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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, 2001 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 0-22686  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.)103 Carnegie Center - Suite 200Princeton, New Jersey
     08540(Address of principal executive
     offices)
     (Zip Code)


Registrant's telephone number, including area code:  (609)
520-1911

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

Common Stock, par value $.01 per share (Title
of class)

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

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act 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]

---

The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant, computed by reference to the
price at which the common equity was sold, as of September 27, 2001, was
$26,959,491.

As of September 27, 2001, 11,199,611 shares of the issuer's
common stock, par value $.01 per share, were outstanding.

Documents incorporated by reference: the registrant's definitive
proxy statement relating to the annual meeting of stockholders currently
scheduled for November 2001, incorporated by reference in Part III of this Form
10-K.

---

TABLE OF CONTENTS

PART I

|Item 1. | Business                                            | Page 4 
|------- | --------------------------------------------------- | -------
|        |                                                     |        
|Item 2. | Properties                                          | Page 14
|        |                                                     |        
|Item 3. | Legal Proceedings                                   | Page 14
|        |                                                     |        
|Item 4. | Submission of Matters to a Vote of Security Holders | Page 15
|        |                                                     |        

PART II

|Item 5.  | Market for Registrant's Common Equity and Related Stockholder Matters                 | Page 16
|-------- | ------------------------------------------------------------------------------------- | -------
|         |                                                                                       |        
|Item 6.  | Selected Financial Data                                                               | Page 17
|         |                                                                                       |        
|Item 7.  | Management's Discussion and Analysis of Financial Condition and Results of Operations | Page 19
|         |                                                                                       |        
|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk                            | Page 28
|         |                                                                                       |        
|Item 8.  | Financial Statements and Supplementary Data                                           | Page 30
|         |                                                                                       |        
|Item 9.  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure  | Page 52
|         |                                                                                       |        

PART III

|Item 10. | Directors, Executive Officers, Promoters and Control Persons;
     Compliance with Section 16(a) of the Exchange Act | Page 53*
|-------- | -------------------------------------------------------------------------------------------------------------------- | --------
|         |                                                                                                                      |         
|Item 11. | Executive Compensation                                                                                               | Page 53*
|         |                                                                                                                      |         
|Item 12. | Security Ownership of Certain Beneficial Owners and Management                                                       | Page 53*
|         |                                                                                                                      |         
|Item 13. | Certain Relationships and Related Transactions                                                                       | Page 53*

*Incorporated by reference from our definitive proxy statement
relating to the 2001 Annual Meeting of Stockholders, which we will file with the
Securities and Exchange Commission within 120 days after our June 30, 2001
fiscal year end.

PART IV

|Item 14.   | Exhibits, Financial Statement Schedules and Reports on Form 8-K | Page 53
|---------- | --------------------------------------------------------------- | -------
|           |                                                                 |        
|Signatures |                                                                 | Page 58

---

Table of Contents

# PART I

## Item 1. Business.

## Forward-looking statements

We make
forward-looking statements in this report and the documents we incorporate by
reference. Sometimes these statements contain words such as "anticipates,"
"plans," "intends," "expects" and similar expressions to identify
forward-looking statements. These statements are not guarantees of our future
performance. Our business involves known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from what we say in this report and in the documents we
incorporate by reference. Given these uncertainties, you should not place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. We may not revise these forward-looking statements to reflect
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.

## Overview

We are a
development-stage pharmaceutical company committed to the discovery, development
and commercialization of novel therapeutics. We do not currently offer any
products for sale. We are concentrating our efforts on the following:

|o | MIDAS (Metal Ion-induced Distinctive Array of
     Structures) is our proprietary technology platform for drug design.
     This technology may be useful to develop drugs to treat diseases or for
     diagnostic imaging. We are engaged in research and development using this
     technology to diagnose infections and treat sexual dysfunction, obesity and
     inflammation, and believe that this technology may have applications in a
     variety of other areas as well, including immune disorders, cancers and
     cardiology.                                                                                                                                                                                                                                                                     
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|o | PT-141 is a new, nasally administered peptide for
     the treatment of sexual dysfunction. Our research suggests that PT-141
     works through a mechanism involving the central nervous system. We began
     human clinical testing of PT-141 for erectile dysfunction in the first
     quarter of calendar 2001. We have completed a Phase 1 study and anticipate
     initiating a Phase 2 efficacy trial later in this calendar year.                                                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|o | LeuTech® is a product in development that is to
     be used to rapidly image and diagnose sites of infection. The FDA Medical
     Imaging Drugs Advisory Committee unanimously voted that LeuTech is safe and
     effective for the diagnosis of appendicitis. The FDA reviewed the biologics
     license application (BLA) and determined that the efficacy and safety data
     are complete, yet additional manufacturing and process validation data were
     required prior to final approval. We are working to resolve the outstanding
     issues and intend to file an amendment to the BLA in the latter part of
     calendar year 2002. We are testing LeuTech for detection of other
     infections, including osteomyelitis (infection deep inside a bone), which
     is now in Phase 2 studies.

