our web site at www.palatin.com.

Compensation
Committee. The Compensation Committee reviews and recommends to the board on an annual
basis employment agreements and compensation for our officers, directors and some
employees, and administers our 2005 Stock Plan and the options still outstanding which
were granted under previous stock option plans. The Compensation Committee is composed of
Mr. deVeer and Drs. Horovitz, Taber and De Souza, all of whom are independent.

The
Compensation Committee does not have a written charter. The committee administers our
2005 Stock Plan, under which it may delegate to an officer its authority to grant stock
options and rights to officers and employees, except that it cannot authorize an officer
to make grants to himself. Our chief financial officer and our Director of Human
Resources and Administration support the committee in its work by gathering, analyzing
and presenting data on our compensation arrangements and compensation in the marketplace.

Nominating
and Corporate Governance Committee. The Nominating and Corporate Governance Committee
assists the board in recommending nominees as described above, and in determining the
composition of committees. It also reviews, assesses and makes recommendations to the
board concerning policies and guidelines for corporate governance, including
relationships of the board, the stockholders and management in determining our direction
and performance. The responsibilities of the Nominating and Corporate Governance
Committee are set forth in a written charter adopted by the board, a copy of which is
available on our web site at www.palatin.com. The Nominating and Corporate Governance
Committee is composed of Mr. deVeer and Drs. Horovitz and De Souza, each of whom meets
the independence requirements currently established by the NYSE Amex.

Duration
of office. Unless a director resigns, all directors hold office until the next annual
meeting of stockholders or until their successors have been elected and qualified.
Directors serve as members of committees as the board determines from time to time.

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Stockholder Communication with
Directors

Generally,
stockholders who have questions or concerns should contact Stephen T. Wills, Secretary,
Palatin Technologies, Inc., 4C Cedar Brook Drive, Cranbury, NJ 08512. However, any
stockholders who wish to address questions regarding our business directly to the board
of directors, or any individual director, should direct their questions to the
non-employee board members via e-mail at boardofdirectors@palatin.com.

Code of Corporate Conduct and Ethics

We
have adopted a code of corporate conduct and ethics that applies to all of our directors,
officers and employees, including our chief executive officer and chief financial
officer. You can view the code of corporate conduct and ethics at our website,
www.palatin.com. We will disclose any amendments to, or waivers from, provisions of the
code of corporate conduct and ethics that apply to our directors, principal executive and
financial officers in a current report on Form 8-K, unless the rules of the NYSE Amex
permit website posting of any such amendments or waivers.

Executive Officers

Executive officers are appointed by
the board and serve at the discretion of the board. Each officer holds his position until
his successor is appointed and qualified. The current executive officers hold office
under employment agreements.

|                           |     |                                                                                           
|-------------------------- | --- | ------------------------------------------------------------------------------------------
|Name                       | Age | Position with Palatin                                                                     
|Carl Spana, Ph.D.          | 47  | Chief executive officer, president, and director                                          
|Stephen T. Wills, MST, CPA | 52  | Chief financial officer and executive vice president ofoperations, secretary and treasurer
|Trevor Hallam, Ph.D.       | 51  | Executive vice president of research and development                                      

Additional information about Dr.
Spana is included above under the heading Identification of Directors.

STEPHEN
T. WILLS, MST, CPA, has been vice president, secretary, treasurer and chief financial
officer since 1997 and has been executive vice president of operations since 2005. From
July 1997 to August 2000, Mr. Wills was also a vice president and the chief financial
officer of Derma Sciences, Inc., a publicly-held company which provides wound and skin
care products, and currently serves as lead director of Derma. Mr. Wills is also a
director of U.S. Helicopter Corp., a publicly-held company. From 1991 to August 2000, he
was the president and chief operating officer of Golomb, Wills & Company, P.C., a
public accounting firm. Mr. Wills, a certified public accountant, received his B.S. in
accounting from West Chester University, and an M.S. in taxation from Temple University.

TREVOR
HALLAM, Ph.D., has been executive vice president of research and development since May
2005. From 1996 to 2005, Dr. Hallam held senior management positions within AstraZeneca
R&D, including vice president of biologics based out of the UK, vice president of
respiratory and inflammation research based in Sweden and vice president of medical
affairs within the US. From 1985 to 1995, Dr. Hallam served in senior management positions
within Smith Kline and French Research, Glaxo Group Research and Roche Research. Dr.
Hallam joined the pharmaceutical industry after a postdoctoral fellowship at the
Physiological Laboratory, University of Cambridge, UK. He earned his Ph.D. in biochemistry
from the University of London and his B.Sc. from the University of Leeds.

Section 16(A) Beneficial
Ownership Reporting Compliance

The
rules of the SEC require us to disclose late filings of reports of stock ownership and
changes in stock ownership by our directors and officers. To the best of our knowledge,
all of the filings for our directors and officers were made on a timely basis in fiscal
2009.

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Item 11. Executive Compensation.

Summary Compensation Table

The
following table summarizes the compensation earned by or paid to our principal executive
officer, principal financial officer and our one other executive officer (our named
executive officers) for our fiscal years ended June 30, 2009 and 2008. We have no
non-equity incentive plan, no defined benefit or actuarial pension plan, and no deferred
compensation plan.

|                           |            |           |              |                    |                     |                              |         
|-------------------------- | ---------- | --------- | ------------ | ------------------ | ------------------- | ---------------------------- | --------
|Name and PrincipalPosition | FiscalYear | Salary($) | Bonus (1)($) | Stockawards (2)($) | Optionawards (2)($) | Allothercompen-sation (3)($) | Total($)
|Carl Spana, Ph.D.,         | 2009       | 390,000   | 25,000       | 245,397            | 106,404             | 9,750                        | 776,551 
|chief executive           
|officer and president      | 2008       | 390,000   | 0            | 281,750            | 66,013              | 5,688                        | 743,451 
|                          
|Stephen T. Wills,          | 2009       | 321,000   | 25,000       | 198,740            | 81,994              | 11,500                       | 638,234 
|MST, CPA, chief           
|financial officer and      | 2008       | 321,000   | 0            | 217,000            | 52,811              | 14,700                       | 605,511 
|executive vice            
|president of              
|operations                
|                          
|Trevor Hallam, Ph.D.,      | 2009       | 321,000   | 25,000       | 198,740            | 66,354              | 11,500                       | 622,594 
|executive vice            
|president of research      | 2008       | 321,000   | 0            | 217,000            | 52,811              | 14,700                       | 605,511 
|and development           

|(1) |  | 2009 bonus
amounts were paid on December 31, 2008. There were no bonuses awarded to any of our
executive officers for fiscal 2008.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Amounts
in these columns represent compensation expense which we recognized in the fiscal year
  shown. For a description of the assumptions we used to calculate these amounts, see
Note 9 to      the consolidated financial statements included in this Annual Report.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Consists
of matching contributions to 401(k) plan accounts.
|--- |  | -----------------------------------------------------------

Employment Agreements

On
June 5, 2007, we entered into employment agreements with Dr. Spana, Mr. Wills and Dr.
Hallam, which continue through June 30, 2010 unless terminated earlier. Under these
agreements, Dr. Spana is serving as chief executive officer and president at a current
salary of $390,000 per year; Mr. Wills is serving as executive vice president of
operations and chief financial officer at a current salary of $321,000 per year; and Dr.
Hallam is serving as executive vice president of research and development at a current
salary of $321,000 per year. Each agreement also provides for:

| |  |  | annual
discretionary bonus compensation, in an amount to be decided by the Compensation
Committee and approved by the board, based on achievement of yearly
objectives; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | participation
in all benefit programs that we establish, to the extent the executive's position,
tenure, salary, age, health and other qualifications make him eligible to
participate.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Compensation Committee awarded a
discretionary bonus of $25,000 to each of our named executive officers in December 2008,
but determined not to award any further discretionary bonuses to our named executive
officers or to authorized any increase in our named executive officers salaries for
fiscal 2009, based on events transpiring during fiscal 2009, including our financial
condition and the decrease in our common stock price.

