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, 2008 or [   ]
     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934  For the transition period from ___________ to
__________ Commission file number 001-15543 _____________________________  PALATIN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter) Delaware
     95-4078884(State or other jurisdiction of
     incorporation or organization)
     (I.R.S. Employer Identification
     No.)4C Cedar Brook DriveCranbury, New Jersey
     08512(Address of principal executive
     offices)
     (Zip Code) (609) 495-2200
(Registrant's telephone number, including area code)


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

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

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

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

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

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes [X]   No [  ]

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



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Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, 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).  Yeso Nox

State the aggregate market value of
the voting and non-voting common equity held by non-affiliates, computed by reference to
the price at which the common stock was last sold, or the average bid and asked price of
such common equity, as of the last business day of the registrants most recently
completed second fiscal quarter (December 31, 2007): $17,018,365.

Indicate the number of shares
outstanding of each of the registrants classes of common stock, as of the latest
practicable date (September 26, 2008): 85,524,077



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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                                                                                                      | 20  
|Item 3.     | Legal Proceedings                                                                                               | 20  
|Item 4      | Submission of Matters to a Vote of
   Security Holders                                                          | 20  
|            | PART II                                                                                                         |     
|Item 5.     | Market for Registrant's Common Equity,
   Related Stockholder Matters and Issuer Purchases of Equity Securities | 21  
|Item 7.     | Management's Discussion and Analysis of
   Financial Condition and Results of Operations                        | 21  
|Item 8.     | Financial Statements and Supplementary
   Data                                                                  | 22  
|Item 9.     | Changes In and Disagreements With
   Accountants on Accounting and Financial Disclosure                         | 44  
|Item 9A(T). | Controls and Procedures                                                                                         | 44  
|Item 9B.    | Other Information                                                                                               | 44  
|PART III   
|Item 10.    | Directors, Executive Officers and Corporate
   Governance                                                       | 45  
|Item 11.    | Executive Compensation                                                                                          | 50  
|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                                    | 59  
|Item 14.    | Principal Accountant Fees and
   Services                                                                       | 59  
|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 compounds with a focus on melanocortin and natriuretic peptide receptor
systems. We have a diverse pipeline of active development programs, including development
of proposed products in the cardiovascular field for treatment of heart
failure, hard-to-control hypertension and for cardiac surgery organ protection, and
proposed products for sexual dysfunction, obesity and metabolic syndrome. 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. 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.

We
have the following products in development:

| |  |  | PL-3994,
a peptidomimetic natriuretic peptide receptor A (NPRA) agonist, for treatment of heart
failure (HF), including chronic HF and acute HF.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | PL-3994
for treatment of difficult-to-control hypertension, including dialysis patients with
hypertension.
| | - |  | ----------------------------------------------------------------------------------------------------------

| |  |  | Bremelanotide,
a peptide melanocortin receptor agonist, for prevention of organ damage secondary to
cardiac surgery and related indications.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

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

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

| |  |  | 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. (Mallinckrodt). We have suspended ongoing clinical trials and regulatory
approvals of NeutroSpec while we and Mallinckrodt evaluate future development and
marketing activities involving NeutroSpec.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Key
elements of our business strategy include: entering into alliances and partnerships with
pharmaceutical companies to facilitate the development, manufacture, marketing, sale and
distribution of product candidates we are developing; partially funding our development
and discovery programs with the cash flow from our collaboration agreements; 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

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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.

Products and Technologies
in Research and Development

PL-3994
for Heart Failure Indications. PL-3994 is an NPRA agonist compound in development for
treatment of HF, including chronic HF and acute 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).

PL-3994
is one of a number of natriuretic peptide receptor agonist compounds we have developed,
which are the subject of pending patent applications in the United States and selected
foreign countries. 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.

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 U.S. Food and Drug Administration (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 cyclic guanosine monophosphate (cGMP), a
natural messenger 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.

One
further Phase 2 trial is planned in patients with worsening HF, which will evaluate
whether a single subcutaneous dose of PL-3994, administered to patients who require
hospitalization due to worsening HF, can achieve a clinically meaningful benefit on
pulmonary capillary wedge pressure, a cardiac function test, and symptoms with an
acceptable safety profile. This trial is projected to commence, depending on sufficient
funding, during the fourth quarter of calendar year 2008 or first quarter of calendar year
2009. A second Phase 2 trial is planned in patients with chronic HF, and 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 2009.

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 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 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

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than the comparable half-lives of
endogenous natriuretic peptides. We believe that PL-3994, if successful, may be amenable
to self-administration by patients, similar to insulin and other self-administered drugs.

Over
five million Americans suffer from HF, with 550,000 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 were $29.6 billion in 2006, with HF constituting the leading cause of
hospitalization in people over 65 years of age, with over 1,100,000 hospitalizations for
HF in 2004. Heart failure is also a high mortality disease, with approximately one-half of
HF patients dying within five years of initial diagnosis.

PL-3994
for Difficult-to-Control Hypertension Indications. PL-3994 is also being developed for
treatment of hypertension associated with kidney dialysis, resistant hypertension and
other difficult-to-control hypertension indications. Resistant hypertension, which is high
blood pressure despite a three-drug regimen that includes a diuretic, is commonly found in
patients with congestive HF or renal disease. Adequate hypertension control is
difficult with some patient populations, including patients on renal dialysis who may
experience hypertension between dialysis sessions. While there are a large number of
approved drugs for treatment of hypertension, there are no approved drugs for hypertension
that are active through the NPRA system. Resistant and other difficult-to-control
hypertension can be caused by increased aldosterone levels. PL-3994 is believed to
decrease activity of the RAAS through the NPRA system, decreasing renin and aldosterone
secretion and thereby decreasing blood pressure.

Preclinical
and clinical trials to date with PL-3994 are described under the heading PL-3994 for
Heart Failure Indications. A Phase 2 dose ranging and safety trial with PL-3994 is
being considered with renal dialysis patients who have interdialytic hypertension
(episodes of hypertension between dialysis sessions). Commencement of this trial is
dependent on results from PL-3994 HF trials and sufficient funding to support the trial.

Over
300,000 Americans are on dialysis. Hypertension, particularly interdialytic hypertension,
is a common finding in dialysis patients. Based upon multiple studies, 50 to 60 percent of
hemodialysis patients and nearly 30 percent of peritoneal dialysis patients are
hypertensive.

Another
potential indication for PL-3994 is post-operative hypertension. Post-operative patients
are limited in their ability to take oral medications, and thus a subcutaneously injected
antihypertensive medication may provide a useful treatment tool.

With
the mechanism of action of PL-3994, it may be possible to control hypertension in patient
populations not adequately controlled by currently available drugs. These populations are
among the most difficult to treat and control  dialysis patients with interdialytic
hypertension, post-operative patients and patients with resistant hypertension.

Bremelanotide
for Organ Protection and Related Indications. Organ damage, particularly kidney damage, is
a recognized complication of many surgical procedures, including cardiac surgeries
involving cardiopulmonary bypass (the use of a heart-lung machine to support blood
circulation and oxygenation during surgery on the heart). Cardiopulmonary bypass is used
with most coronary artery bypass graft surgeries. Patients with acute renal (kidney)
failure resulting from surgery have higher death rates, longer hospital stays, and may
require dialysis. Ischemiareperfusion injury and inflammation are believed to be
primary contributors to surgically-induced organ injury. The kidneys, which have high
metabolic requirements, are particularly vulnerable to this type of injury. The brain,
liver, lungs and gut may also suffer injury following cardiopulmonary bypass or high
blood-loss surgeries.

Bremelanotide
has been studied extensively by us for sexual dysfunction in nasal formulations and in
subcutaneously and intravenously injected formulations. In these trials, almost 2,000
patients received at least one dose of bremelanotide, with about 1,500 receiving multiple
doses. Increases in blood pressure were observed in some patients, and this observed
increase was a significant factor leading us to discontinue work on bremelanotide as a
first-line therapy for sexual dysfunction.

There
are no approved drugs for prevention of acute renal injury secondary to cardiac surgery.
This remains a major unmet medical need. We are developing bremelanotide for this and
related indications. We have demonstrated increased survival rates and
organ protection following administration of bremelanotide in a hemorrhagic shock rat
model. Substantially less damage to the liver, kidneys and gut was seen in animals
administered bremelanotide compared to control animals. Dose-responsive increases in blood
pressure were also seen, together with improved maintenance of core body temperature and
cardiac function. Bremelanotide also prevented metabolic acidosis (decrease in blood pH)
following induced shock. We are continuing to conduct dose

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ranging and other preclinical
studies in animal models preparatory to initiating human clinical trials for this
indication.

Following
completion of ongoing animal dose-ranging studies and preclinical studies, we are
considering initiating a Phase 2 study on patients undergoing cardiopulmonary bypass
surgery. This study would examine a number of endpoints, including measurement of kidney
function post-surgery. Commencement of the Phase 2 study is dependent on sufficient
funding to support the trial and FDA approval.

Acute
renal failure remains a major complication of cardiopulmonary bypass surgery that is
strongly associated with in-hospital mortality. Over 450,000 coronary artery bypass graft
surgeries are performed annually in the United States. The incidence rate of acute renal
failure has increased in recent years, resulting in increases in healthcare resource
utilization and length of intensive care and hospital stay. Other potential indications
for bremelanotide include improvement in survival and prevention of organ dysfunction in
patients with traumatic injuries resulting in hemorrhagic shock. This patient population
includes potential emergency medicine and military applications.

PL-6983
for Treatment of Female 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 female sexual dysfunction (FSD). 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.

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
discontinued development of bremelanotide for sexual dysfunction after the FDA raised
concerns about the acceptable benefit/risk ratio of bremelanotide as a first-line therapy
for erectile dysfunction, primarily because of increases in blood pressure observed in
some patients.

We
are developing PL-6983 primarily for FSD, a major unmet medical need. 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. We anticipate
that these initial studies will be conducted in men and women, but assuming favorable
efficacy results without significant increases in blood pressure, future studies would be
conducted in women with FSD. Depending on results of clinical trials, we may also
seek to develop PL-6983 for erectile dysfunction (ED).

Obesity.
We have a development program for melanocortin receptor-targeted compounds for the
treatment of obesity, diabetes and related metabolic syndrome. Obesity is a
multifactorial condition with significant biochemical components relating to satiety
(feeling full), energy utilization and homeostasis. A number of different metabolic and
hormonal pathways are being evaluated by companies around the world in efforts to develop
better treatments for obesity. Scientific research has established that 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 but which
induce a limited or no sexual response. Certain of these compounds have been demonstrated
to be effective in normal diet-induced obese and genetically obese animal models for
decreasing food intake and body weight, without an increase in sexual response in normal
animals at the same or higher dose levels. Tests to date have been conducted only in
animal models and in laboratory tests.

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

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of obesity, diabetes and related
metabolic syndrome. In June 2008, the collaboration agreement was amended to include
additional compounds and associated intellectual property we developed. Pursuant to the
terms of the agreement, we received an up-front payment of $10 million from AstraZeneca
and are eligible for milestone payments totaling up to $300 million, with up to $180
million contingent upon development and regulatory milestones and the balance on
achievement of sales targets, plus royalties on sales of approved products. We anticipate
receiving a significant milestone payment from AstraZeneca by the end of the first
quarter of calendar year 2009, provided we achieve specified objectives by that time.
AstraZeneca has assumed responsibility for product commercialization, product discovery
and development costs. We are providing certain scientific expertise in the research
collaboration at a negotiated rate.

NeutroSpec.
We are evaluating future development and marketing activities involving NeutroSpec, our
trade name for technetium (99m Tc) fanolesomab, a radiolabeled monoclonal antibody
product for imaging and diagnosing infection, with Mallinckrodt, with whom we entered
into a strategic collaboration agreement in 1999. NeutroSpec includes an anti-CD 15
monoclonal antibody which selectively binds to neutrophils (a type of white blood cell
involved in immune responses). When labeled with technetium (a radioactive tracer) and
injected into the blood stream, the antibody binds to neutrophils accumulated at an
infection site, labeling these cells. As a result, physicians can rapidly image and
locate an infection using a gamma camera, a common piece of hospital equipment that
detects radioactivity.

In
July 2004, we received approval from the FDA to market NeutroSpec for imaging of patients
with equivocal signs and symptoms of appendicitis who are five years of age or older.
During 2005, we and Mallinckrodt reported to the FDA the occurrence of several serious
adverse events, including two deaths, involving patients with severe underlying
cardiopulmonary compromise who received NeutroSpec for off-label uses. In December 2005,
the FDA informed Mallinckrodt and us that it had reconsidered the risk/benefit assessment
of NeutroSpec and determined that the product should not be administered to patients,
until a further understanding and review of the relationship between NeutroSpec and the
reported serious adverse events is complete. We have reviewed data and conducted studies
on the relationship between NeutroSpec use and the observed serious adverse events, but we
and Mallinckrodt have not made a final decision concerning future activities involving
NeutroSpec. We anticipate making a decision on whether to seek to proceed with NeutroSpec
in the second half of calendar year 2008.