4

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## Products and Technologies in Research and
Development

In order to
understand the process of drug testing and approval, it is helpful to be
familiar with the following terminology of clinical trial phases and FDA
applications:

| | Preclinical testing:animal trials to
     evaluate toxicity.                                                                                                                                                                                                         
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                      
| | Phase 1:In Phase 1 clinical trials,
     researchers test a new drug or treatment in a small group of patients for the
     first time to evaluate its safety.                                                                                                       
| |                                                                                                                                                                                                                                                                      
| | Phase 2: In Phase 2 clinical trials, the
     study drug or treatment is given to patients to see if it is effective, to
     determine a safe dosage range and to further evaluate its
     safety.                                                                 
| |                                                                                                                                                                                                                                                                      
| | Phase 3: In Phase 3 studies, the study
     drug or treatment is given to a large group of patients to confirm its
     effectiveness, monitor side effects, compare it to commonly used
     treatments, and collect information that will support product approval.
| |                                                                                                                                                                                                                                                                      
| | Investigational new drug application, or
     IND: report on preclinical testing and intended clinical testing
     through Phase 3, with manufacturing and labeling information.                                                                                    
| |                                                                                                                                                                                                                                                                      
| | Biologics license application, or BLA:
     application for FDA approval for sale of a product classified as a
     biologic.                                                                                                                                        
| |                                                                                                                                                                                                                                                                      
| | New Drug Application: application for FDA
     approval for sale of a product classified as a drug.                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                      
| | MIDAC: Medical Imaging Drug Advisory
     Committee.                                                                                                                                                                                                                 

MIDAS is a proprietary technology platform that allows us to routinely design
and synthesize novel pharmaceuticals that mimic the activity of peptides but
offer significant advantages to conventional protein or peptide-based drugs.
MIDAS uses metal ions to fix the three-dimensional shape of peptides, forming
conformationally rigid molecules that remain folded specifically in their active
forms. These MIDAS molecules are simple to synthesize, stable chemically and
proteolytically, and have the potential to be orally bioavailable. Moreover,
unlike most other drug discovery approaches, MIDAS is unique in that it can be
used to generate either receptor antagonists (drugs that block a particular
metabolic response) or agonists (drugs that promote a particular metabolic
response). In addition, MIDAS molecules are information-rich and provide data on
structure-activity relationships that can be used to design traditional small
molecule drugs.

We have
initiated a MIDAS program to discover and develop compounds that interact with
the melanocortin (MC) family of receptors. MC receptors regulate a diverse array
of

5

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functions such as pigmentation, adrenocortical function, immune
modulation, sexual arousal and energy maintenance. Based on this effort, we have
identified several MIDAS molecules that are now in preclinical development as
potential treatments for obesity and inflammation. Additionally, we have
identified molecules that interact with receptors on cancer cells; one of these
molecules is now in preclinical development as a potential treatment for cancer.
We expect to file INDs for at least one of these preclinical compounds and
initiate clinical testing within two years.

Generation of
commercially viable protein and peptide drug molecules with desirable properties
continues to be arduous, expensive and labor-intensive. We believe that our
MIDAS technology simplifies the development process by eliminating many of the
inherent limitations associated with peptides and proteins. We intend to seek to
enter into strategic alliances or collaborative arrangements to provide
additional financial and technical resources for MIDAS development.

PT-141. PT-141 is our lead therapeutic drug candidate and it is now in
development for the treatment of erectile dysfunction (ED). PT-141 works through
a novel mechanism of action. Company research suggests this mechanism may
involve the central nervous system which is different from currently marketed ED
therapies. We believe PT-141 has the potential to treat both male and female
sexual dysfunction and that it may offer significant benefits in terms of safety
and efficacy over currently marketed products. We have completed our Phase 1
human safety evaluation and plan to commence our Phase 2 human efficacy trials
later this calendar year. In addition, we anticipate beginning a
"proof-of-concept" clinical study in female sexual dysfunction in the next
calendar year.