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Each
agreement allows us or the executive to terminate the agreement upon written notice, and
contains other provisions for termination by us for "cause," or by the employee for "good
reason" or due to a "change in control" (as these terms are defined in the employment
agreements and set forth below). Early termination may, in some circumstances, result in
severance pay at the salary then in effect, plus continuation of medical and dental
benefits then in effect for a period of two years (Dr. Spana) or 18 months (Mr. Wills and
Dr. Hallam). Arrangements with our named executive officers in connection with a
termination following a change in control are described below. Each agreement includes
non-competition, non-solicitation and confidentiality covenants.

Stock Option and
Restricted Stock Unit Grants

In
October 2006, we granted 375,000, 300,000 and 300,000 restricted stock units to Dr.
Spana, Mr. Wills and Dr. Hallam, respectively, which vest on March 26, 2010, provided
that the executive remains employed by us through such date, subject to earlier vesting in
the event of a change in control or termination of employment other than a voluntary
termination or termination for cause. The restricted stock units also require that each
executive retain ownership of at least 33% of the vested stock for the duration of the
executives employment with us unless there is a change in control or for hardship as
determined by the board of directors.

In
connection with the grant of the restricted stock units to our named executive officers in
October 2006, we determined at that time that the named executive officers would not
receive any further stock options or stock awards during the remainder of fiscal year 2007
or the next three fiscal years thereafter, subject, however, to annual review by the
Compensation Committee, which is authorized to make additional grants if warranted based
on market conditions, our common stock price, the need to retain our executive officers
and the interests of our stockholders. In fiscal year 2009, the Compensation Committee
determined that additional equity grants were necessary in order to motivate and retain
our named executive officers. Effective July 1, 2008, Dr. Spana, Mr. Wills and Dr. Hallam
were granted options to purchase 250,000, 200,000 and 200,000 shares of common stock,
respectively, which options vest over four years. On December 10, 2008, Dr. Spana, Mr.
Wills and Dr. Hallam were awarded restricted stock units as to 250,000 shares of common
stock each, which restricted stock units will vest on December 31, 2009, provided that the
executive remains employed by us through such date, subject to earlier vesting in the
event of a change in control or termination of employment other than a voluntary
termination or termination for cause. In fiscal year 2008, the Compensation Committee
determined that additional stock option grants were necessary in order to motivate and
retain our named executive officers, and on March 26, 2008, Dr. Spana, Mr. Wills and Dr.
Hallam were granted options to purchase 375,000, 300,000 and 300,000 shares of common
stock, respectively. Twenty-five percent of the shares underlying each option were granted
at an exercise price in excess of the fair market value on the date of grant in order to
incentivize the executive to improve our financial condition.

Outstanding Equity Awards at 2009
Fiscal Year-End

The
following table summarizes all of the outstanding equity awards granted to our named
executive officers as of June 30, 2009, the end of our fiscal year.

|     |           |             |               |          |            |                |                |  |  |  |  |  | 
|---- | --------- | ----------- | ------------- | -------- | ---------- | -------------- | -------------- |  |  |  |  |  | 
|     |           | Number of   | Number of     |          |            |                |               
|     |           | securities  | securities    |          |            | Number         | Market value  
|     | Option or | underlying  | underlying    |          |            | of shares or   | of shares or  
|     | stock     | unexercised | unexercised   | Option   |            | units of stock | units of stock
|     | award     | options     | options       | exercise | Option     | that have not  | that have not 
|     | grant     | (#)         | (#)           | price    | expiration | vested         | vested        
|Name | date      | exercisable | unexercisable | ($)      | date       | (#)            | ($) (3)       

|           |  |          |  |         |  |   |  |  |        |          |  |  | 
|---------- |  | -------- |  | ------- |  | - |  |  | ------ | -------- |  |  | 
|Carl Spana |  | 07/08/99 |  | 75,000  |  | 0 |  |  | 4.875  | 07/08/09 |  |  | 
|           |  | 10/05/99 |  | 150,000 |  | 0 |  |  | 3.0625 | 10/05/09 |  |  | 
|           |  | 08/01/00 |  | 140,000 |  | 0 |  |  | 5.125  | 08/01/10 |  |  | 
|           |  | 10/01/01 |  | 100,000 |  | 0 |  |  | 3.19   | 10/01/11 |  |  | 

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|     |           |             |               |          |            |                |                |  |  |  |  |  | 
|---- | --------- | ----------- | ------------- | -------- | ---------- | -------------- | -------------- |  |  |  |  |  | 
|     |           | Number of   | Number of     |          |            |                |               
|     |           | securities  | securities    |          |            | Number         | Market value  
|     | Option or | underlying  | underlying    |          |            | of shares or   | of shares or  
|     | stock     | unexercised | unexercised   | Option   |            | units of stock | units of stock
|     | award     | options     | options       | exercise | Option     | that have not  | that have not 
|     | grant     | (#)         | (#)           | price    | expiration | vested         | vested        
|Name | date      | exercisable | unexercisable | ($)      | date       | (#)            | ($) (3)       