Our
1999 collaboration agreement with Mallinckrodt provides for marketing and distribution
rights to NeutroSpec. Under this agreement, we are responsible for the manufacture of
NeutroSpec and Mallinckrodt agreed to pay us a transfer price on each product unit sold to
Mallinckrodt and a royalty on their net sales of NeutroSpec. If NeutroSpec is reintroduced
to the market, we may receive milestone payments from Mallinckrodt on the achievement of
development, regulatory or sales objectives; however, we may not be able to reintroduce
NeutroSpec to the market or meet development or sales objectives.

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 heart
failure and difficult-to-control hypertension.

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 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 can be used to
design small molecule, non-peptide drugs.

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Competition

Our
products under development will compete on the basis of quality, performance, cost
effectiveness, and application suitability with numerous established products and
technologies. We have many competitors, including pharmaceutical, biopharmaceutical and
biotechnology companies. 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 with many companies that have developed or are working to
develop products similar to ours. Such companies may succeed in developing technologies
and products that are more effective or less costly than any of those that we may develop.
Such companies may be more successful than us in developing, manufacturing and marketing
products.

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.

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 treatment of chronic HF. While PL-3994 may compete with nesiritide
or carperitide for treatment of acute HF in a hospital setting, there is no NPRA agonist
drug approved in the United States for treatment of chronic HF, including
worsening HF. We are aware of at least one company developing natriuretic
peptide drugs, with one drug 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.

PL-3994
for Difficult-to-Control Hypertension Indications. While other natriuretic peptide drugs
are marketed or under development, we are not aware of any NPRA agonist drug in
development for difficult-to-control hypertension or related indications. However, there
are a number of approved oral drugs for hypertension which work by a variety of
mechanisms, including renal competitive aldosterone antagonists such as spirolactone.
There are also several approved intravenous antihypertensive drugs which could compete
with PL-3994 for certain indications, including post-operative hypertension. A number of
approved drugs and drugs in development regulate effects of the RAAS, including inhibitors
of angiotensin-converting enzyme (ACE inhibitors), angiotensin receptor blockers (ARBs),
and renin receptor inhibitors. The antihypertensive drug market is highly competitive,
with numerous drugs in various stages of development in addition to the marketed drugs.

Bremelanotide
for Organ Protection and Related Indications. We are aware of one drug in clinical trials
being developed to prevent post-surgical kidney injury after thoracic aortic aneurysm
repair which is reported to act through the melanocortin receptor system. There are a
number of other drugs and technologies in clinical studies for prevention or treatment of
renal injury secondary to cardiac surgery. However, we are not aware of any drug approved
in the United States for prevention of renal injury secondary to cardiac surgery.

PL-6983
for Treatment of Female Sexual Dysfunction. There is tremendous competition and incentive
to develop, market and sell drugs for the treatment of FSD. A number of hormonal therapies
have been commercialized, including progestin, androgen and localized estrogen therapies,
but they have not gained widespread market acceptance. None are specifically approved for
an FSD indication, and they are reported to be effective in a comparatively small
percentage of FSD cases. Drugs approved for ED indications have been studied for use in
treatment of FSD, primarily 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®). None are specifically
approved for an FSD indication, and PDE-5 inhibitors are reported to be either ineffective
or effective in limited FSD indications. Despite the fact that a number of drugs are in
various stages of research or development for FSD, to our knowledge none utilize
melanocortin pathways as the mechanism of action.

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

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

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

Patents and Proprietary
Information

Patent
protection. Our success will depend in substantial part on our ability to obtain, defend
and enforce patents, maintain trade secrets and operate without infringing upon the
proprietary rights of others, both in the United States and abroad. We own 43 issued
United States patents and have over 25 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, and
have a pending United States provisional patent application claiming use of bremelanotide
for prevention of organ damage and related uses. 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, referred to as 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. However, these patent applications have not yet been examined, and we do not
know the scope of patent claims that will be allowed, or whether any patents will issue.

We
have a provisional patent application pending on melanocortin receptor-specific peptides
including PL-6983, but have not yet filed either a United States utility patent
application or patent applications in any foreign countries. Until these applications are
filed and the patent applications 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, the majority
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.

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

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

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

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Future
patent infringement.We do not know for certain that our commercial activities will not
infringe upon patents or patent applications of third parties, some of which may not even
have been issued. Although we are not aware of any valid U.S. patents which are infringed
by PL-3994, bremelanotide, PL-6983 or NeutroSpec 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.

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

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 either a biologics license application (BLA) or new drug
application (NDA) from the FDA for any of our proposed products, any facility that
manufactures such a product must comply with current good manufacturing practices (cGMPs).
This means, among other things, that the drug manufacturing establishment must be
registered with, and subject to inspection by, the FDA. Foreign manufacturing
establishments must also comply with cGMPs and are subject to periodic inspection by the
FDA or by corresponding regulatory agencies in such other countries under reciprocal
agreements with the FDA. In complying with standards established by the FDA, manufacturing
establishments must continue to expend time, money and effort in the areas of production
and quality control to ensure full technical compliance. We 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 cGMPs and
other regulatory requirements.

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Third-Party Reimbursements

Successful
sales of our proposed products in the United States and other countries will depend on the
availability of adequate reimbursement from third-party payors such as governmental
entities, managed care organizations and private insurance plans. Reimbursement by a
third-party payor may depend on a number of factors, including the payors
determination that the product has been approved by the FDA for the indication for which
the claim is being made, 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 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 cGMPs prescribed by the FDA and at acceptable costs. We do not have the facilities
to manufacture any of our proposed products under cGMPs. We intend to rely on
collaborators, licensees or contract manufacturers for the commercial manufacture of our
proposed products.

Our
PL-3994 product candidate is a peptidomimetic 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,
but 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
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 cGMPs 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 cGMPs. 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-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 cGMPs at acceptable costs. Additionally, scaling up to
commercial quantities may involve production, purification, formulation and other problems
not present in the scale of manufacturing done to date.

If
sales of NeutroSpec resume, we will be dependent on DSM N.V. of the Netherlands for the
manufacture of the NeutroSpec drug substance and intermediate drug product and on Ben
Venue Laboratories of Cleveland, Ohio for the manufacture of the final NeutroSpec drug
product. We do not have long-term supply agreements in force with either DSM N.V. or Ben
Venue Laboratories, and may not be able to enter into supply agreements on acceptable
terms, if at all. The failure to enter into a definitive supply agreement with either
could interfere with our ability to deliver NeutroSpec on a timely basis or at all. If
sales of NeutroSpec resume, we will rely on our arrangement with Mallinckrodt to market,
sell and distribute NeutroSpec. We have limited control over these activities. We package
and ship our radiopharmaceutical products in the form of non-radioactive kits. Prior to
patient administration, the product is radiolabeled with the specified radioisotope,
generally by a specialized radiopharmacy. We do not sell or distribute any radioactive
substances.

The
failure of any manufacturer or supplier to comply with FDA cGMPs 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 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.

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Product Liability and
Insurance

Our
business may be affected by potential product liability risks which are inherent in the
testing, manufacturing, marketing and use of 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 26, 2008, we employed 46 persons full time, of whom 32 are engaged in
research and development activities and 14 are engaged in administration and management.
18 of our employees 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.

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, 2008, we had
an accumulated deficit of approximately $202.6 million. We expect to incur additional
losses as we continue our development of PL-3994, bremelanotide, PL-6983 and NeutroSpec.
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 need to raise additional funds and
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.

We
expect that our existing cash and cash equivalents, available-for-sale investments and
other current assets will not provide sufficient working capital to fund our operations
for the next twelve months. In order to maintain our presently anticipated operations, we
will need to raise additional funds. In 2007, we were able to raise $25.5 million in net
proceeds through the sale of common stock. However, we have substantial ongoing operating
expenses associated with the development of our product candidates. As of June 30, 2008, we
had cash and cash equivalents of $9.4 million and available-for-sale investments of $3.4
million, with current liabilities of $3.3 million net of the current portion of deferred
revenues of $1.7 million. We anticipate receiving a significant milestone payment from
AstraZeneca by the end of the first quarter of calendar year 2009, provided we achieve
specified objectives by that time, but no assurance can be given that we will achieve the
specified objectives by that time.

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, 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
PL-3994, bremelanotide, PL-6983 and NeutroSpec. 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.

Our independent registered public
accounting firm has expressed doubt about our ability to continue as a going concern,
which may hinder our ability to obtain future financing.

Our
consolidated financial statements as of June 30, 2008 have been prepared under the
assumption that we will continue as a going concern. Our independent registered public
accounting firm has issued a report dated September 26, 2008 that included an explanatory
paragraph referring to our recurring net losses and negative cash flows from operations
and expressing substantial doubt in our ability to continue as a going concern without
additional funds becoming available. Our ability to continue as a going concern is
dependent upon our ability to obtain additional equity financing or other capital, attain
further operating efficiencies, reduce expenditures, and,

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ultimately, to generate revenue. The
consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty. We are continually evaluating opportunities to raise
additional funds through public or private equity financings, as well as evaluating
prospective business partners, and will continue to do so. However, if adequate funds
are not available to us when we need it, and we are unable to enter into some form of
strategic relationship that will give us access to additional cash resources, we will be
required to even further curtail our operations which would, in turn, further raise
substantial doubt about our ability to continue as a going concern.

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

If
we raise additional capital as we intend, we will almost certainly need to sell a
significant amount of equity securities, whether in the form of new shares of common stock or some
other form of convertible security, in order to raise any meaningful amount of capital,
based upon our recent stock price. 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.

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 you to assess our ability to commercialize our product candidates.

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

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

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

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

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

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

If
we are unable to obtain regulatory approval of any of our product candidates, 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.

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,
potentially using various doses and formulations, must be performed before we can begin
human clinical trials. Even if we obtain favorable results in the preclinical studies, the
results in humans may be different. Numerous small-scale human clinical trials may be
necessary to obtain initial data on a 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
| | - |  | ---------------------------------------------------------------

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| |  |  | 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 preclinical laboratory tests, preclinical studies and formulation studies;
| | - |  | ----------------------------------------------------------------------------------------

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

| |  |  | performance
of adequate and well-controlled 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, or, for products categorized as biologicals such as NeutroSpec, a
BLA; and
| | - |  | -----------------------------------------------------------------------------------------------------------

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

The
results of product development, preclinical studies and clinical studies are submitted to
the FDA as part of an NDA or BLA. The NDA or BLA also must contain extensive manufacturing
information. Once the submission has been accepted for filing, the FDA generally has ten
months to review the application and respond to the applicant. The review process is often
significantly extended by FDA requests for additional information or clarification. The
FDA may refer the NDA or BLA to an advisory committee for review, evaluation and
recommendation as to whether the application should be approved, but the FDA is not bound
by the recommendation of 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. 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 pre- and post-market regulatory standards is not maintained or if
problems occur after the product reaches the marketplace. In addition, the FDA may require
post-marketing studies, referred to as Phase 4 studies, to monitor the effect of approved
products, and may limit further marketing of the product based on the results of these
post-market studies. The FDA has broad post-market regulatory and enforcement powers,
including the ability to levy fines and civil penalties, suspend or delay issuance of
approvals, seize or recall products, and withdraw approvals.

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

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

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.

In order to reintroduce NeutroSpec to
the market, we will be required to conduct extensive clinical trials of NeutroSpec, and
may not be able to obtain regulatory approval.

We
do not anticipate seeking approval to recommence marketing NeutroSpec for the previously
approved indication, imaging and diagnosing equivocal appendicitis. The reported serious
adverse events were associated with off-label use (use for an indication other than
diagnosis of equivocal appendicitis), and substantial sales of NeutroSpec were for
off-label uses. We have conducted additional laboratory studies to explore the
relationship between NeutroSpec and the reported serious adverse events. However, results
of those studies are not conclusive, and we may not be able to develop a sufficient
understanding of the relationship to warrant application to the FDA to conduct additional
studies. We also may not be able to develop methods, formulations or protocols that permit
NeutroSpec to be used safely. We also do not know whether the FDA will concur in our
risk/benefit assessment of NeutroSpec, or permit NeutroSpec to be marketed again. Even if
we seek to reintroduce NeutroSpec to the market, we anticipate seeking approval to market
NeutroSpec for indications, such as osteomyelitis (infection deep inside a bone), which
will require that Phase 2 and Phase 3 clinical trials be successfully completed, as to
which there can be no assurance, prior to seeking approval of the FDA.