Studies indicate
that as many as 30 million men in the United States may be afflicted with some
form of male erectile dysfunction. Because of the large number of men believed
to be afflicted with male erectile dysfunction, we believe the total market for
treatment will be several billion dollars per year. There is tremendous
competition to develop and market drugs for treatment of male erectile
dysfunction.

LeuTech. LeuTech is a radiolabeled monoclonal antibody that is intended to image
and diagnose sites of infection. When injected into the blood stream, LeuTech
binds to white blood cells present at the infection site, labeling these
cells with the radioactive tracer. As a result, physicians can rapidly image and
detect an infection using a gamma camera, a common piece of hospital equipment
that records radioactivity. In July 2000, the FDA MIDAC panel unanimously
recommended the approval of LeuTech for use in diagnosing appendicitis in
patients with equivocal signs and symptoms. Currently, we are responding to the
FDA's request for additional

6

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manufacturing and process validation information in
accordance with their complete review letter dated September 23, 2000. We
anticipate completing the steps necessary for the filing of amendments to the
BLA in the latter part of calendar 2002. We are conducting additional clinical
trials with LeuTech to diagnose other infections such as bone infections,
infections of prostheses, or artificial body parts, and abscesses. We believe
that LeuTech can be used to diagnose a wide range of other infections, including
infections of the intra-abdominal area, such as intestinal, spleen, liver or
urinary tract infections.

Strategic
Collaboration Agreement with Mallinckrodt. On August 16, 1999, we entered
into a strategic collaboration agreement with Mallinckrodt, Inc., a large
international healthcare products company, to jointly develop and market
LeuTech. In October 2000, Tyco International, Ltd. acquired Mallinckrodt.

Research and
Development. Our research and development efforts primarily focus on two
areas: diagnostic imaging and therapeutics. By combining these
areas, we believe our technologies will facilitate the development of a
portfolio of potential products. Our current product development efforts are
focused on three areas:

|o | LeuTech, a patented, radiolabeled monoclonal antibody product under investigation for
imaging and diagnosing infections.       
|- | -------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                
|o | PT-141, a novel, nasally administered peptide under investigation for the
treatment of both male and female sexual dysfunction.
|  |                                                                                                                                
|o | MIDAS, a powerful, patented drug discovery platform, which:                                                                    

|o | Enables the rapid, systematic design and synthesis of rigid, peptide-derived
compounds for drug development.                                                                                                                                                                
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                             
|o | Provides an in depth understanding of receptor-ligand interactions and
structure-activity relationships which give us a valuable tool for the
structure-based design of small molecule compounds and additionally provides
powerful tools for use in drug target validation.

A summary of our
research and development program appears below. Research includes
the identification of novel molecular targets, development of assay systems,
discovery and evaluation of prototype compounds in vitro and in vivo with animal
testing. Development includes product formulation, toxicology and
additional animal testing of a compound followed by clinical testing and
manufacturing methods development.

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`Program                   Indication                    Status                       Commercial Rights
-------                   ----------                    ------                       -----------------
LeuTech                   Equivocal Appendicitis        Pending FDA Approval         Mallinckrodt/Tyco

                          Osteomyelitis - Prosthetic    Phase 2                      Mallinckrodt/Tyco
                          Joint Infection

                          Osteomyelitis - Diabetic      Phase 2                      Mallinckrodt/Tyco
                          Foot Ulcers

PT-141                    Erectile Dysfunction          Phase 1 complete, Phase 2
                                                        to begin later this
                                                        calendar year

                          Female Sexual Arousal         Proof of concept clinical
                          Disorder                      study to begin next
                                                        calendar year

PT-15 (MIDAS compound)    Obesity                       Preclinical

PT-16 (MIDAS compound)    Cancer Treatment              Preclinical

Anti-Inflammatory agent   Inflammation/Ischemia         Preclinical`

Over the last
three fiscal years, we have spent approximately the following amounts on
company-sponsored research and development activities:

|o | year
ended June 30, 2001:  $10,109,000 
|- | ---------------------------------------
|  |                                        
|o | year
ended June 30, 2000:  $  9,110,000
|  |                                        
|o | year
ended June 30, 1999:  $  8,720,000

## Patents and Proprietary Information

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

We own or have
rights to patents and pending applications directed to radiolabeling of
antibodies, antibody fragments, and peptides; MIDAS peptides; peptide
pharmaceuticals; and to methods for making and using the foregoing in diagnostic
and therapeutic applications. We own or have rights to over 25 United States
patents, several pending United States patent applications, and foreign patents
and applications in selected foreign countries corresponding to certain United
States patents and applications.