|                 |  |          |  |         |  |         |  |  |        |          |  |         |       
|---------------- |  | -------- |  | ------- |  | ------- |  |  | ------ | -------- |  | ------- | ------
|                 |  | 12/11/02 |  | 100,000 |  | 0       |  |  | 2.00   | 12/11/12 |  |         |       
|                 |  | 07/16/03 |  | 100,000 |  | 0       |  |  | 3.24   | 07/16/13 |  |         |       
|                 |  | 07/01/05 |  | 56,250  |  | 18,750  |  |  | 3.75   | 07/01/15 |  |         |       
|                 |  | 07/01/05 |  | 83,000  |  | 0       |  |  | 1.75   | 07/01/15 |  |         |       
|                 |  | 10/06/06 |  | 62,500  |  | 62,500  |  |  | 2.49   | 10/06/16 |  |         |       
|                 |  | 10/06/06 |  |         |  |         |  |  |        |          |  | 375,000 | 93,750
|                 |  | 03/26/08 |  | 70,312  |  | 210,938 |  |  | 0.28   | 03/26/18 |  |         |       
|                 |  | 03/26/08 |  | 11,718  |  | 35,157  |  |  | 0.50   | 03/26/18 |  |         |       
|                 |  | 03/26/08 |  | 11,718  |  | 35,157  |  |  | 0.66   | 03/26/18 |  |         |       
|                 |  | 07/01/08 |  | 0       |  | 250,000 |  |  | 0.18   | 07/01/88 |  |         |       
|                 |  | 12/10/08 |  |         |  |         |  |  |        |          |  | 250,000 | 62,500
|                
|Stephen T. Wills |  | 07/08/99 |  | 50,000  |  | 0       |  |  | 4.875  | 07/08/09 |  |         |       
|                 |  | 10/05/99 |  | 150,000 |  | 0       |  |  | 3.0625 | 10/05/09 |  |         |       
|                 |  | 08/01/00 |  | 65,000  |  | 0       |  |  | 5.125  | 08/01/10 |  |         |       
|                 |  | 10/01/01 |  | 70,000  |  | 0       |  |  | 3.19   | 10/01/11 |  |         |       
|                 |  | 12/11/02 |  | 80,000  |  | 0       |  |  | 2.00   | 12/11/12 |  |         |       
|                 |  | 07/16/03 |  | 80,000  |  | 0       |  |  | 3.24   | 07/16/13 |  |         |       
|                 |  | 07/01/05 |  | 37,500  |  | 12,500  |  |  | 3.75   | 07/01/15 |  |         |       
|                 |  | 07/01/05 |  | 73,000  |  | 0       |  |  | 1.75   | 07/01/15 |  |         |       
|                 |  | 10/06/06 |  | 50,000  |  | 50,000  |  |  | 2.49   | 10/06/16 |  |         |       
|                 |  | 10/06/06 |  |         |  |         |  |  |        |          |  | 300,000 | 75,000
|                 |  | 03/26/08 |  | 56,250  |  | 168,750 |  |  | 0.28   | 03/26/18 |  |         |       
|                 |  | 03/26/08 |  | 9,375   |  | 28,125  |  |  | 0.50   | 03/26/18 |  |         |       
|                 |  | 03/26/08 |  | 9,375   |  | 28,125  |  |  | 0.66   | 03/26/18 |  |         |       
|                 |  | 07/01/08 |  | 0       |  | 200,000 |  |  | 0.18   | 07/01/88 |  |         |       

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|     |           |             |               |          |            |                |                |  |  |  |  |  | 
|---- | --------- | ----------- | ------------- | -------- | ---------- | -------------- | -------------- |  |  |  |  |  | 
|     |           | Number of   | Number of     |          |            |                |               
|     |           | securities  | securities    |          |            | Number         | Market value  
|     | Option or | underlying  | underlying    |          |            | of shares or   | of shares or  
|     | stock     | unexercised | unexercised   | Option   |            | units of stock | units of stock
|     | award     | options     | options       | exercise | Option     | that have not  | that have not 
|     | grant     | (#)         | (#)           | price    | expiration | vested         | vested        
|Name | date      | exercisable | unexercisable | ($)      | date       | (#)            | ($) (3)       

|              |  |          |  |         |  |         |  |  |      |          |  |         |       
|------------- |  | -------- |  | ------- |  | ------- |  |  | ---- | -------- |  | ------- | ------
|              |  | 12/10/08 |  |         |  |         |  |  |      |          |  | 250,000 | 62,500
|             
|Trevor Hallam |  | 05/09/05 |  | 350,000 |  | 0       |  |  | 1.99 | 05/09/15 |  |         |       
|              |  | 10/06/06 |  | 50,000  |  | 50,000  |  |  | 2.49 | 10/06/16 |  |         |       
|              |  | 10/06/06 |  |         |  |         |  |  |      |          |  | 300,000 | 75,000
|              |  | 03/26/08 |  | 56,250  |  | 168,750 |  |  | 0.28 | 03/26/18 |  |         |       
|              |  | 03/26/08 |  | 9,375   |  | 28,125  |  |  | 0.50 | 03/26/18 |  |         |       
|              |  | 03/26/08 |  | 9,375   |  | 28,125  |  |  | 0.66 | 03/26/18 |  |         |       
|              |  | 07/01/08 |  | 0       |  | 200,000 |  |  | 0.18 | 07/01/88 |  |         |       
|              |  | 12/10/08 |  |         |  |         |  |  |      |          |  | 250,000 | 62,500

|(1) |  | Stock
option vesting schedules: all options granted before July 1, 2005 have fully vested.
Options granted on or after July 1, 2005 have the following vesting schedules:
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|            |                       |                                                                                                                                                                                                
|----------- | --------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Grant date: | ExercisePrice:        | Vesting schedule:                                                                                                                                                                              
|07/01/05    | $3.75                 | vests over four years
        with 1/4 of the shares vesting per year starting on the first anniversary of the grant date                                                                      
|07/01/05    | $1.75                 | vested over three years with 1/4 of the shares vesting
        on the grant date and 1/4 of the shares vesting each year thereafter starting on the first anniversary of the grant
        date
|10/06/06    | $2.49                 | vests over four years
        with 1/4 of the shares vesting per year starting on the first anniversary of the grant date                                                                      
|03/26/08    | $0.28, $0.50and $0.66 | vests over four years
        with 1/4 of the shares vesting per year starting on the first anniversary of the grant date                                                                      
|07/01/08    | $0.18                 | vests over four years
        with 1/4 of the shares vesting per year starting on the first anniversary of the grant date                                                                      

|(2) |  | Stock
awards consist of restricted stock units granted on October 6, 2006 which vest on March
26, 2010 and restricted stock units granted on December 10, 2008 which vest on December 31, 2009, provided that
the named executive officer remains continuously employed by us through such dates, and
which provide for accelerated vesting on a change in control or termination of
employment other than for cause or at the election of the named executive officers (as
these terms are defined in employment agreements with the named executive officers). If
the named executive officer is terminated for cause or voluntarily terminates employment,
all unvested restricted stock units are immediately forfeited.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|(3) |  | Calculated
by multiplying the number of restricted stock units by $0.25, the closing market price of
our common stock on June 30, 2009, the last trading day of our most recently completed
fiscal year.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Termination and
Change-In-Control Arrangements

The
employment agreements and restricted stock unit agreements with Dr. Spana, Mr. Wills and
Dr. Hallam contain the following provisions concerning severance compensation and the
vesting of stock options and restricted stock units upon termination of employment or upon
a change in control. The executives entitlement to severance, payment of health
benefits and accelerated vesting of options is contingent on the executive executing a
general release of claims against us.

Termination
Without Severance Compensation. Regardless of whether there has been a change in control,
if we terminate employment for cause or the executive terminates employment without good
reason (as those terms are defined in the employment agreement and set forth below), then
the executive receives only his accrued salary and vacation benefits through the date of
termination. He may also elect to receive medical and dental benefits pursuant to COBRA
for up to eighteen months, but must remit the cost of coverage to us. Under the terms of
our outstanding options and restricted stock units, all unvested options and restricted
stock units would terminate immediately, and vested options would be exercisable for three
months after termination.