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

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

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

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

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

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

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

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

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

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

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

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

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

We
do not have the facilities to manufacture PL-3994, bremelanotide, PL-6983 or NeutroSpec.
Our contract manufacturers must perform these manufacturing activities in a manner that
complies with FDA regulations. Failure to conduct their activities in compliance with FDA
regulations could delay our development programs or negatively impact our ability to
receive FDA approval of our potential products. Establishing relationships with new
suppliers, who must be FDA-approved, is a time-consuming and costly process.

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

We
are subject to various laws and regulations regarding laboratory practices, the
experimental use of animals and the use and disposal of hazardous or potentially hazardous
substances in connection with our research. In each of these areas, as noted above, the
FDA and other regulatory authorities have broad regulatory and enforcement powers,
including the ability to levy fines and civil penalties, suspend or delay issuance of
approvals, seize or recall products and withdraw approvals, any one or more of which could
have a material adverse effect 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 PL-3994, an NPRA agonist, for the treatment of heart failure and
difficult-to-control hypertension, bremelanotide for prevention of organ damage secondary
to cardiac surgery and related indications, and PL-6983 for FSD. 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.

If
we recommence sales of NeutroSpec, we will depend on Mallinckrodt, our strategic
collaboration partner, to market, sell and distribute the product. If Mallinckrodt fails
to adequately market NeutroSpec or devote enough resources to NeutroSpec, our potential
revenues will be adversely affected. If Mallinckrodt determines to not

15

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proceed with NeutroSpec, we may have
difficulty establishing new marketing relationships, and in any event, we will have
limited control over these activities.

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

Under
our January 2007 license agreement with AstraZeneca, as amended in June 2008, 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.

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 another synthetic natriuretic
product are being conducted in the United States. In addition, other products for
treatment of HF are either currently being marketed or in development.

There
are a large number of approved oral and intravenous drugs for control of hypertension,
some of which may be used for difficult-to-control hypertension. While PL-3994 is believed
to decrease hypertension by a different mechanism than existing approved drugs, we may be
required to demonstrate efficacy and safety equivalent or superior to these other products
in order to achieve approval and market acceptance.

We
are not aware of any FDA-approved product for organ protection that works by the same
mechanism as bremelanotide. However, we are aware of one other product in Phase 2 clinical
trials that we believe works by the same or a related mechanism, and there are other
products and technologies in development for organ protection, including renal protection.
In order to achieve approval and market acceptance, bremelanotide may be required to
demonstrate efficacy and safety equivalent or superior to these other products and
technologies.

There
are a number of other products being developed for FSD and ED. We are aware of three oral
FDA-approved PDE-5 inhibitor drugs for the treatment of ED. These products are also
approved in Europe, Japan and most of the worlds pharmaceutical markets. In order to
achieve approval and market acceptance, PL-6983 may be required to demonstrate efficacy
and safety equivalent or superior to these other products.

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

The
biopharmaceutical and diagnostic industries are highly competitive. We are likely to
encounter significant competition with respect to PL-3994, bremelanotide, PL-6983 and
NeutroSpec. 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 PL-3994, bremelanotide,
PL-6983 or NeutroSpec. In addition, academic institutions, hospitals, governmental
agencies and other public and private research organizations are also conducting research
and may develop competing products or technologies on their own or through strategic
alliances or collaborative arrangements.

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

The
continuing efforts of government and insurance companies, health maintenance
organizations (HMOs) and other payers of healthcare costs to contain or reduce costs of
healthcare may adversely affect our future revenues and ability to achieve profitability.
Our ability to successfully commercialize our future products will depend, in significant
part, on the extent to which healthcare providers can obtain appropriate reimbursement
levels

16

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for the cost of our products and
related treatment. Third-party payers are increasingly challenging the prices charged for
diagnostic and therapeutic products and related services. Also, the trend towards managed
healthcare in the U.S. and the concurrent growth of organizations such as HMOs could
control or significantly influence the purchase of

healthcare services and products. In
addition, legislative proposals to reform healthcare or reduce government insurance
programs may result in lower prices or the actual inability of prospective customers to
purchase our future products. The cost containment measures that healthcare payers and
providers are instituting and the effect of any healthcare reform could materially and
adversely affect our ability to operate profitably. Furthermore, even if reimbursement is
available, it may not be available at price levels sufficient for us to realize a
positive return on our investment.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We are highly dependent on our
management team, senior research professionals and third-party contractors and
consultants, and the loss of their services could materially adversely affect our
business.

We
have decreased staffing levels to 46 employees, the minimum that we believe is necessary
to execute our currently planned preclinical and clinical programs. We will rely on
various contractors and consultants to provide critical services, some of which were
previously provided by our employees. Our ability to execute our preclinical and clinical
programs depends on our continued retention and motivation of remaining 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 required new personnel, our
development programs could be adversely affected. Competition for personnel is intense. In
addition, we will 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.

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

As
of June 30, 2008, options and warrants to purchase 11,628,688 shares of common stock were
outstanding at various exercise prices ranging from $0.21 per share to $5.13 per share,
1,138,824 shares were issuable under restricted stock units granted to our employees that
will vest if the employee remains employed with us through September 30, 2008 or earlier
under certain conditions, and 975,000 shares were issuable under restricted stock units to
our executive officers that will vest if the named officers remain employed with us
through March 26, 2010 or earlier under certain conditions. The issuance or potential
issuance of common stock upon the exercise of these options and warrants and vesting of
restricted stock units may adversely affect the market price of our common stock and
result in substantial dilution to our existing stockholders.

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

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| |  |  | 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 year ended June 30, 2008, the price of our stock has been extremely volatile, ranging
from a high of $2.09 per share to a low of $0.17 per share. The volatility in our stock
price related primarily to our announcement that we delayed initiation of Phase 3 clinical
trials of bremelanotide for ED, following responses in late August 2007 from the FDA
raising serious concerns about the acceptable benefit/risk ratio to support progression
into Phase 3 as a first-line therapy in the general population.

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

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

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

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

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

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

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

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.

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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
leased properties are in good condition.

Item 3. Legal Proceedings.

We
may be 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.

None.

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Table of Contents

PART II

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

The
table below provides, for the fiscal quarters indicated, the reported high and low sales
prices for the common stock on the AMEX since July 1, 2006.

|                                     |       |      
|------------------------------------ | ----- | -----
|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 
|                                     |       |      
|                                    
|FISCAL YEAR
     ENDED JUNE 30, 2007 | HIGH  | LOW  
|Fourth Quarter                       | $2.13 | $1.80
|Third Quarter                        | 4.00  | 1.75 
|Second Quarter                       | 3.03  | 1.85 
|First Quarter                        | 2.50  | 1.71 

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

Holders
of common stock.On September 26, 2008, we had approximately 257 holders of record of
common stock. On September 26, 2008, the closing sales price of our common stock as
reported on the AMEX was $0.16 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 26, 2008, 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.

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.

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 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.

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

Accrued Expenses

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

Stock-based Compensation

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

Certain
options are subject to periodic re-measurement over the vesting period as services are
rendered, based on changes in the fair value of our common stock. The vesting of certain
other options is dependent on future events. In addition, the amount and timing of
compensation expense to be recorded in future periods related to grants of restricted
stock units may be affected by employment terminations and certain changes in our share
price. As a result, share-based compensation charges may vary significantly from period
to period.

Results of Operations

Year Ended June 30, 2008 Compared to
the Year Ended June 30, 2007:

Licenses,
Grants and Contracts  For the fiscal year ended June 30, 2008 (fiscal 2008), we
recognized $11.5 million in licenses, grants and contracts compared to $14.4 million for
the fiscal year ended June 30, 2007 (fiscal 2007). Revenue consisted of the following:

|             |  |               |  |                                                                                                                                      | 
|------------ |  | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ | 
|Fiscal 2008  |  | Fiscal 2007   |  | Revenue related to:                                                                                                                  | 
|            
|$8.2 million |  | $12.9 million |  | bremelanotide for ED and FSD pursuant to our
        collaboration agreement with King, which was terminated effective December 2007 | 
|            
|$3.0 million |  | $1.2 million  |  | our license agreement with AstraZeneca                                                                                               | 
|            
|$0.3 million |  | $0.3 million  |  | NeutroSpec, pursuant to our collaboration
        agreement with Mallinckrodt.                                                       | 

The
fluctuation in revenue related to King primarily 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. License and contract revenue
from AstraZeneca for fiscal 2008 and fiscal 2007 consists of $1.3 million and $0.6
million, respectively, of revenue related to our research services performed during those
periods and $1.7 million and $0.6 million, respectively, of license revenue related to
AstraZenecas up-front license fee. Contract revenue from Mallinckrodt primarily
reflects Mallinckrodts share of the costs incurred in NeutroSpec development
activities. 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 $21.2 million for
fiscal 2008 compared to $36.9 million for fiscal 2007.

Research
and development expenses related to bremelanotide, primarily for ED and FSD, decreased
approximately $15.1 million, from $18.3 million in fiscal 2007 to $3.2 million for fiscal
2008. These amounts

22

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include both third-party costs
incurred by us and partially reimbursed by King and our share of costs for development
activities performed by King. Research and development expenses related to bremelanotide
for ED and FSD decreased as a result of (i) the completion of certain Phase 2B trials on
both men and women, (ii) the decision to not initiate Phase 3 clinical trials for ED, and
iii) the strategic restructuring and refocusing of our clinical-stage product portfolio
development programs. Similar to the recognition of license revenue explained above,
fiscal 2008 includes the recognition of $0.8 million of recorded deferred costs based on
the termination of our collaboration agreement with King.

Research
and development expenses related to our PL-3994, bremelanotide for prevention of organ
damage, PL-6983, obesity, NeutroSpec and other preclinical programs were $3.9 million for
fiscal 2008 compared to $4.1 million for fiscal 2007. Spending to date has been primarily
related to the identification and optimization of lead compounds, and secondarily to
preclinical studies and a Phase 1 and a Phase 2a trial with PL-3994. 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 PL-3994 into human clinical trials.

The
historical amounts of project spending above exclude general research and development
spending, which decreased to $14.1 million for fiscal 2008 compared to $14.5 million for
fiscal 2007. The decrease is primarily related to the reduction in workforce in September
2007.

Cumulative
spending from inception to June 30, 2008 on our bremelanotide, NeutroSpec and other
programs (which includes PL-3994, PL-6983, obesity, and other discovery programs) amounts
to approximately $120.7 million, $55.4 million and $43.8 million, respectively. Due to
various risk factors described in our periodic filings with the SEC, including the
difficulty in currently estimating the costs and timing of future Phase 1 clinical trials
and 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.

General
and Administrative  General and administrative expenses decreased to $6.9 million
for fiscal 2008 compared to $7.3 million for fiscal 2007. The decrease is primarily
related to the reduction in workforce initiated in September 2007.

Income
Tax Benefit  Income tax benefits of $1.3 million in fiscal 2008 and $0.8 million in
fiscal 2007 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.
|- |  | -----------------------------

23

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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.

During
fiscal 2008, we used $20.6 million of cash for our operating activities, compared to $22.1
million used in fiscal 2007 and $23.4 million used in fiscal 2006. 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 2008, net cash used in investing activities amounted to $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 and $0.8 million,
respectively, used for the acquisition of capital equipment during fiscal 2007 and fiscal
2006.

For
fiscal 2008, net cash used in financing activities amounted to $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 amounted to $26.0 million, primarily reflecting proceeds from the
sale of common stock in a registered offering in February 2007. During fiscal 2006, net
cash provided by financing activities was $36.9 million and included proceeds from the
sale of common stock and warrants to King in September 2005 and the sale of common stock
and warrants in an April 2006 offering.

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, 2008, our cash and cash
equivalents were $9.4 million and our available-for-sale investments were $3.4 million.
Our existing cash, cash equivalents and available-for-sale investments are not sufficient
to fund our planned operations for the next twelve months. This raises substantial doubt
about our ability to continue as a going concern. The accompanying consolidated financial
statements have been prepared assuming that we continue as a going concern.

We
intend to seek additional capital through public or private equity financings,
collaborative arrangements on our product candidates, milestone payments or other sources.
We anticipate receiving a significant milestone payment from AstraZeneca by the end of
the first quarter of calendar year 2009, provided we achieve specified objectives by that
time. 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.

Future
capital requirements will also depend on the extent to which we acquire or invest in
businesses, products and technologies or sell or license our product candidates to others.
If we are successful in identifying a product or technology for acquisition, we may
require substantial funds for such an acquisition and subsequent development or
commercialization. We do not know whether any acquisition will be consummated in the
future or whether we will be able to obtain additional funding if we identify such an
acquisition.

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.

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,
2008:

24

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Table of Contents

|                              |  |  |   |                        |  |   |                 |  |   |             |  |   |             |  |   |                  | 
|----------------------------- |  |  | - | ---------------------- |  | - | --------------- |  | - | ----------- |  | - | ----------- |  | - | ---------------- | 
|                              |  |  |   | Payments due by Period
|                              |  |  |   | Total                  |  |   | Less than 1Year |  |   | 1 - 3 Years |  |   | 3 - 5 Years |  |   | More than 5Years | 
|                             
|Facility operating leases     |  |  | $ | 9,208,329              |  | $ | 2,115,527       |  | $ | 4,341,056   |  | $ | 2,290,236   |  | $ | 461,510          | 
|Capital lease obligations     |  |  |   | 421,924                |  |   | 291,011         |  |   | 116,070     |  |   | 14,843      |  |   | -                | 
|License agreements            |  |  |   | 240,000                |  |   | 15,000          |  |   | 30,000      |  |   | 30,000      |  |   | 165,000          | 
|Total contractual obligations |  |  | $ | 9,870,253              |  | $ | 2,421,538       |  | $ | 4,487,126   |  | $ | 2,335,079   |  | $ | 626,510          | 

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.

25

---



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 | 27  
|
| | Consolidated Balance Sheets                                | 28  
|
| | Consolidated Statements of
   Operations                   | 29  
|
| | Consolidated Statements of Cash Flows                      | 30  
|
| | Consolidated Statements of Stockholders'
   Equity         | 31  
|
| | Notes to Consolidated Financial
   Statements              | 32  

26

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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, 2008 and 2007, and the related consolidated
statements of operations, cash flows, and stockholders equity for each of the years
in the three-year period ended June 30, 2008. 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, 2008 and 2007, and the results of their operations and their cash flows for
each of the years in the three-year period ended June 30, 2008, in conformity with U.S.
generally accepted accounting principles.

The
accompanying consolidated financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company has suffered recurring net losses and negative cash flows from
operations and will require substantial additional financing to continue to fund its
development activities.  These conditions raise substantial doubt about its ability to
continue as a going concern. Managements plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ KPMG LLP

Philadelphia, PennsylvaniaSeptember
26, 2008

27

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.

Consolidated Balance Sheets

|                                                                        |  |               |   |               |   |  |   |              |  
|----------------------------------------------------------------------- |  | ------------- | - | ------------- | - |  | - | ------------ | -
|                                                                        |  | June 30, 2008 |   | June 30, 2007
|ASSETS                                                                  |  |               |   |               |   |  |   |             
|Current assets:                                                         |  |               |   |               |   |  |   |             
|Cash and cash equivalents                                               |  |               | $ | 9,421,770     |   |  | $ | 31,447,615   |  
|Available-for-sale investments                                          |  |               |   | 3,352,771     |   |  |   | 2,323,642    |  
|Accounts receivable                                                     |  |               |   | 5,747         |   |  |   | 607,841      |  
|Prepaid expenses and other current assets                               |  |               |   | 484,362       |   |  |   | 1,008,464    |  
|Total current assets                                                    |  |               |   | 13,264,650    |   |  |   | 35,387,562   |  
|                                                                       
|Property and equipment, net                                             |  |               |   | 5,128,076     |   |  |   | 6,070,226    |  
|Restricted cash                                                         |  |               |   | 475,000       |   |  |   | 475,000      |  
|Other assets                                                            |  |               |   | 257,198       |   |  |   | 848,446      |  
|Total assets                                                            |  |               | $ | 19,124,924    |   |  | $ | 42,781,234   |  
|                                                                       
|LIABILITIES AND STOCKHOLDERS' EQUITY                                    |  |              
|Current liabilities:                                                    |  |              
|Capital lease obligations, current portion                              |  |               | $ | 263,128       |   |  | $ | 216,841      |  
|Accounts payable                                                        |  |               |   | 635,183       |   |  |   | 1,120,894    |  
|Accrued expenses                                                        |  |               |   | 1,666,628     |   |  |   | 2,420,837    |  
|Accrued compensation                                                    |  |               |   | 767,509       |   |  |   | 941,300      |  
|Deferred revenue, current portion                                       |  |               |   | 1,666,669     |   |  |   | 4,864,833    |  
|Total current liabilities                                               |  |               |   | 4,999,117     |   |  |   | 9,564,705    |  
|                                                                       
|Capital lease obligations, net of current portion                       |  |               |   | 121,629       |   |  |   | 275,126      |  
|Deferred rent, net of current portion                                   |  |               |   | 1,479,794     |   |  |   | 1,966,628    |  
|Deferred revenue, net of current portion                                |  |               |   | 5,972,220     |   |  |   | 12,443,087   |  
|Total liabilities                                                       |  |               |   | 12,572,760    |   |  |   | 24,249,546   |  
|                                                                       
|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, 2008 and 2007, respectively                                         |  |               |   | 50            |   |  |   | 50           |  
|Common stock of $0.01 par value - authorized 150,000,000 shares; issued |  |              
|and outstanding 85,524,077 and 85,126,915 shares as of June 30, 2008    |  |              
|and 2007, respectively                                                  |  |               |   | 855,241       |   |  |   | 851,269      |  
|Additional paid-in capital                                              |  |               |   | 208,247,194   |   |  |   | 205,875,438  |  
|Accumulated other comprehensive income                                  |  |               |   | 29,117        |   |  |   | -            |  
|Accumulated deficit                                                     |  |               |   | (202,579,438  | ) |  |   | (188,195,069 | )
|Total stockholders' equity                                              |  |               |   | 6,552,164     |   |  |   | 18,531,688   |  
|Total liabilities and stockholders' equity                              |  |               | $ | 19,124,924    |   |  | $ | 42,781,234   |  

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

28

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.

Consolidated Statements of
Operations

|                                                                                                                         |  |                     |             |      |  |      |             |   |  |   |             |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                                                                                         |  | Year Ended June 30,
|                                                                                                                         |  | 2008                |             | 2007 |  | 2006
|REVENUES:                                                                                                                |  |                     |             |      |  |      |             |   |  |  
|Licenses, grants and contracts                                                                                           |  | $                   | 11,483,287  |      |  | $    | 14,405,665  |   |  | $ | 18,239,783  |  
|Royalties                                                                                                                |  |                     | -           |      |  |      | -           |   |  |   | 1,508,862   |  
|Total revenues                                                                                                           |  |                     | 11,483,287  |      |  |      | 14,405,665  |   |  |   | 19,748,645  |  
|                                                                                                                        
|OPERATING EXPENSES:                                                                                                      |  |                    
|Research and development                                                                                                 |  |                     | 21,187,762  |      |  |      | 36,913,739  |   |  |   | 41,013,894  |  
|General and administrative                                                                                               |  |                     | 6,928,295   |      |  |      | 7,293,091   |   |  |   | 6,843,817   |  
|Cost of product sales                                                                                                    |  |                     | -           |      |  |      | -           |   |  |   | 2,041,175   |  
|Royalties                                                                                                                |  |                     | -           |      |  |      | -           |   |  |   | 299,995     |  
|Total operating expenses                                                                                                 |  |                     | 28,116,057  |      |  |      | 44,206,830  |   |  |   | 50,198,881  |  
|                                                                                                                        
|Loss from operations                                                                                                     |  |                     | (16,632,770 | )    |  |      | (29,801,165 | ) |  |   | (30,450,236 | )
|                                                                                                                        
|OTHER INCOME (EXPENSE):                                                                                                  |  |                    
|Investment income                                                                                                        |  |                     | 1,030,452   |      |  |      | 1,324,671   |   |  |   | 855,601     |  
|Interest expense                                                                                                         |  |                     | (73,495     | )    |  |      | (53,339     | ) |  |   | (30,522     | )
|Total other income, net                                                                                                  |  |                     | 956,957     |      |  |      | 1,271,332   |   |  |   | 825,079     |  
|                                                                                                                        
|Loss before income taxes                                                                                                 |  |                     | (15,675,813 | )    |  |      | (28,529,833 | ) |  |   | (29,625,157 | )
|Income tax benefit                                                                                                       |  |                     | 1,291,444   |      |  |      | 778,308     |   |  |   | 666,275     |  
|                                                                                                                        
|NET LOSS                                                                                                                 |  | $                   | (14,384,369 | )    |  | $    | (27,751,525 | ) |  | $ | (28,958,882 | )
|                                                                                                                        
|Basic and diluted net loss per common share                                                                              |  | $                   | (0.17       | )    |  | $    | (0.36       | ) |  | $ | (0.48       | )
|                                                                                                                        
|Weighted average number of common shares
        outstandingused in computing basic and diluted net loss per commonshare |  |                     | 85,220,575  |      |  |      | 76,204,160  |   |  |   | 60,356,610  |  

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

29

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.

Consolidated Statements of Cash Flows

|                                                    |  |                     |             |      |  |      |             |   |  |   |             |  
|--------------------------------------------------- |  | ------------------- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                    |  | Year Ended June 30,
|                                                    |  | 2008                |             | 2007 |  | 2006
|CASH FLOWS FROM OPERATING ACTIVITIES:               | 
|Net loss                                            |  | $                   | (14,384,369 | )    |  | $    | (27,751,525 | ) |  | $ | (28,958,882 | )
|Adjustments to reconcile net loss to net cash       |  |                    
|used in operating activities:                       |  |                    
|Depreciation and amortization                       |  |                     | 1,393,077   |      |  |      | 1,449,577   |   |  |   | 1,263,899   |  
|Realized loss on investments                        |  |                     | -           |      |  |      | 61,928      |   |  |   | -           |  
|Stock-based compensation                            |  |                     | 2,265,499   |      |  |      | 1,726,825   |   |  |   | 1,167,177   |  
|Changes in operating assets and liabilities:        |  |                    
|Accounts receivable                                 |  |                     | 602,094     |      |  |      | (538,250    | ) |  |   | 5,371,834   |  
|Inventories                                         |  |                     | -           |      |  |      | -           |   |  |   | 1,382,160   |  
|Prepaid expenses and other assets                   |  |                     | 1,115,350   |      |  |      | 673,991     |   |  |   | 805,368     |  
|Accounts payable                                    |  |                     | (485,711    | )    |  |      | (1,972,068  | ) |  |   | (1,680,335  | )
|Accrued expenses and other liabilities              |  |                     | (1,414,834  | )    |  |      | (2,300,113  | ) |  |   | 155,622     |  
|Deferred revenues                                   |  |                     | (9,669,031  | )    |  |      | 6,598,403   |   |  |   | (2,954,749  | )
|Net cash used in operating activities               |  |                     | (20,577,925 | )    |  |      | (22,051,232 | ) |  |   | (23,447,906 | )
|                                                   
|CASH FLOWS FROM INVESTING ACTIVITIES:               |  |                    
|Purchase of available-for-sale investments          |  |                     | (1,000,012  | )    |  |      | -           |   |  |   | -           |  
|Purchases of property and equipment                 |  |                     | (263,938    | )    |  |      | (862,471    | ) |  |   | (819,953    | )
|Net cash used in investing activities               |  |                     | (1,263,950  | )    |  |      | (862,471    | ) |  |   | (819,953    | )
|                                                   
|CASH FLOWS FROM FINANCING ACTIVITIES:               |  |                    
|Payments on capital lease obligations               |  |                     | (294,199    | )    |  |      | (173,764    | ) |  |   | (40,268     | )
|Proceeds from common stock, stock option            |  |                    
|and warrant issuances, net                          |  |                     | 110,229     |      |  |      | 26,201,871  |   |  |   | 36,920,974  |  
|Net cash provided by (used in) financing activities |  |                     | (183,970    | )    |  |      | 26,028,107  |   |  |   | 36,880,706  |  
|                                                   
|NET INCREASE (DECREASE) IN CASH                     |  |                    
|AND CASH EQUIVALENTS                                |  |                     | (22,025,845 | )    |  |      | 3,114,404   |   |  |   | 12,612,847  |  
|                                                   
|CASH AND CASH EQUIVALENTS, beginning                |  |                    
|of year                                             |  |                     | 31,447,615  |      |  |      | 28,333,211  |   |  |   | 15,720,364  |  
|                                                   
|CASH AND CASH EQUIVALENTS, end of year              |  | $                   | 9,421,770   |      |  | $    | 31,447,615  |   |  | $ | 28,333,211  |  
|                                                   
|SUPPLEMENTAL CASH FLOW INFORMATION:                 |  |                    
|Cash paid for interest                              |  | $                   | 58,495      |      |  | $    | 53,339      |   |  | $ | 30,522      |  
|Equipment acquired under financing arrangements     |  |                     | 186,989     |      |  |      | 316,862     |   |  |   | 326,214     |  
|Unrealized gain (loss) on available-for-sale        |  |                    
|investments                                         |  |                     | 29,117      |      |  |      | (7,192      | ) |  |   | (54,736     | )

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

30

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Table of Contents (Financial)

PALATIN TECHNOLOGIES, INC.