Severance
Compensation Without a Change in Control. If we terminate or fail to extend the employment
agreement without cause, or the executive terminates employment with good reason, then the
executive will receive as severance pay his salary then in effect, paid on our regular pay
schedule, plus medical and dental benefits at our expense, for a period of two years (Dr.
Spana) or 18 months (Mr. Wills and Dr. Hallam) after the termination date. All unvested
options would immediately vest and be exercisable for two years after the termination
date. All unvested restricted stock units would terminate immediately.

Severance
Compensation After a Change in Control. If, within one year after a change in control, we
terminate employment or the executive terminates employment with good reason, then the
executive will receive as severance pay 200% (Dr. Spana) or 150% (Mr. Wills and Dr.
Hallam) of his salary then in effect, paid in a lump sum, plus medical and dental benefits
at our expense, for a period of two years (Dr. Spana) or 18 months (Mr. Wills and Dr.
Hallam) after the termination date. We would also reimburse the executive for up to
$25,000 in fees and expenses during the six months following termination, for locating
employment. We would also reimburse the executive for any excise tax he might incur on
excess parachute payments (as defined in Section 280G(b) of the Internal
Revenue Code). All unvested options would immediately vest and be exercisable for two
years after the termination date. All unvested restricted stock units will vest upon a
change in control, without regard to whether the exeuctives employment is
terminated.

Option
Vesting Upon a Change in Control. A change in control by itself does not change
compensation or benefits while the employment agreement remains in effect. However, if
any options are to be terminated in connection with a change in control, those options
will vest in full immediately before the change in control. Definitions. Under the
employment agreements, a change in control, cause and good
reason are defined as follows:

A
change in control occurs when:

| | (a) |  | some
person or entity acquires more than 50% of the voting power of our outstanding securities;
| | --- |  | -----------------------------------------------------------------------------------------------

| | (b) |  | the
individuals who, during any twelve month period, constitute our board of directors cease
to constitute at least a majority of the board of directors;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | we
enter into a merger or consolidation; or
| | --- |  | -------------------------------------------

| | (d) |  | we
sell substantially all our assets.
| | --- |  | -------------------------------------

The
term "cause" means:

52

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| | (a) |  | the
occurrence of (i) the executive's material breach of, or habitual neglect or failure to
perform the material duties which he is required to perform under, the terms of his
employment agreement; (ii) the executive's material     failure to follow the reasonable
directives or policies established by or at the direction of our board of     directors;
or (iii) the executive's engaging in conduct that is materially detrimental to our
interests such that we sustain a material loss or injury as a result thereof,
provided that the breach or failure of performance is not cured, to the extent cure
is possible, within ten days of the delivery to the executive of written notice thereof;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | the
willful breach by the executive of his obligations to us with respect to confidentiality,
invention and non-disclosure, non-competition or non-solicitation; or
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | the
conviction of the executive of, or the entry of a pleading of guilty or nolo contendere
by the executive to, any crime involving moral turpitude or any felony.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
term good reason means the occurrence of any of the following, with our
failure to cure such circumstances within 30 days of the delivery to us of written notice
by the executive of such circumstances:

| | (a) |  | any
material adverse change in the executive's duties, authority or responsibilities, which
causes the executive's position with us to become of significantly less responsibility,
or assignment of duties and responsibilities inconsistent with the executive's position;
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | a
material reduction in the executives salary;
| | --- |  | -----------------------------------------------

| | (c) |  | our
failure to continue in effect any material compensation or benefit plan in which the
executive participates, unless an equitable arrangement has been made with respect to
such plan, or our failure to continue the executive's participation therein (or in a
substitute or alternative plan) on a basis not materially less favorable, both in terms
of the amount of benefits provided and the level of the executive's participation
relative to other participants;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) |  | our
failure to continue to provide the executive with benefits substantially similar to those
enjoyed by the executive under any of our health and welfare insurance, retirement and
other fringe-benefit plans, the taking of any action by us which would directly or
indirectly materially reduce any of such benefits, or our failure to provide the
executive with the number of paid vacation days to which he is entitled; or
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) |  | the
relocation of the executive to a location which is a material distance from Cranbury, New
Jersey.
| | --- |  | -----------------------------------------------------------------------------------------------------

Director Compensation

The
following table sets forth the compensation we paid to all directors during fiscal 2009,
except for Dr. Spana, whose compensation is set forth above in the Summary Compensation
Table and related disclosure. Dr. Spana did not receive any separate compensation for his
services as a director.

Director Compensation
in Fiscal 2009

|                             |                                |                          |          
|---------------------------- | ------------------------------ | ------------------------ | ---------
|Name                         | Fees earned orpaid in cash ($) | Option awards($) (1) (2) | Total ($)
|John K.A. Prendergast, Ph.D. | 60,000                         | 21,151                   | 81,151   
|Perry B. Molinoff, M.D.      | 30,000                         | 11,921                   | 41,921   
|Robert K. deVeer, Jr.        | 34,000                         | 11,921                   | 45,921   
|Zola P. Horovitz, Ph.D.      | 30,000                         | 11,921                   | 41,921   
|Robert I. Taber, Ph.D.       | 32,000                         | 11,921                   | 43,921   

53

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|                                                                                                                                                                                                                                                                                      |        |        |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ------ | ------
|Errol De Souza, Ph.D.                                                                                                                                                                                                                                                                 | 30,000 | 11,921 | 41,921
|J. Stanley Hull                                                                                                                                                                                                                                                                       | 30,000 | 19,267 | 49,267
|(1)  
        Amounts in this column represent compensation expense which we recognized in fiscal 2009. For a description
         of the assumptions we used to calculate these amounts, see Note 9 to the consolidated financial statements
        included in this Annual Report.
|(2)  
        The aggregate number of shares underlying option awards outstanding at June 30,
        2009 for each director was:                                                                                                                                                    

|                |        
|--------------- | -------
|Dr. Prendergast | 761,000
|Dr. Molinoff    | 524,583
|Mr. deVeer      | 448,533
|Dr. Horovitz    | 355,000
|Dr. Taber       | 350,000
|Dr. De Souza    | 308,750
|Mr. Hull        | 266,667

Non-employee
directors' option grants. Non-employee directors receive an annual option grant on the
first day of each fiscal year. On July 1, 2008, the first day of our last completed
fiscal year, the chairman of the board received an option to purchase 75,000 shares of
common stock and each other non-employee director received an option to purchase 40,000
shares of common stock. All of these options have an exercise price of $0.18 per share,
the closing price of our common stock on the date of grant, vested in twelve monthly
installments beginning July 31, 2008, expire ten years from the date of grant and provide
for accelerated vesting in the event of involuntarily termination as a director following
a change in control, with exercise permitted following accelerated vesting for up to the
earlier of one year after termination or the expiration date of the option.

In
addition to the annual option grant, on July 1, 2008 the chairman of the board received
an option to purchase 250,000 shares of common stock and each other non-employee director
received an option to purchase 150,000 shares of common stock. All of these options have
an exercise price $0.18 per share, the closing price of our
common stock on the date of grant, vest in four annual installments on the anniversary of
the date of grant, expire ten years from the date of grant and provide for accelerated
vesting in the event of involuntarily termination as a director following a change in
control, with exercise permitted following accelerated vesting for up to the earlier of
one year after termination or the expiration date of the option.

On
July 1, 2009, the first day of the current fiscal year, the chairman of the board
received an option to purchase 60,000 shares of common stock and each other non-employee
director received an option to purchase 40,000 shares of common stock. All of these
options have an exercise price of $0.28 per share, the closing price of our common stock
on the date of grant, vest in twelve monthly installments beginning July 31, 2009, expire
ten years from the date of grant and provide for accelerated vesting in the event of
involuntarily termination as a director following a change in control, with exercise
permitted following accelerated vesting for up to the earlier of one year after
termination or the expiration date of the option.

In
addition to the annual option grant, on July 1, 2009, as compensation for consulting
services rendered in addition to his services as a director, Mr. deVeer received an
option to purchase 35,000 shares of common stock at an exercise price $0.28 per share,
the closing price of our common stock on the date of grant, which option vests in four
annual installments on the anniversary of the date of grant, expires ten years from the
date of grant and provides for accelerated vesting in the event of involuntarily
termination as a director following a change in control, with exercise permitted
following accelerated vesting for up to the earlier of one year after termination or the
expiration date of the option.

54

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Non-employee
directors' cash compensation. Dr. Prendergast serves as chairman of the board and
receives an annual retainer of $60,000, payable quarterly. Other non-employee directors
receive an annual retainer of $30,000, payable on a quarterly basis, with the Audit
Committee chairperson and Compensation Committee chairperson receiving an additional
$4,000 and $2,000, respectively, payable on a quarterly basis.

Non-employee
directors' expenses. Non-employee directors are reimbursed for expenses incurred in
performing their duties as directors, including attending all meetings of the board and
any committees on which they serve.

Employee
directors. Employee directors are not separately compensated for services as directors,
but are reimbursed for expenses incurred in performing their duties as directors,
including attending all meetings of the board and any committees on which they serve.

Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters.

Securities
authorized for issuance under equity compensation plans. The table below provides
information on our equity compensation plans as of June 30, 2009:

|                                                             |                                                                                         |                                                                         |                                                                                                                                             |         |  |           |  |  | 
|------------------------------------------------------------ | --------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ------- |  | --------- |  |  | 
|Equity Compensation Plan
     Informationas of June 30, 2009
|Plan category                                                | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights | Weighted-averageexercise price ofoutstandingoptions, warrantsand rights | Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding
     securitiesreflected in column (a))
|                                                             | (a)                                                                                     | (b)                                                                     | (c)                                                                                                                                        
|Equity compensation plans                                    |                                                                                        
|approved by security                                         |                                                                                        
|holders                                                      |                                                                                         | 10,553,627                                                              |                                                                                                                                             | $  1.39 |  | 6,001,285 | 
|                                                            
|Equity compensation plans                                    |                                                                                        
|not approved by security                                     |                                                                                        
|holders                                                      |                                                                                         | 30,000                                                                  |                                                                                                                                             | $  3.41 |  | 0         | 
|                                                            
|Total                                                        |                                                                                         | 10,583,627                                                              |                                                                                                                                             | $  1.40 |  | 6,001,285 | 

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

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

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

Beneficial
Ownership Tables. The tables below show the beneficial stock ownership and voting power,
as of September 25, 2009, of:

| |  |  | each
director, each of the named executive officers, and all current directors and officers as
a group; and
| | - |  | -----------------------------------------------------------------------------------------------------------

| |  |  | all
persons who, to our knowledge, beneficially own more than five percent of the common
stock or Series A preferred stock.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

55

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Beneficial ownership here
means direct or indirect voting or investment power over outstanding stock and stock which
a person has the right to acquire now or within 60 days after September 25, 2009. See the
footnotes for more detailed explanations of the holdings. To our knowledge, the persons
named in the tables beneficially own and have sole voting and investment power over all
shares listed.

The
common stock has one vote per share and the Series A preferred stock has approximately
44.25 votes per share. Voting power is calculated on the basis of the aggregate of common
stock and Series A preferred stock outstanding as of September 25, 2009, on which date
96,155,249 shares of common stock and 4,997 shares of Series A preferred stock were
outstanding.

The
address for all members of our management is c/o Palatin Technologies, Inc., 4C Cedar
Brook Drive, Cranbury, NJ 08512. Addresses of other beneficial owners are in the table.

MANAGEMENT:

|       |                                                         |                                         |  |                 |                      
|------ | ------------------------------------------------------- | --------------------------------------- |  | --------------- | ---------------------
|Class  | Name of Beneficial Owner                                | Amount and Natureof BeneficialOwnership |  | Percent ofclass | Percent ofvotingpower
|Common | Carl Spana, Ph.D.                                       | 1,040,673(1)                            |  | 1.1%            | *                    
|Common | Stephen T. Wills                                        | 796,500(2)                              |  | *               | *                    
|Common | Trevor Hallam, Ph.D.                                    | 552,500(3)                              |  | *               | *                    
|Common | John K.A. Prendergast, Ph.D.                            | 601,173(4)                              |  | *               | *                    
|Common | Perry B. Molinoff, M.D.                                 | 435,416(5)                              |  | *               | *                    
|Common | Robert K. deVeer, Jr.                                   | 340,366(6)                              |  | *               | *                    
|Common | Zola P. Horovitz, Ph.D.                                 | 260,833(7)                              |  | *               | *                    
|Common | Robert I. Taber, Ph.D.                                  | 255,833(8)                              |  | *               | *                    
|Common | Errol De Souza, Ph.D.                                   | 209,583(9)                              |  | *               | *                    
|Common | J. Stanley Hull                                         | 167,500(10)                             |  | *               | *                    
|       | All current directors and executive officers as a group | 4,660,377(11)                           |  | 4.6%            | *                    
|       | (ten persons)                                          

______________________
        *Less than one percent.

| | (1) |  | Includes
998,000 shares which Dr. Spana has the right to acquire under options. Does not include
625,000 shares issuable on vesting of restricted stock units.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) |  | Includes
768,000 shares which Mr. Wills has the right to acquire under options. Does not include
550,000 shares issuable on vesting of restricted stock units.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) |  | Includes
550,000 shares which Dr. Hallam has the right to acquire under options. Does not include
550,000 shares issuable on vesting of restricted stock units.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) |  | Includes
583,500 shares which Dr. Prendergast has the right to acquire under options.
| | --- |  | -------------------------------------------------------------------------------------

| | (5) |  | Includes
425,416 shares which Dr. Molinoff has the right to acquire under options.
| | --- |  | ----------------------------------------------------------------------------------

| | (6) |  | Includes
339,366 shares which Mr. deVeer has the right to acquire under options.
| | --- |  | --------------------------------------------------------------------------------

| | (7) |  | Includes
255,833 shares which Dr. Horovitz has the right to acquire under options.
| | --- |  | ----------------------------------------------------------------------------------

| | (8) |  | Includes
250,833 shares which Dr. Taber has the right to acquire under options.
| | --- |  | -------------------------------------------------------------------------------

| | (9) |  | Comprised
of shares which Dr. De Souza has the right to acquire under options.
| | --- |  | ------------------------------------------------------------------------------