Consolidated Statements of Stockholders Equity

|                                         |                 |              |         |               |             |               |         |       |  |            |  |   |         |  |   |             |   |   |         |   |   |              |   |   |             |  
|---------------------------------------- | --------------- | ------------ | ------- | ------------- | ----------- | ------------- | ------- | ----- |  | ---------- |  | - | ------- |  | - | ----------- | - | - | ------- | - | - | ------------ | - | - | ----------- | -
|                                         | Accumulated     |             
|                                         | Additional      | Other        |        
|                                         | Preferred Stock | Common Stock | Paid-in | Comprehensive | Accumulated |              
|                                         | Shares          | Amount       | Shares  | Amount        | Capital     | Income (Loss) | Deficit | Total
|Balance, July 1, 2005                    |                 |              |         | 11,447        |             | $             | 114     |       |  | 54,236,544 |  | $ | 542,365 |  | $ | 140,167,431 |   | $ | -       |   | $ | (131,484,662 | ) | $ | 9,225,248   |  
|Sale of common shares, net of costs      |                 |              |         | -             |             |               | -       |       |  | 15,478,013 |  |   | 154,780 |  |   | 34,669,275  |   |   | -       |   |   | -            |   |   | 34,824,055  |  
|Conversion of preferred shares           |                 |              |         | (1,450        | )           |               | (14     | )     |  | 55,723     |  |   | 557     |  |   | (543        | ) |   | -       |   |   | -            |   |   | -           |  
|Exercise of options and warrants         |                 |              |         | -             |             |               | -       |       |  | 1,108,241  |  |   | 11,083  |  |   | 2,085,836   |   |   | -       |   |   | -            |   |   | 2,096,919   |  
|Stock-based compensation                 |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | 1,167,177   |   |   | -       |   |   | -            |   |   | 1,167,177   |  
|Comprehensive loss:                      |                 |             
|Unrealized loss on investments           |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | -           |   |   | (54,736 | ) |   | -            |   |   | (54,736     | )
|Net loss                                 |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | -           |   |   | -       |   |   | (28,958,882  | ) |   | (28,958,882 | )
|Total comprehensive loss                 |                 | (29,013,618  | )      
|Balance, June 30, 2006                   |                 |              |         | 9,997         |             |               | 100     |       |  | 70,878,521 |  |   | 708,785 |  |   | 178,089,176 |   |   | (54,736 | ) |   | (160,443,544 | ) |   | 18,299,781  |  
|Sale of common shares, net of costs      |                 |              |         | -             |             |               | -       |       |  | 13,750,000 |  |   | 137,500 |  |   | 25,372,402  |   |   | -       |   |   | -            |   |   | 25,509,902  |  
|Conversion of preferred shares           |                 |              |         | (5,000        | )           |               | (50     | )     |  | 199,203    |  |   | 1,992   |  |   | (1,942      | ) |   | -       |   |   | -            |   |   | -           |  
|Exercise of options and warrants         |                 |              |         | -             |             |               | -       |       |  | 299,191    |  |   | 2,992   |  |   | 688,976     |   |   | -       |   |   | -            |   |   | 691,969     |  
|Stock-based compensation                 |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | 1,726,825   |   |   | -       |   |   | -            |   |   | 1,726,825   |  
|Comprehensive loss:                      |                 |             
|Unrealized loss on investments           |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | -           |   |   | (7,192  | ) |   | -            |   |   | (7,192      | )
|Reclassification adjustment for realized |                 |             
|losses included in net loss              |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | -           |   |   | 61,928  |   |   | -            |   |   | 61,928      |  
|Net loss                                 |                 |              |         | -             |             |               | -       |       |  | -          |  |   | -       |  |   | -           |   |   | -       |   |   | (27,751,525  | ) |   | (27,751,525 | )
|Total comprehensive loss                 |                 | (27,696,789  | )      
|Balance, June 30, 2007                   |                 |              |         | 4,997         |             |               | 50      |       |  | 85,126,915 |  |   | 851,269 |  |   | 205,875,438 |   |   | -       |   |   | (188,195,069 | ) |   | 18,531,688  |  
|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   |  

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

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PALATIN TECHNOLOGIES, INC.
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, including proposed products in the
cardiovascular field for treatment of heart failure, hard-to-control
hypertension and for cardiac surgery organ protection, and proposed products for sexual
dysfunction, obesity and metabolic syndrome. 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 PL-3994, a peptidomimetic natriuretic
peptide receptor A agonist, for treatment of heart failure and difficult-to-control
hypertension, bremelanotide, a peptide melanocortin receptor agonist, for prevention of
organ damage secondary to cardiac surgery and related indications, and PL-6983, a peptide
melanocortin receptor agonists, for treatment of female sexual dysfunction. 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. Sales, marketing and
distribution of the Companys NeutroSpec product, 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. (Mallinckrodt), were
voluntarily suspended in December 2005 following the occurrence of certain serious adverse
events involving patients who received NeutroSpec. Significant development activities
pertaining to NeutroSpec are currently suspended while the Company and Mallinckrodt
evaluate future development and marketing alternatives.

Key
elements of the Companys business strategy include entering into alliances and
partnerships with pharmaceutical companies to facilitate the development, manufacture,
marketing, sale and distribution of the Companys product candidates under
development, partial funding of the Companys development and discovery programs
with the cash flow from collaboration agreements and, depending of the availability of sufficient funding, expansion of the
Companys pipeline through the utilization of its melanocortin expertise and drug
discovery technologies and opportunistic acquisition of 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, 2008 and incurred a net loss for fiscal 2008. 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.

As
of June 30, 2008, the Companys cash and cash equivalents were $9,421,770 and its
available-for-sale investments were $3,352,771. Palatin does not believe that its capital
resources, together with expected receipts from collaboration and license agreements and
other income, will be adequate to fund the Companys operations for the next twelve
months. The accompanying consolidated financial statements have been prepared assuming
that the Company continues as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The Company
is exploring sources of additional capital through public or private financing or
collaborative agreements with

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the intent to raise additional
capital. There is no assurance that required additional capital will be obtained. These
matters raise substantial doubt over the Companys ability to continue as a going
concern.

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, 2008 consists only of amounts due from
Mallinckrodt. Revenues from collaboration partners as a percentage of total revenues were
as follows:

|                           |                     |     |      |     |      |     | 
|-------------------------- | ------------------- | --- | ---- | --- | ---- | --- | 
|                           | Year Ended June 30, |    
|                           | 2008                |     | 2007 |     | 2006 |    
|King Pharmaceuticals, Inc. |                     | 71% |      | 90% |      | 91% | 
|AstraZeneca                |                     | 26% |      | 9%  |      | -%  | 
|Mallinckrodt               |                     | 3%  |      | 1%  |      | 9%  | 

(2)   SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:

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

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

Cash
and 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 recorded at fair value based on quoted market prices. Unrealized
holding gains and losses, net of the related tax effect, if any, are generally excluded
from earnings and are reported in accumulated other comprehensive 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

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estimated useful lives of the related assets,
generally five years for laboratory equipment, seven years for office furniture and equipment and
the lesser of the term of the lease or the useful life for leasehold improvements.
Amortization of assets acquired under capital leases is included in depreciation expense.
Maintenance and repairs are expensed as incurred while expenditures that extend the
useful life of an asset are capitalized.

Impairment
of Long-Lived Assets  The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. To determine recoverability of a long-lived asset,
management evaluates whether the estimated future undiscounted net cash flows from the
asset 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.

Other
Assets  Other assets and other current assets include certain payments the Company
made to licensors in cash and stock as their share of up-front payments received from
collaboration partners in connection with the Companys collaboration agreements. The
Company has treated these payments as incremental direct costs of the up-front payments,
to be charged over the same period as the related deferred revenue is recognized, in
accordance with guidance contained in the Securities and Exchange Commissions Staff Accounting Bulletin No. 104,
Revenue Recognition and, by analogy, to paragraph 4 of Financial Accounting
Standards Board (FASB) Technical Bulletin 90-1, Accounting for Separately Priced
Extended Warranty and Product Maintenance Contracts.

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.

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

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

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

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

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

During
the years ended June 30, 2008, 2007 and 2006, the Company sold New Jersey state net
operating loss carryforwards, which resulted in the recognition of tax benefits.

Net
Loss per Common Share  Basic earnings per share (EPS) is computed by dividing net
loss by the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution from the exercise or conversion of securities into
common stock, including stock options and warrants, restricted stock units and shares of
Series A Convertible Preferred Stock. For the years ended June 30, 2008, 2007 and 2006,
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 13,941,595, 16,512,769 and 15,954,843 as of June
30, 2008, 2007 and 2006, respectively.

Recently
Issued Accounting Pronouncements  In December 2007, the 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
June 2007, the FASB issued EITF Issue 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future Research and Development
Activities, which applies to companies involved in research and development
activities that make non-refundable advance payments for goods that will be used, or for
services that will be performed, in future research and development activities. EITF Issue
07-3 is effective for financial statements issued for fiscal years beginning after
December 15, 2007. The Company does not expect the adoption of EITF Issue 07-3 to have a
material impact on its consolidated results of operations and financial position.

In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets
and Financial Liabilities. SFAS 159 permits entities to measure many financial
instruments and certain other items at fair value at specified election dates. Under SFAS
159, any unrealized holding gains and losses on items for which the fair value option has
been elected are reported in earnings at each subsequent reporting date. If elected, the
fair value option (1) may be applied instrument by instrument, with a few exceptions, such
as investments otherwise accounted for by the equity method; (2) is irrevocable (unless a
new election date occurs); and (3) is applied only to entire instruments and not to
portions of instruments. SFAS 159 is effective as of an entitys first fiscal year
that begins after November 15, 2007. The Company is currently evaluating the potential
impact of SFAS 159 on its consolidated results of operations and financial position.

In
September 2006, the FASB issued SFAS 157, Fair Market Measurements. SFAS 157
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

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beginning after November 15, 2007,
and will be applied on a prospective basis. The Company does not expect the adoption of
SFAS 157 to have a material impact on its consolidated results of operations, financial
position or cash flows.

In
June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes(FIN 48), an interpretation of SFAS 109, Accounting for Income Taxes. FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises
financial statements in accordance with SFAS 109. FIN 48 prescribes a two-step process to
determine the amount of tax benefit to be recognized. First, the tax position must be
evaluated to determine the likelihood that it will be sustained upon examination.  If the
tax position is deemed more-likely-than-not to be sustained, the tax position is
measured at the largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement.  FIN 48 was adopted by the Company in fiscal 2008 and
did not have any impact on its consolidated results of operations and financial position.

(3)   AGREEMENT
WITH KING

King
Pharmaceuticals, Inc. (King) terminated the collaborative development and marketing
agreement between the Company and King, relating to development and commercialization of
bremelanotide for treatment of sexual dysfunction, effective December 2007. 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 years ended June 30, 2007 and 2006 as revenue $2,808,441
and $3,159,496, respectively, of the deferred revenue. As described in Note 9, King
retains certain Company common stock obtained upon entering into the agreement in August
2004 and pursuant to the September 2005 agreement.

(4)   AGREEMENT WITH
ASTRAZENECA

In
January 2007, the Company entered into an exclusive global licensing and research
collaboration agreement with AstraZeneca to discover, develop and commercialize 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. 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.

Under
the terms of the agreement, the Company received an up-front payment of $10,000,000 from
AstraZeneca and is eligible for milestone payments totaling $300,000,000, with up to
$180,000,000 contingent 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 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 as a license fee is being
recognized as revenue on a straight-line basis over the maximum period during which the
Company may perform research services under the agreement. Per-employee compensation from
AstraZeneca for research services is recognized as earned at the contractual rate, which
approximates the fair value of such services. Payments received upon the attainment of
substantive milestones are recognized as revenue when earned. If the Companys
estimated period of performance is reduced to less than the maximum, the amortization
period for any remaining deferred revenue will also be reduced. For the years ended June
30, 2008 and 2007, the Company recognized as revenue $1,666,667 and $694,444,
respectively, of the deferred revenue.