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| | (10) |  | Comprised
of shares which Mr. Hull has the right to acquire under options.
| | ---- |  | --------------------------------------------------------------------------

| | (11) |  | Includes
4,548,031 shares which directors and officers have the right to acquire under options.
Does not include 1,725,000 shares issuable on vesting of restricted stock units.
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

MORE THAN 5% BENEFICIAL
OWNERS:

|          |                                      |                                         |  |                 |                      
|--------- | ------------------------------------ | --------------------------------------- |  | --------------- | ---------------------
|Class     | Name and Address of Beneficial Owner | Amount and Natureof BeneficialOwnership |  | Percent ofClass | Percent ofVotingPower
|         
|Common    | BAM Opportunity Fund, L.P. (1)       | 9,484,848                               |  | 9.9%            | 9.9%                 
|          | c/o BAM Capital, LLC                
|          | 44 Wall Street, Suite 1603          
|          | New York, NY 10005                  
|         
|Common    | King Pharmaceuticals, Inc.           | 5,675,471                               |  | 5.9%            | 5.9%                 
|          | 501 Fifth Street                    
|          | Bristol, TN 37620                   
|         
|Series A  | Tokenhouse PTE LTD                   | 667                                     |  | 13.3%           | *                    
|Preferred | 9 - 11 Reitergasse                  
|          | Zurich 8027                         
|          | Switzerland                         
|         
|Series A  | Steven N. Ostrovsky                  | 500                                     |  | 10.0%           | *                    
|Preferred | 43 Nikki Ct.                        
|          | Morganville, NJ 07751               
|         
|Series A  | Thomas L. Cassidy IRA Rollover       | 500                                     |  | 10.0%           | *                    
|Preferred | 38 Canaan Close                     
|          | New Canaan, CT 06840                
|         
|Series A  | Jonathan E. Rothschild               | 500                                     |  | 10.0%           | *                    
|Preferred | 300 Mercer St., #28F                
|          | New York, NY 10003                  
|         
|Series A  | 103336 Canada Inc.                   | 300                                     |  | 6.0%            | *                    
|Preferred | 168 Forest Hill Rd.                 
|          | Toronto, Ontario, M5P2M9            
|          | Canada                              
|         
|Series A  | Arthur J. Nagle                      | 250                                     |  | 5.0%            | *                    
|Preferred | 19 Garden Avenue                    
|          | Bronxville, NY 10708                
|         
|Series A  | Thomas P. and Mary E. Heiser, JTWROS | 250                                     |  | 5.0%            | *                    
|Preferred | 10 Ridge Road                       
|          | Hopkinton, MA 01748                 
|         
|Series A  | Carl F. Schwartz                     | 250                                     |  | 5.0%            | *                    
|Preferred | 31 West 87th St.                    
|          | New York, NY 10016                  
|         
|Series A  | Michael J. Wrubel                    | 250                                     |  | 5.0%            | *                    
|Preferred | 3650 N. 36 Avenue, #39              
|          | Hollywood, FL 33021                 
|         
|Series A  | Myron M. Teitelbaum, M.D.            | 250                                     |  | 5.0%            | *                    
|Preferred | 175 Burton Lane                     
|          | Lawrence, NY 11559                  

57

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|          |                                                |                                         |  |                 |                      
|--------- | ---------------------------------------------- | --------------------------------------- |  | --------------- | ---------------------
|Class     | Name and Address of Beneficial Owner           | Amount and Natureof BeneficialOwnership |  | Percent ofClass | Percent ofVotingPower
|         
|Series A  | Laura Gold Galleries Ltd. Profit Sharing Trust | 250                                     |  | 5.0%            | *                    
|Preferred | Park South Gallery at Carnegie Hall           
|          | 154 West 57th Street, Suite 114               
|          | New York, NY 10019-3321                       
|         
|Series A  | Laura Gold                                     | 250                                     |  | 5.0%            | *                    
|Preferred | 180 W. 58th Street                            
|          | New York, NY 10019                            

______________________
        *Less than one percent.

|(1) |  | Based
solely on information contained in a Schedule 13G filed with the SEC on August 17, 2009
by BAM Opportunity Fund, L.P., BAM Capital, LLC, BAM Management, LLC, Hal Mintz
and Ross Berman to report shares directly owned by BAM Opportunity Fund,          L.P. as
of that date, and the percentage beneficially owned was determined based on the shares
outstanding as of that date. Does not include warrants to purchase 3,391,697
shares of common stock held by BAM Opportunity Fund, L.P., which warrants
contain a contractual provision that disallows their exercise to the extent that
BAM Opportunity Fund, L.P. and its affiliates would, as a result of such
exercise, beneficially own more than 4.9% of our common stock.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 13. Certain Relationships and
Related Transactions, and Director Independence.

As
a condition of employment, we require all employees to disclose in writing actual or
potential conflicts of interest, including related party transactions. Our code of
corporate conduct and ethics, which applies to employees, officers and directors,
requires that the Audit Committee review and approve related party transactions. Since
July 1, 2008, there have been no transactions or proposed transactions in which we were
or are to be a participant, in which any related person had or will have a direct or
indirect material interest.

Item 14. Principal Accountant Fees
and Services.

KPMG
LLP (KPMG) served as our independent registered public accounting firm for fiscal 2009
and fiscal 2008.

Audit
Fees. For fiscal 2009, we anticipate that KPMG will bill us a total of $210,000 for
professional services rendered for the audit of our annual consolidated financial
statements, review of our consolidated financial statements in our Forms 10-Q and
services provided in connection with regulatory filings. For fiscal 2008, the total
billed for the same services was of $233,000.

Audit-Related
Fees. For fiscal 2009 and 2008, KPMG did not perform or bill us for any audit-related
services.

Tax
Fees. For fiscal 2009, we anticipate that KPMG will bill us a total of $15,500 for
professional services rendered for tax compliance. For fiscal 2008, KPMG billed us
$15,500 for professional services rendered for tax compliance.

All
Other Fees. KPMG did not perform or bill us for any services other than those described
above for fiscal 2009 and 2008.

Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors. Consistent with SEC policies regarding auditor independence, the
Audit Committee has responsibility for appointing, setting compensation for and
overseeing the work of the independent registered public accounting firm. In recognition
of this responsibility, the Audit Committee has established a policy to pre-approve all
audit and permissible non-audit services provided by the independent registered public
accounting firm.

The
Audit Committee pre-approves fees for each category of service. The fees are budgeted and
the Audit Committee requires the independent registered public accounting firm and
management to report

58

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actual fees versus the budget
periodically throughout the year by category of service. During the year, circumstances
may arise when it may become necessary to engage the independent registered public
accounting firm for additional services not contemplated in the original pre-approval. In
those instances, the Audit Committee requires specific pre-approval before engaging the
independent registered public accounting firm.

The
Audit Committee may delegate pre-approval authority to one or more of its members. The
member to whom such authority is delegated must report, for informational purposes only,
any pre-approval decisions to the Audit Committee at its next scheduled meeting.

59

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PART IV

Item 15. Exhibits and Financial
Statement Schedules.

(a)   Documents filed as part of
the report:

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

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

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

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

| |  |  | Consolidated
Statements of Stockholders Equity and Comprehensive Loss
| | - |  | ----------------------------------------------------------------------

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

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

2.
Financial statement schedules: None.

3.
Exhibits:

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

|3.01 |  | Restated
certificate of incorporation. *
|---- |  | ----------------------------------------

|3.02 |  | Bylaws. Incorporated by reference to Exhibit 3.1 of our Quarterly Report on Form 10-Q for
the quarter ended December 31, 2007, filed with the SEC on February 8, 2008.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.01 |  | Form of warrant issued to purchasers in our April 2006 private placement. Incorporated by
reference to Exhibit 10.3 of our Current Report on Form 8-K, filed with the SEC on April
12, 2006.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.02 |  | Form of warrant issued to purchasers in our August 2009 registered direct offering.
Incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K, filed with the
SEC on August 13, 2009.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.01 |  | 1996
Stock Option Plan, as amended. * 
|----- |  | ---------------------------------------

|10.02 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.03 |  | 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.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.04 |  | 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.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.05 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.06 |  | Form of Option Certificate (incentive option) under the 2005 Stock Plan. Incorporated by
reference to Exhibit 10.1 of our Current Report on Form 8-K, filed with the SEC on
September 21, 2005. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.07 |  | Form of Incentive Stock Option Agreement  Standard under the 2005 Stock Plan.
Incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K, filed with
the SEC on September 21, 2005. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|10.08 |  | Form of Option Certificate (non-qualified option) under the 2005 Stock Plan. Incorporated
by reference to Exhibit 10.3 of our Current Report on Form 8-K, filed with the SEC on
September 21, 2005. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.09 |  | Form of Non-Qualified Stock Option Agreement under the 2005 Stock Plan. Incorporated by
reference to Exhibit 10.4 of our Current Report on Form 8-K, filed with the SEC on
September 21, 2005. 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | Form of stock purchase agreement for our April 2006 private placement. Incorporated by
reference to Exhibit 10.2 of our Current Report on Form 8-K, filed with the SEC on April
12, 2006.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 10.1 of our
Quarterly Report on Form 10-Q for the quarter ended December 31, 2006, filed with the SEC
on February 8, 2007. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | Research Collaboration and License Agreement dated January 30, 2007, between Palatin and
AstraZeneca AB. Incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form
10-Q for the quarter ended December 31, 2006, filed with the SEC on February 8, 2007. We
have requested confidential treatment of certain provisions contained in this exhibit. The
copy filed as an exhibit omits the information subject to the confidentiality request.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | Employment Agreement dated as of June 5, 2007 between Palatin and Carl Spana. Incorporated
by reference to Exhibit 10.45 of our Annual Report on Form 10-K for the year ended June
30, 2007, filed with the SEC on September 13, 2007. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | Employment Agreement dated as of June 5, 2007 between Palatin and Stephen T. Wills.
Incorporated by reference to Exhibit 10.46 of our Annual Report on Form 10-K for the year
ended June 30, 2007, filed with the SEC on September 13, 2007. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Employment Agreement dated as of June 5, 2007, between Palatin and Trevor Hallam.
Incorporated by reference to Exhibit 10.47 of our Annual Report on Form 10-K for the year
ended June 30, 2007, filed with the SEC on September 13, 2007. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | First Amendment to the Employment Agreement dated as of June 5, 2007 between Palatin and
Carl Spana. Incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q
for the quarter ended December 31, 2007, filed with the SEC on February 8, 2008. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | First Amendment to the Employment Agreement dated as of June 5, 2007 between Palatin and
Stephen T. Wills. Incorporated by reference to Exhibit 10.2 of our Quarterly Report on
Form 10-Q for the quarter ended December 31, 2007, filed with the SEC on February 8, 2008.

|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | First Amendment to the Employment Agreement dated as of June 5, 2007 between Palatin and
Trevor Hallam. Incorporated by reference to Exhibit 10.3 of our Quarterly Report on Form
10-Q for the quarter ended December 31, 2007, filed with the SEC on February 8, 2008. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | Palatin
Technologies, Inc. 2007 Change in Control Severance Plan. Incorporated by reference to
Exhibit 10.4 of our Quarterly Report on Form 10-Q for the quarter ended
December 31, 2007, filed with the SEC on February 8, 2008. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | 2005 Stock Plan, as amended effective December 7, 2007, March 10, 2009 and May 13, 2009.
Incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2009, filed with the SEC on May 15, 2009. 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | Form of Executive Officer Option Certificate. Incorporated by reference to Exhibit 10.1 of
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed with the SEC
on May 14, 2008. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | Form of Amended Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 10.2
of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed with the
SEC on May 14, 2008. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.23 |  | Form of Amended Option Certificate (incentive option) under the 2005 Stock Plan.
Incorporated by reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2008, filed with the SEC on May 14, 2008. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

61

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Table of Contents

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

|10.24 |  | First Amendment dated June 27, 2008 to the Research Collaboration and License Agreement
between Palatin and AstraZeneca AB. Incorporated by reference to Exhibit 10.28 of our
Annual Report on Form 10-K for the year ended June 30, 2008, filed with the SEC on
September 29, 2008. 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | Second Amendment dated December 5, 2008 to the Research Collaboration and License
Agreement between Palatin and AstraZeneca AB. Incorporated by reference to Exhibit 10.2 of
our Quarterly Report on Form 10-Q for the quarter ended December 31, 2008, filed with the
SEC on February 13, 2009. 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | Clinical Trial Sponsored Research Agreement dated December 5, 2008 to the Research
Collaboration and License Agreement between Palatin and AstraZeneca AB. Incorporated by
reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q for the quarter ended
December 31, 2008, filed with the SEC on February 13, 2009. 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 |  | Form of Executive Officer Restricted Stock Unit Agreement. Incorporated by reference to
Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2008,
filed with the SEC on February 13, 2009. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.28 |  | Form of securities purchase agreement for our August 2009 registered direct offering.
Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed with
the SEC on August 13, 2009.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 or furnished with
this report. Management contract or compensatory plan or arrangement.