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(5)   INVESTMENTS

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

|                       |  |              |           |              |  |   |           | 
|---------------------- |  | ------------ | --------- | ------------ |  | - | --------- | 
|                       |  | June 30,2008 |           | June 30,2007
|Cost                   |  | $            | 3,323,654 |              |  | $ | 2,323,642 | 
|Gross unrealized gains |  |              | 29,117    |              |  |   | -         | 
|Fair value             |  | $            | 3,352,771 |              |  | $ | 2,323,642 | 

The
Company recorded a realized loss of $61,928 in its statement of operations for the year
ended June 30, 2007, upon determining that certain previously unrealized losses were other
than temporary, and reduced the cost basis of the underlying securities accordingly.

(6)   PROPERTY AND
EQUIPMENT, NET

Property
and equipment, net, consists of the following:

|                                   |  |              |            |              |  |   |            |  
|---------------------------------- |  | ------------ | ---------- | ------------ |  | - | ---------- | -
|                                   |  | June 30,2008 |            | June 30,2007
|Office equipment                   |  | $            | 1,941,620  |              |  | $ | 1,928,218  |  
|Laboratory equipment               |  |              | 4,112,908  |              |  |   | 3,695,680  |  
|Leasehold improvements             |  |              | 7,086,305  |              |  |   | 7,066,008  |  
|                                   |  |              | 13,140,833 |              |  |   | 12,689,906 |  
|Less: Accumulated depreciation and
|amortization                       |  |              | (8,012,757 | )            |  |   | (6,619,680 | )
|                                   |  | $            | 5,128,076  |              |  | $ | 6,070,226  |  

The
cost of assets acquired under capital leases amounted to $941,974 and $755,112 as of June
30, 2008 and 2007, respectively. Accumulated amortization associated with assets acquired
under capital leases amounted to $375,446 and $199,134 as of June 30, 2008 and 2007,
respectively.

(7)   ACCRUED
EXPENSES

Accrued
expenses consist of the following:

|                                |  |              |           |              |  |   |           | 
|------------------------------- |  | ------------ | --------- | ------------ |  | - | --------- | 
|                                |  | June 30,2008 |           | June 30,2007
|Clinical study costs            |  | $            | 363,255   |              |  | $ | 147,798   | 
|Formulation development         |  |              | -         |              |  |   | 203,250   | 
|Other research related expenses |  |              | 465,412   |              |  |   | 635,810   | 
|Deferred rent, current portion  |  |              | 470,830   |              |  |   | 959,303   | 
|Other                           |  |              | 367,131   |              |  |   | 474,676   | 
|                                |  | $            | 1,666,628 |              |  | $ | 2,420,837 | 

(8)   COMMITMENTS
AND CONTINGENCIES

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

| |                      |  |                | 
| | -------------------- |  | -------------- | 
| | Year Ending June 30,
| | 2009                 |  | $    2,115,527 | 
| | 2010                 |  | 2,144,401      | 
| | 2011                 |  | 2,196,655      | 
| | 2012                 |  | 1,995,860      | 
| | 2013                 |  | 294,376       
| | Thereafter           |  | 461,510        | 

For
the years ended June 30, 2008, 2007 and 2006, rent expense was $1,650,273, $1,657,842 and
$1,630,165, respectively.

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Table of Contents (Financial)

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, 2008 are as follows:

| |                              |  |              |  | 
| | ---------------------------- |  | ------------ |  | 
| | Year Ending June 30,        
| | 2009                         |  | $    291,011 |  | 
| | 2010                         |  | 93,806       |  | 
| | 2011                         |  | 22,264       |  | 
| | 2012                         |  | 14,843       |  | 
| | Total                        |  | 421,924      | 
| | Amount representing interest |  | (37,167)     |  | 
| | Net                          |  | $    384,757 |  | 

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 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, 2008, 2007 and 2006, Company
contributions amounted to $341,997, $211,778 and $180,248, 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 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 accrued and charged to general and administrative expense as of
December 31, 2007.

The
Company is subject to an inherent risk of product liability claims as a result of the
testing and marketing of its products. In December 2005, as a result of safety concerns
raised in connection with the use of NeutroSpec, the Company and Mallinckrodt suspended
NeutroSpec sales and marketing activities. If any claim is asserted based on the use of
NeutroSpec, the Company may incur future expenses or losses in connection with the related
litigation.

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Table of Contents (Financial)

(9)  STOCKHOLDERS EQUITY

Series
A Convertible Preferred Stock  As of June 30, 2008, 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, 2008, 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, 2008.

Common
Stock Transactions  In August 2004, upon the signing of the Companys
collaborative development and marketing agreement with King, the Company issued to King
1,176,125 shares of common stock and three-year warrants to purchase 235,225 shares of
common stock at an exercise price of $4.25 per share. Of the $20,000,000 aggregate payment
received from King upon signing, $3,606,672 was allocated to the shares and warrants based
on their estimated fair market value. These warrants expired unexercised in August 2007.

In
September 2005, the Company sold to King 4,499,336 shares of its common stock and
three-year warrants to purchase 719,894 shares of common stock at an exercise price of
$2.22 per share for an aggregate purchase price of $10,000,000. The sale of the stock and
warrants was made pursuant to the Companys collaborative development and marketing
agreement with King. The warrants expired unexercised on September 26, 2008.

In
April 2006, the Company sold 10,978,677 units in a private placement for a total purchase
price of $26,800,000. Each unit consisted of one share of its common stock and a five-year
warrant to purchase 0.3 shares of common stock at an exercise price of $2.88 per share.
Net proceeds to the Company, after offering costs, amounted to approximately $24,800,000.

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

Outstanding
Stock Purchase Warrants  As of June 30, 2008, the Company had outstanding warrants
exercisable for shares of common stock as follows:

|                      |                         |        |                        |                    | 
|--------------------- | ----------------------- | ------ | ---------------------- | ------------------ | 
|Shares of CommonStock | Exercise Price perShare |        | Latest TerminationDate |                   
|719,894               |                         | $ 2.22 |                        | September 26, 2008 | 
|15,000                |                         | 2.82   |                        | May 13, 2012       | 
|3,293,591             |                         | 2.88   |                        | April 17, 2011     | 
|15,000                |                         | 4.00   |                        | December 15, 2010  | 
|1,041,750             |                         | 4.06   |                        | January 28, 2009   | 
|5,085,235             |                        

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. 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, 2008, 4,445,816 shares were available for grant under the 2005 Stock
Plan.

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Table of Contents (Financial)

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

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

|                   |  |      |  |                 |   |      |                              |  |  |                 |   |  |                              |  |  |                 |   |  |                              | 
|------------------ |  | ---- |  | --------------- | - | ---- | ---------------------------- |  |  | --------------- | - |  | ---------------------------- |  |  | --------------- | - |  | ---------------------------- | 
|                   |  | 2008 |  | 2007            |   | 2006
|                   |  |      |  | Number ofShares |   |      | WeightedAverageExercisePrice |  |  | Number ofShares |   |  | WeightedAverageExercisePrice |  |  | Number ofShares |   |  | WeightedAverageExercisePrice | 
|Outstanding at     |  |     
|beginning of       |  |     
|year               |  |      |  | 6,394,720       |   |      | $2.89                        |  |  | 5,659,302       |   |  | $3.12                        |  |  | 4,688,152       |   |  | $3.41                        | 
|Granted            |  |      |  | 1,787,450       |   |      | 1.04                         |  |  | 1,406,975       |   |  | 2.10                         |  |  | 1,276,297       |   |  | 2.10                         | 
|Forfeited          |  |      |  | (1,381,538      | ) |      | 2.32                         |  |  | (260,520        | ) |  | 1.99                         |  |  | (149,527        | ) |  | 2.33                         | 
|Exercised          |  |      |  | -               |   |      | -                            |  |  | (78,460         | ) |  | 1.48                         |  |  | (21,162         | ) |  | 1.64                         | 
|Expired            |  |      |  | (257,179        | ) |      | 4.82                         |  |  | (332,577        | ) |  | 4.52                         |  |  | (134,458        | ) |  | 4.23                         | 
|Outstanding at end |  |     
|of year            |  |      |  | 6,543,453       |   |      | 2.40                         |  |  | 6,394,720       |   |  | 2.89                         |  |  | 5,659,302       |   |  | 3.12                         | 
|Exercisable at end |  |     
|of year            |  |      |  | 4,392,852       |   |      | 2.93                         |  |  | 4,549,759       |   |  | 3.18                         |  |  | 4,267,879       |   |  | 3.41                         | 
|Weighted average   |  |     
|fair value of      |  |     
|options granted    |  |     
|during the year    |  |      |  |                 |   |      | $0.73                        |  |  |                 |   |  | $1.52                        |  |  |                 |   |  | $1.38                        | 

The
following table summarizes options outstanding as of June 30, 2008:

|                           |  |                 |           |                              |  |                                      |       |                         |  |  |     |  |  |  |    | 
|-------------------------- |  | --------------- | --------- | ---------------------------- |  | ------------------------------------ | ----- | ----------------------- |  |  | --- |  |  |  | -- | 
|                           |  | Number ofShares |           | WeightedAverageExercisePrice |  | WeightedAverageRemainingTerm inYears |       | AggregateIntrinsicValue
|Options outstanding at end |  |                
|of year                    |  |                 | 6,543,453 |                              |  |                                      | $2.40 |                         |  |  | 5.9 |  |  |  | $0 | 
|Options vested and         |  |                
|exercisable at end of year |  |                 | 4,392,852 |                              |  |                                      | 2.93  |                         |  |  | 4.4 |  |  |  | 0  | 
|Unvested options expected  |  |                
|to vest                    |  |                 | 2,013,197 |                              |  |                                      | 1.28  |                         |  |  | 8.9 |  |  |  | 0  | 

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

The
fair value of option grants is estimated at the grant date using the Black-Scholes model.
For grants during the year ended June 30, 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. For
grants during the year ended June 30, 2006, the Companys weighted average
assumptions for expected volatility, dividends, term and risk-free interest rate were
85%, 0%, 6.6 years and 4.0%, respectively. Expected volatilities are based primarily on
the Companys historical volatility. The expected term of options is 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.

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Table of Contents (Financial)

For
the years ended June 30, 2008, 2007 and 2006, in accordance with SFAS 123(R), the Company
recorded stock-based compensation related to stock options of $1,016,579, $1,223,481 and
$1,167,177, respectively. The Company did not record a tax benefit related to stock-based compensation
expense. As of June 30, 2008, there was $1,141,452 of total unrecognized compensation cost
related to unvested options, which is expected to be recognized over a weighted-average
period of 1.25 years.

In
July 2008, the Company granted 2,768,300 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.

On
March 26, 2008, the Companys Compensation Committee revised the vesting conditions
of the restricted stock units granted to the three executive officers on October 6, 2006.
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. 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 year ended June 30,
2008, the Company recognized $705,250 of stock-based compensation expense related to
these restricted stock units.

On
September 25, 2007, the Company issued grants of restricted stock units under the
Companys 2005 Stock Plan totaling in the aggregate 1,573,915 shares of common stock
as retention bonuses to its employees, other than the executive officers, that were not
affected by the September 2007 reduction in workforce. As of June 30, 2008, after adjusting for
forfeitures, 1,138,824 shares of common stock will vest on September 30, 2008, provided
that the employee remains continuously employed by the Company through such date, or
earlier if the employee is involuntarily terminated by reason of a position elimination or
change in control. The Company is amortizing the fair value of these restricted stock
units, totaling approximately $730,000, on a straight-line basis over a one-year period.
On May 12, 2008, due to the Companys reduction in its workforce, approximately
320,000 of these shares of common stock vested due to employees being involuntarily
terminated by reason of position elimination resulting in the acceleration of expense
recognized for the now vested shares of approximately $87,000. For the year ended June 30,
2008, the Company recognized $543,670 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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Table of Contents (Financial)

As
of June 30, 2008, the Company had federal and state net operating loss carryforwards of
approximately $185,000,000 and $118,000,000, respectively, which expire between 2009 and
2028 if not utilized. As of June 30, 2008, 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 30,2008 |             | June 30,2007
|Net operating loss carryforwards             |  | $            | 71,549,000  |              |  | $ | 63,610,000  |  
|Research and development tax credits         |  |              | 4,997,000   |              |  |   | 4,513,000   |  
|Accrued expenses, deferred revenue and other |  |              | 5,075,000   |              |  |   | 8,569,000   |  
|                                             |  |              | 81,621,000  |              |  |   | 76,692,000  |  
|Valuation allowances                         |  |              | (81,621,000 | )            |  |   | (76,692,000 | )
|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, 2008 and 2007. The valuation
allowance for the years ended June 30, 2008, 2007 and 2006 increased by $4,929,000,
$12,435,000 and $11,261,000, 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, 2008, 2007 and 2006, the Company sold New Jersey state net
operating loss carryforwards, which resulted in the recognition of $1,291,444, $778,308
and $666,275, respectively, in tax benefits.