62

---



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
      (principal executive officer)

Date: September 28, 2009

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 28, 2009
|Carl Spana                | (principal executive officer)                        |                   
|                          |                                                      |                   
|/s/ Stephen T. Wills      | Executive Vice President and Chief Financial Officer | September 28, 2009
|Stephen T. Wills          | (principal financial and accounting officer)         |                   
|                          |                                                      |                   
|/s/ John K.A. Prendergast | Chairman and Director                                | September 28, 2009
|John K.A. Prendergast     |                                                      |                   
|                          |                                                      |                   
|/s/ Perry B. Molinoff     | Director                                             | September 28, 2009
|Perry B. Molinoff         |                                                      |                   
|                          |                                                      |                   
|/s/ Robert K. deVeer, Jr. | Director                                             | September 28, 2009
|Robert K. deVeer, Jr.     |                                                      |                   
|                          |                                                      |                   
|/s/ Zola P. Horovitz      | Director                                             | September 28, 2009
|Zola P. Horovitz          |                                                      |                   
|                          |                                                      |                   
|/s/ Robert I. Taber       | Director                                             | September 28, 2009
|Robert I. Taber           |                                                      |                   
|                          |                                                      |                   
|/s/ Errol De Souza        | Director                                             | September 28, 2009
|Errol De Souza            |                                                      |                   
|                          |                                                      |                   
|/s/ J. Stanley Hull       | Director                                             | September 28, 2009
|J. Stanley Hull           |                                                      |                   

63

---



Table of Contents

EXHIBIT LIST

|3.01 |  | Restated
certificate of incorporation. *
|---- |  | ----------------------------------------

|3.02 |  | Bylaws. Incorporated by reference to Exhibit 3.1 of our Quarterly Report on Form 10-Q for
the quarter ended December 31, 2007, filed with the SEC on February 8, 2008.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.01 |  | Form of warrant issued to purchasers in our April 2006 private placement. Incorporated by
reference to Exhibit 10.3 of our Current Report on Form 8-K, filed with the SEC on April
12, 2006.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.02 |  | Form of warrant issued to purchasers in our August 2009 registered direct offering.
Incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K, filed with the
SEC on August 13, 2009.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.01 |  | 1996
Stock Option Plan, as amended. * 
|----- |  | ---------------------------------------

|10.02 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.03 |  | 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.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.04 |  | 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.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.05 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.06 |  | Form of Option Certificate (incentive option) under the 2005 Stock Plan. Incorporated by
reference to Exhibit 10.1 of our Current Report on Form 8-K, filed with the SEC on
September 21, 2005. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.07 |  | Form of Incentive Stock Option Agreement  Standard under the 2005 Stock Plan.
Incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K, filed with
the SEC on September 21, 2005. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.08 |  | Form of Option Certificate (non-qualified option) under the 2005 Stock Plan. Incorporated
by reference to Exhibit 10.3 of our Current Report on Form 8-K, filed with the SEC on
September 21, 2005. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.09 |  | Form of Non-Qualified Stock Option Agreement under the 2005 Stock Plan. Incorporated by
reference to Exhibit 10.4 of our Current Report on Form 8-K, filed with the SEC on
September 21, 2005. 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | Form of stock purchase agreement for our April 2006 private placement. Incorporated by
reference to Exhibit 10.2 of our Current Report on Form 8-K, filed with the SEC on April
12, 2006.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 10.1 of our
Quarterly Report on Form 10-Q for the quarter ended December 31, 2006, filed with the SEC
on February 8, 2007. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | Research Collaboration and License Agreement dated January 30, 2007, between Palatin and
AstraZeneca AB. Incorporated by reference to Exhibit 10.2 of our Quarterly Report on Form
10-Q for the quarter ended December 31, 2006, filed with the SEC on February 8, 2007. We
have requested confidential treatment of certain provisions contained in this exhibit. The
copy filed as an exhibit omits the information subject to the confidentiality request.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | Employment Agreement dated as of June 5, 2007 between Palatin and Carl Spana. Incorporated
by reference to Exhibit 10.45 of our Annual Report on Form 10-K for the year ended June
30, 2007, filed with the SEC on September 13, 2007. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | Employment Agreement dated as of June 5, 2007 between Palatin and Stephen T. Wills.
Incorporated by reference to Exhibit 10.46 of our Annual Report on Form 10-K for the year
ended June 30, 2007, filed with the SEC on September 13, 2007. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Employment Agreement dated as of June 5, 2007, between Palatin and Trevor Hallam.
Incorporated by reference to Exhibit 10.47 of our Annual Report on Form 10-K for the year
ended June 30, 2007, filed with the SEC on September 13, 2007. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | First Amendment to the Employment Agreement dated as of June 5, 2007 between Palatin and
Carl Spana. Incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q
for the quarter ended December 31, 2007, filed with the SEC on February 8, 2008. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | First Amendment to the Employment Agreement dated as of June 5, 2007 between Palatin and
Stephen T. Wills. Incorporated by reference to Exhibit 10.2 of our Quarterly Report on
Form 10-Q for the quarter ended December 31, 2007, filed with the SEC on February 8, 2008.

|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | First Amendment to the Employment Agreement dated as of June 5, 2007 between Palatin and
Trevor Hallam. Incorporated by reference to Exhibit 10.3 of our Quarterly Report on Form
10-Q for the quarter ended December 31, 2007, filed with the SEC on February 8, 2008. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | Palatin
Technologies, Inc. 2007 Change in Control Severance Plan. Incorporated by reference to
Exhibit 10.4 of our Quarterly Report on Form 10-Q for the quarter ended
December 31, 2007, filed with the SEC on February 8, 2008. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | 2005 Stock Plan, as amended effective December 7, 2007, March 10, 2009 and May 13, 2009.
Incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2009, filed with the SEC on May 15, 2009. 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | Form of Executive Officer Option Certificate. Incorporated by reference to Exhibit 10.1 of
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed with the SEC
on May 14, 2008. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | Form of Amended Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 10.2
of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, filed with the
SEC on May 14, 2008. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.23 |  | Form of Amended Option Certificate (incentive option) under the 2005 Stock Plan.
Incorporated by reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2008, filed with the SEC on May 14, 2008. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.24 |  | First Amendment dated June 27, 2008 to the Research Collaboration and License Agreement
between Palatin and AstraZeneca AB. Incorporated by reference to Exhibit 10.28 of our
Annual Report on Form 10-K for the year ended June 30, 2008, filed with the SEC on
September 29, 2008. 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | Second Amendment dated December 5, 2008 to the Research Collaboration and License
Agreement between Palatin and AstraZeneca AB. Incorporated by reference to Exhibit 10.2 of
our Quarterly Report on Form 10-Q for the quarter ended December 31, 2008, filed with the
SEC on February 13, 2009. 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | Clinical Trial Sponsored Research Agreement dated December 5, 2008 to the Research
Collaboration and License Agreement between Palatin and AstraZeneca AB. Incorporated by
reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q for the quarter ended
December 31, 2008, filed with the SEC on February 13, 2009. 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 |  | Form of Executive Officer Restricted Stock Unit Agreement. Incorporated by reference to
Exhibit 10.1 of our Quarterly Report on Form 10-Q for the quarter ended December 31, 2008,
filed with the SEC on February 13, 2009. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.28 |  | Form of securities purchase agreement for our August 2009 registered direct offering.
Incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed with
the SEC on August 13, 2009.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 or furnished with
this report. Management contract or compensatory plan or arrangement.