(11)  CONSOLIDATED
QUARTERLY FINANCIAL DATA  UNAUDITED

The
following tables provide quarterly data for the years ended June 30, 2008 and 2007:

|                           |  |                                               |            |               |  |                  |            |                   |  |   |            |   |  |   |            |  
|-------------------------- |  | --------------------------------------------- | ---------- | ------------- |  | ---------------- | ---------- | ----------------- |  | - | ---------- | - |  | - | ---------- | -
|                           |  | 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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Table of Contents (Financial)

|                           |  |                                               |            |               |  |                  |            |                   |  |   |            |   |  |   |            |  
|-------------------------- |  | --------------------------------------------- | ---------- | ------------- |  | ---------------- | ---------- | ----------------- |  | - | ---------- | - |  | - | ---------- | -
|                           |  | Three Months Ended                           
|                           |  | June 30,2007                                  |            | March 31,2007 |  | December 31,2006 |            | September 30,2006
|                           |  | (amounts in thousands, except per share data)
|Total revenues             |  | $                                             | 2,638      |               |  | $                | 3,090      |                   |  | $ | 3,743      |   |  | $ | 4,935      |  
|Total operating expenses   |  |                                               | 9,147      |               |  |                  | 10,150     |                   |  |   | 11,224     |   |  |   | 13,686     |  
|Total other income, net    |  |                                               | 404        |               |  |                  | 339        |                   |  |   | 214        |   |  |   | 314        |  
|Loss before income taxes   |  |                                               | (6,105     | )             |  |                  | (6,721     | )                 |  |   | (7,267     | ) |  |   | (8,437     | )
|Income tax benefit         |  |                                               | -          |               |  |                  | -          |                   |  |   | 778        |   |  |   | -          |  
|Net loss                   |  | $                                             | (6,105     | )             |  | $                | (6,721     | )                 |  | $ | (6,489     | ) |  | $ | (8,437     | )
|Basic and diluted net loss |  |                                              
|per common share           |  | $                                             | (0.07      | )             |  | $                | (0.09      | )                 |  | $ | (0.09      | ) |  | $ | (0.12      | )
|Weighted average number of |  |                                              
|common shares outstanding  |  |                                              
|used in computing basic    |  |                                              
|and diluted net loss per   |  |                                              
|common share               |  |                                               | 84,965,331 |               |  |                  | 78,052,712 |                   |  |   | 71,055,893 |   |  |   | 70,878,521 |  

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Table of Contents

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, 2008, 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,
2008. 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, 2008, 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. Managements
report was not subject to attestation by our independent registered public accounting firm
pursuant to temporary rules of the SEC that permit us to provide only managements
report in this Annual Report.

Item 9B.  Other Information.

None.

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Table of Contents

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 December 7, 2007.

|                                                                    |     |                                                  
|------------------------------------------------------------------- | --- | -------------------------------------------------
|Name                                                                | Age | Position with Palatin                            
|Carl Spana, Ph.D.                                                   | 46  | Chief executive officer, president and a director
|John K.A. Prendergast, Ph.D.                                        | 54  | Director, chairman of the board of directors     
|Perry B. Molinoff, M.D.                                             | 68  | Director                                         
|Robert K. deVeer, Jr. (1) (2) (3)                                   | 62  | Director                                         
|Zola P. Horovitz, Ph.D. (1) (2) (3)                                 | 73  | Director                                         
|Robert I. Taber, Ph.D. (1) (2)                                      | 72  | Director                                         
|Errol De Souza, Ph.D. (2) (3)                                       | 54  | Director                                         
|J. Stanley Hull                                                     | 56  | 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 traded 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 traded life science company, and a director of
Curalogic A/S, a Danish life science company publicly traded on the Copenhagen Stock
Exchange. 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., where he serves as the lead director. He is currently the chairman of
AVAX Technologies, Inc. and executive chairman of the board of directors of Antyra, Inc.,
a privately-held biopharmaceutical company. 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. He is also a director of Cypress Bioscience, Inc., a publicly-held life
science company. Dr. Molinoff has more

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than 30 years of experience in both
the 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: Genaera Corporation, Biocryst
Pharmaceuticals, Inc., Avigen, Inc., Dov Pharmaceutical, Inc., NitroMed, Inc., GenVec,
Inc. and Immunicon Corporation. 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. 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. Dr. De Souza joined
Archemix Corp., a biopharmaceutical company focused on aptamer therapeutics, on April 1,
2003 as president and chief executive officer. 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 Corp., IDEXX Laboratories, Inc. 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 John Hopkins 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 is currently Senior Vice
President for the U.S. Pharmaceuticals  RTP Business Division. Prior to his current
position, he 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 Wellcome Inc. Mr. Hull started his career in the
pharmaceutical

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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 Compensation

The
following table sets forth the compensation we paid to all directors during fiscal 2008,
except for Dr. Spana, whose compensation is set forth under Item 11, Executive
Compensation. Dr. Spana did not receive any separate compensation for his services as a
director.

Director Compensation
in Fiscal 2008

|                                                                                                                                                                                                                                                                                                                                                                                       |                                |                          |          
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ------------------------ | ---------
|Name                                                                                                                                                                                                                                                                                                                                                                                   | Fees earned orpaid in cash ($) | Option awards($) (1) (2) | Total ($)
|John K.A. Prendergast, Ph.D.                                                                                                                                                                                                                                                                                                                                                           | 60,000                         | 62,566                   | 122,566  
|Perry B. Molinoff, M.D.                                                                                                                                                                                                                                                                                                                                                                | 30,000                         | 31,283                   | 61,283   
|Robert K. deVeer, Jr.                                                                                                                                                                                                                                                                                                                                                                  | 34,000                         | 31,283                   | 65,283   
|Zola P. Horovitz, Ph.D.                                                                                                                                                                                                                                                                                                                                                                | 30,000                         | 31,283                   | 61,283   
|Robert I. Taber, Ph.D.                                                                                                                                                                                                                                                                                                                                                                 | 32,000                         | 31,283                   | 63,283   
|Errol De Souza, Ph.D.                                                                                                                                                                                                                                                                                                                                                                  | 30,000                         | 31,283                   | 61,283   
|J. Stanley Hull                                                                                                                                                                                                                                                                                                                                                                        | 30,000                         | 31,283                   | 61,283   
|(1)  
        Amounts in this column represent compensation expense which we recognized in
        fiscal 2008 under Statement of Financial Accounting Standards No. 123R,
        Share-Based Payment. 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,
        2008 for each director was:                                                                                                                                                                                                                                                     

|                |        
|--------------- | -------
|Dr. Prendergast | 527,667
|Dr. Molinoff    | 334,583
|Mr. deVeer      | 274,440
|Dr. Horovitz    | 165,000
|Dr. Taber       | 160,000
|Dr. De Souza    | 118,750
|Mr. Hull        | 76,667 

Non-employee
directors' option grants.Non-employee directors receive an annual option grant on the
first day of each fiscal year. On July 1, 2007, the first day of our last completed
fiscal year, the chairman of the board received an option to purchase 40,000 shares of
common stock and each other non-employee director received an option to purchase 20,000
shares of common stock. All of these options have an exercise price of $1.98 per share,
the closing price of our common stock on June 29, 2007, the last business day preceding
the date of grant, vest in twelve monthly installments beginning July 31, 2007, and
expire ten years from the date of grant.

The
amount of the annual option grant may vary from year to year and has increased for the
current fiscal year. On July 1, 2008, the first day of the current 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

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price of $0.18 per share, the
closing price of our common stock on the date of grant, vest 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.

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.

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 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 2008, the board met six times. During
fiscal 2008, the Audit Committee met five times, the Compensation Committee met three
times 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 2007 annual meeting of stockholders.

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
121B(2) of the AMEX listing requirements, and satisfy the requirements of the 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.

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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 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.

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 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.          | 46  | Chief executive officer, president, and director                                          
|Stephen T. Wills, MST, CPA | 51  | Chief financial officer and executive vice president ofoperations, secretary and treasurer
|Trevor Hallam, Ph.D.       | 50  | 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

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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
2008.

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, 2008 and 2007. We have no
non-equity incentive plan, no defined benefit or actuarial pension plan, and no deferred
compensation plan.

|                           |      |           |              |                    |                     |                              |         
|-------------------------- | ---- | --------- | ------------ | ------------------ | ------------------- | ---------------------------- | --------
|Name and PrincipalPosition | Year | Salary($) | Bonus (1)($) | Stockawards (2)($) | Optionawards (2)($) | Allothercompen-sation (3)($) | Total($)
|Carl Spana, Ph.D.,         | 2008 | 390,000   | 0            | 281,750            | 66,013              | 5,688                        | 743,451 
|chief executive           
|officer and president      | 2007 | 370,000   | 60,000       | 193,594            | 48,836              | 3,238                        | 675,668 
|                          
|Stephen T. Wills,          | 2008 | 321,000   | 0            | 217,000            | 52,811              | 14,700                       | 605,511 
|MST, CPA, chief           
|financial officer and      | 2007 | 305,000   | 42,500       | 154,875            | 33,467              | 6,900                        | 542,742 
|executive vice            
|president of              
|operations                
|                          
|Trevor Hallam, Ph.D.,      | 2008 | 321,000   | 0            | 217,000            | 52,811              | 14,700                       | 605,511 
|executive vice            
|president of research      | 2007 | 305,000   | 42,500       | 154,875            | 33,467              | 7,050                        | 542,892 
|and development           

|(1) | Bonus
amounts earned in fiscal 2007 were paid in July 2007, after the end of the fiscal year.
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
10 to the consolidated financial statements included in this Annual Report.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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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 determined
not to award any discretionary bonuses to our named executive officers for fiscal 2008,
based on events transpiring during fiscal 2008, including discontinuation of development
of bremelanotide for sexual dysfunction, termination of the King agreement and the
decrease in our common stock price.

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.

Amendment of Restricted Stock Units

In
October 2006, we granted restricted stock units to our named 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 our common stock was $4.00 or more for
20 consecutive trading days, an additional 325,000 shares vested if the quoted market price of
our common stock was $6.00 or more for 20 consecutive trading days and the remaining
325,000 shares vested if the quoted market price of our common stock was $8.00 or more for 20
consecutive trading days. On March 26, 2008, the Compensation Committee revised the
vesting conditions of the restricted stock units to provide more appropriate vesting
incentives based on our condition at that time. Under the revised conditions, the 375,000
restricted stock units granted to Dr. Spana and the 300,000 restricted stock units granted
to each of Mr. Wills and Dr. Hallam will 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.

Stock Option Grants

In
connection with the grant of the restricted stock units to our named executive officers in
October 2006, we determined at such 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 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.

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Outstanding Equity Awards at 2008
Fiscal Year-End

The
following table summarizes all of the outstanding equity awards granted to our named
executive officers as of June 30, 2008, 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       |  | 09/11/98 |  | 50,000  |  | 0       |  |  | 2.50   | 09/11/08 |  |         |       
|                 |  | 12/31/98 |  | 50,000  |  | 0       |  |  | 4.125  | 12/31/08 |  |         |       
|                 |  | 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 |  |         |       
|                 |  | 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 |  | 37,500  |  | 37,500  |  |  | 3.75   | 07/01/15 |  |         |       
|                 |  | 07/01/05 |  | 62,250  |  | 20,750  |  |  | 1.75   | 07/01/15 |  |         |       
|                 |  | 10/06/06 |  | 31,250  |  | 93,750  |  |  | 2.49   | 10/06/16 |  |         |       
|                 |  | 10/06/06 |  |         |  |         |  |  |        |          |  | 375,000 | 71,250
|                 |  | 03/26/08 |  | 0       |  | 281,250 |  |  | 0.28   | 03/26/18 |  |         |       
|                 |  | 03/26/08 |  | 0       |  | 46,875  |  |  | 0.50   | 03/26/18 |  |         |       
|                 |  | 03/26/08 |  | 0       |  | 46,875  |  |  | 0.66   | 03/26/18 |  |         |       
|                
|Stephen T. Wills |  | 09/11/98 |  | 50,000  |  | 0       |  |  | 2.50   | 09/11/08 |  |         |       
|                 |  | 12/31/98 |  | 50,000  |  | 0       |  |  | 4.125  | 12/31/08 |  |         |       
|                 |  | 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 |  |         |       

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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)       

|              |  |          |  |         |  |         |  |  |      |          |  |         |       
|------------- |  | -------- |  | ------- |  | ------- |  |  | ---- | -------- |  | ------- | ------
|              |  | 07/01/05 |  | 25,000  |  | 25,000  |  |  | 3.75 | 07/01/15 |  |         |       
|              |  | 07/01/05 |  | 54,750  |  | 18,250  |  |  | 1.75 | 07/01/15 |  |         |       
|              |  | 10/06/06 |  | 25,000  |  | 75,000  |  |  | 2.49 | 10/06/16 |  |         |       
|              |  | 10/06/06 |  |         |  |         |  |  |      |          |  | 300,000 | 57,000
|              |  | 03/26/08 |  | 0       |  | 225,000 |  |  | 0.28 | 03/26/18 |  |         |       
|              |  | 03/26/08 |  | 0       |  | 37,500  |  |  | 0.50 | 03/26/18 |  |         |       
|              |  | 03/26/08 |  | 0       |  | 37,500  |  |  | 0.66 | 03/26/18 |  |         |       
|             
|Trevor Hallam |  | 05/09/05 |  | 350,000 |  | 0       |  |  | 1.99 | 05/09/15 |  |         |       
|              |  | 10/06/06 |  | 25,000  |  | 75,000  |  |  | 2.49 | 10/06/16 |  |         |       
|              |  | 10/06/06 |  |         |  |         |  |  |      |          |  | 300,000 | 57,000
|              |  | 03/26/08 |  | 0       |  | 225,000 |  |  | 0.28 | 03/26/18 |  |         |       
|              |  | 03/26/08 |  | 0       |  | 37,500  |  |  | 0.50 | 03/26/18 |  |         |       
|              |  | 03/26/08 |  | 0       |  | 37,500  |  |  | 0.66 | 03/26/18 |  |         |       

|(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                 | vests over three years
        with 1/4 of the shares vesting on the grant date and 1/4 of the shares vesting each
        year thereafter on the 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                                                      

|(2) | Stock
awards consist of restricted stock units which vest on March 26, 2010, provided that the
named executive officer remains continuously employed by us through such date, 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
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | terminated for cause or voluntarily terminates employment, all unvested restricted stock units are
immediately forfeited.
| | -------------------------------------------------------------------------------------------------------------------------

|(3) | Calculated
by multiplying the number of restricted stock units by $0.19, the closing market price of
our common stock on June 30, 2008, 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 two years, 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.
| | --- |  | -------------------------------------

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The
term cause means:

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

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, 2008:

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|                                                             |                                                                                         |                                                                         |                                                                                                                                             |         |  |           |  |  | 
|------------------------------------------------------------ | --------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ------- |  | --------- |  |  | 
|Equity Compensation Plan
     Informationas of June 30, 2008
|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                                 |                                                                                         | 8,657,277                                                               |                                                                                                                                             | $  1.82 |  | 4,445,816 | 
|                                                            
|Equity compensation plans not                                |                                                                                        
|approved by security holders                                 |                                                                                         | 30,000                                                                  |                                                                                                                                             | $  3.41 |  | 0         | 
|                                                            
|Total                                                        |                                                                                         | 8,687,277                                                               |                                                                                                                                             | $  1.82 |  | 4,445,816 | 

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 26, 2008, 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

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 26, 2008. 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
39.84 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 26, 2008, on which date
85,524,077 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.

56

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MANAGEMENT:

|       |                                                         |                                         |  |                 |                      
|------ | ------------------------------------------------------- | --------------------------------------- |  | --------------- | ---------------------
|Class  | Name of Beneficial Owner                                | Amount and Natureof BeneficialOwnership |  | Percent ofclass | Percent ofvotingpower
|Common | Carl Spana, Ph.D.                                       | 959,423(1)                              |  | 1.7%            | *                    
|Common | Stephen T. Wills                                        | 734,000(2)                              |  | *               | *                    
|Common | Trevor Hallam, Ph.D.                                    | 402,500(3)                              |  | *               | *                    
|Common | John K.A. Prendergast, Ph.D.                            | 570,340(4)                              |  | *               | *                    
|Common | Perry B. Molinoff, M.D.                                 | 357,916(5)                              |  | *               | *                    
|Common | Robert K. deVeer, Jr.                                   | 288,773(6)                              |  | *               | *                    
|Common | Zola P. Horovitz, Ph.D.                                 | 183,333(7)                              |  | *               | *                    
|Common | Robert I. Taber, Ph.D.                                  | 178,333(8)                              |  | *               | *                    
|Common | Errol De Souza, Ph.D.                                   | 132,083(9)                              |  | *               | *                    
|Common | J. Stanley Hull                                         | 85,000(10)                              |  | *               | *                    
|       | All current directors and executive officers as a group | 3,891,701(11)                           |  | 4.5%            | *                    
|       | (ten persons)                                          

______________________
        *Less than one percent.

|(1) |  | Includes
916,750 shares which Dr. Spana has the right to acquire under options. Does not include
375,000 shares issuable on vesting of restricted stock units.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes
705,500 shares which Mr. Wills has the right to acquire under options. Does not include
300,000 shares issuable on vesting of restricted stock units.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes
400,000 shares which Dr. Hallam has the right to acquire under options. Does not include
300,000 shares issuable on vesting of restricted stock units.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes
552,667 shares which Dr. Prendergast has the right to acquire under options.
|--- |  | -------------------------------------------------------------------------------------

|(5) |  | Includes
347,916 shares which Dr. Molinoff has the right to acquire under options.
|--- |  | ----------------------------------------------------------------------------------

|(6) |  | Includes
287,773 shares which Mr. deVeer has the right to acquire under options.
|--- |  | --------------------------------------------------------------------------------

|(7) |  | Includes
178,333 shares which Dr. Horovitz has the right to acquire under options.
|--- |  | ----------------------------------------------------------------------------------

|(8) |  | Includes
173,333 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.
|--- |  | ------------------------------------------------------------------------------

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

|(11) |  | Includes
3,779,355 shares which directors and officers have the right to acquire under options.
Does not include 975,000 shares issuable on vesting of restricted stock units.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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MORE THAN 5% BENEFICIAL
OWNERS:

|          |                                                |                                         |  |                 |                      
|--------- | ---------------------------------------------- | --------------------------------------- |  | --------------- | ---------------------
|Class     | Name and Address of Beneficial Owner           | Amount and Natureof BeneficialOwnership |  | Percent ofClass | Percent ofVotingPower
|         
|Common    | King Pharmaceuticals, Inc.                     | 5,675,471                               |  | 6.6%            | 6.2%                 
|          | 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                            
|         
|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                       

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|          |                                      |                                         |  |                 |                      
|--------- | ------------------------------------ | --------------------------------------- |  | --------------- | ---------------------
|Class     | Name and Address of Beneficial Owner | Amount and Natureof BeneficialOwnership |  | Percent ofclass | Percent ofvotingpower
|         
|Series A  | Laura Gold                           | 250                                     |  | 5.0%            | *                    
|Preferred | 180 W. 58th Street                  
|          | New York, NY 10019                  

______________________
        *Less than one percent.

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,
2007, 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 2008 and
fiscal 2007.

Audit
Fees. For fiscal 2008, KPMG billed us a total of $233,000 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 2007, the total billed for the same services and the
audit of our internal control over financial reporting was $367,000.

Audit-Related
Fees. For fiscal 2008 and 2007, KPMG did not perform or bill us for any audit-related
services.

Tax
Fees. For fiscal 2008, we anticipate that KPMG will bill us a total of $15,500 for
professional services rendered for tax compliance, tax advice and tax planning. For fiscal
2007, KPMG billed us $15,000 for professional services rendered for tax compliance, tax
advice and tax planning.

All
Other Fees. KPMG did not perform or bill us for any services other than those described
above for fiscal 2008 and 2007.

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 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.

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PART IV

Item 15. Exhibits and Financial
Statement Schedules.

(a)   Documents filed as part of
the report:

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

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

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

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

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

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

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

2.
Financial statement schedules: None.

3.
Exhibits:

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

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

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

|10.01 |  | 1996
Stock Option Plan, as amended effective January 1, 2001. Incorporated by reference to
Exhibit 4.1 of our Registration Statement on Form S-8, Commission File No. 333-83876,
filed with the SEC on March 6, 2002. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.02 |  | 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 |  | Form
of stock purchase agreement for our March 2003 private placement. Incorporated by
reference to Exhibit 10.33 of our Annual Report on Form 10-K for the year ended June 30,
2003, filed with the SEC on September 29, 2003.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.05 |  | Formof
stock purchase agreement, including warrant certificate, for our January 2004 private
placement. Incorporated by reference to Exhibit 10.01 of our Quarterly Report on Form
10-Q for the quarter ended December 31, 2003, filed with the SEC on February 17, 2004.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.06 |  | 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.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.07 |  | 2005
Stock Plan. Incorporated by reference to Exhibit 10.01 of our Current Report on Form 8-K,
filed with the SEC on June 10, 2005. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------

60

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|10.08 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.09 |  | 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. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | 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. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | 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. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | 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. 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | 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.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | Form
of warrant issued to purchasers in our April 2006 private placement. Incorporated by
reference to Exhibit 10.3 of our Current Report on Form 8-K, filed with the SEC on April
12, 2006.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | 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. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | 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. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | 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. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | 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. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | 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. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | 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. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | 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. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.23 |  | 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. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

61

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Table of Contents

|10.24 |  | 2005
Stock Plan, as amended effective December 7, 2007. Incorporated by reference to Exhibit 4
of our Registration Statement on Form S-8, Commission File No. 333-149093, filed with the
SEC on February 7, 2008. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | 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. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | 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. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|10.28 |  | First
Amendment dated June 27, 2008 to the Research Collaboration and License Agreement between
Palatin and AstraZeneca AB. 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. *
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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

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Table of Contents

SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

PALATIN TECHNOLOGIES, INC.

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

Date: September 29, 2008

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 29, 2008
|Carl Spana                | (principal executive officer)                        |                   
|                          |                                                      |                   
|/s/ Stephen T. Wills      | Executive Vice President and Chief Financial Officer | September 29, 2008
|Stephen T. Wills          | (principal financial and accounting officer)         |                   
|                          |                                                      |                   
|/s/ John K.A. Prendergast | Chairman and Director                                | September 29, 2008
|John K.A. Prendergast     |                                                      |                   
|                          |                                                      |                   
|/s/ Perry B. Molinoff     | Director                                             | September 29, 2008
|Perry B. Molinoff         |                                                      |                   
|                          |                                                      |                   
|/s/ Robert K. deVeer, Jr. | Director                                             | September 29, 2008
|Robert K. deVeer, Jr.     |                                                      |                   
|                          |                                                      |                   
|/s/ Zola P. Horovitz      | Director                                             | September 29, 2008
|Zola P. Horovitz          |                                                      |                   
|                          |                                                      |                   
|/s/ Robert I. Taber       | Director                                             | September 29, 2008
|Robert I. Taber           |                                                      |                   
|                          |                                                      |                   
|/s/ Errol De Souza        | Director                                             | September 29, 2008
|Errol De Souza            |                                                      |                   
|                          |                                                      |                   
|/s/ J. Stanley Hull       | Director                                             | September 29, 2008
|J. Stanley Hull           |                                                      |                   

62

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Table of Contents

EXHIBIT LIST

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

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

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

|10.01 |  | 1996
Stock Option Plan, as amended effective January 1, 2001. Incorporated by reference to
Exhibit 4.1 of our Registration Statement on Form S-8, Commission File No. 333-83876,
filed with the SEC on March 6, 2002. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.02 |  | 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 |  | Form
of stock purchase agreement for our March 2003 private placement. Incorporated by
reference to Exhibit 10.33 of our Annual Report on Form 10-K for the year ended June 30,
2003, filed with the SEC on September 29, 2003.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.05 |  | Formof
stock purchase agreement, including warrant certificate, for our January 2004 private
placement. Incorporated by reference to Exhibit 10.01 of our Quarterly Report on Form
10-Q for the quarter ended December 31, 2003, filed with the SEC on February 17, 2004.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.06 |  | 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.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.07 |  | 2005
Stock Plan. Incorporated by reference to Exhibit 10.01 of our Current Report on Form 8-K,
filed              with the SEC on June 10, 2005. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|10.08 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.09 |  | 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. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | 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. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | 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. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | 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. 
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | 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.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | Form
of warrant issued to purchasers in our April 2006 private placement. Incorporated by
reference to Exhibit 10.3 of our Current Report on Form 8-K, filed with the SEC on April
12, 2006.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | 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. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | 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. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | 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. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | 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. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | 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. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | 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. 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | 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. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.23 |  | 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. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.24 |  | 2005
Stock Plan, as amended effective December 7, 2007. Incorporated by reference to Exhibit 4
of our Registration Statement on Form S-8, Commission File No. 333-149093, filed with the
SEC on February 7, 2008. 
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | 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. 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | 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. 
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|10.28 |  | First
Amendment dated June 27, 2008 to the Research Collaboration and License Agreement between
Palatin and AstraZeneca AB. 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. *
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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.