We have
exclusive rights to patents relating to PT-141, as well as to pending
applications covering PT-141. We may not be able to obtain patents covering
PT-141, and the claims of any patents that

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issue may not provide meaningful protection for PT-141. In
addition, even if such patents issue they may not be valid.

We own patents
covering certain aspects of the LeuTech product, but the claims of those patents
may not be effective to prevent others from developing competing products. In
addition, the validity of these patents has not been determined.

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 losing
patent protection for the subject of the interference, subjecting us to
significant liabilities to third parties and requiring us to obtain licenses
from third parties at undetermined cost or to cease using the technology.

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

Government
rights. Some of our patents are directed to inventions developed internally
or within academic institutions from which we previously acquired rights to such
patents with funds from United States government agencies. As a result of these
arrangements, the United States government may have rights in certain inventions
developed during the course of the performance of federally funded projects, as
required by law or agreements with the funding agency.

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
agreements with our employees, consultants and certain contractors. If our
employees, scientific consultants or collaborators or licensees develop
inventions or processes independently that may be applicable to our product
candidates, disputes may arise about ownership of proprietary rights to those
inventions and processes. Such inventions and processes will not necessarily
become our property, but may

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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, among other things, to 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, and criminal
prosecution.

After approving
a product for marketing, the FDA may require post-marketing testing, including
extensive Phase 4 studies, and surveillance to monitor the effects 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.

Good
manufacturing practices. In addition to obtaining either a biologics license
application or new drug application approval from the FDA for any of our
proposed products, if the proposed product is manufactured in the United States,
the drug manufacturing establishment must be registered with, and inspected by,
the FDA. Such drug manufacturing establishments are subject to biennial
inspections by the FDA, and must comply with good manufacturing practices
regulations enforced by the FDA. To supply products for use in the United
States, foreign manufacturing establishments must comply with good manufacturing
practices and are subject to periodic inspection by the FDA or by corresponding
regulatory agencies in such other countries under reciprocal agreements with the
FDA. In complying with standards established by the FDA, manufacturing
establishments must continue to expend time, money and effort in the areas of
production and quality control to ensure full technical compliance. We depend on
contract manufacturing establishments, both in the United States and in foreign
countries, to manufacture components of LeuTech. We anticipate that contract
manufacturing establishments will manufacture PT-141 and proposed products
resulting from MIDAS technology.

## 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

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that use of a product is safe and efficacious, neither
experimental nor investigational, medically necessary, appropriate for the
specific patient and cost effective. Since reimbursement approval is required
from each payor individually, seeking such approvals is a time-consuming and
costly process. Third-party payors routinely limit reimbursement coverage 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, or that the reimbursement, if obtained,
will be adequate. Less than full reimbursement by governmental and other
third-party payors for our products would adversely affect the market acceptance
of these products. Further, health care 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 products must be manufactured in commercial quantities under
current good manufacturing practices requirements prescribed by the FDA and at
acceptable costs. We do not have the facilities to manufacture any products in
commercial quantities under good manufacturing practices. We intend to rely on
collaborators, licensees or contract manufacturers for the commercial
manufacture of our products.

We are dependent
on Dutch State Mines of the Netherlands for the manufacture of the antibody used
in LeuTech, and on Ben Venue Laboratories of Cleveland, Ohio for the manufacture
of LeuTech kits. The failure of either of these manufacturers to comply with FDA
current good manufacturing practices or to supply these key components of
LeuTech on a timely basis or at all, could force us to seek alternative sources
of supply and could interfere with our ability to deliver product on a timely
basis or at all. Establishing relationships with new suppliers, any of whom must
be FDA-approved, is a time-consuming and costly process.

If LeuTech is
approved for marketing by the FDA, we will rely on our arrangement with
Mallinckrodt/Tyco to market, sell and distribute LeuTech. We will have limited
control over these activities.

Proposed
products resulting from MIDAS technology and PT-141 are synthetic peptides. The
peptides are synthesized from readily available amino acids, and the production
process involves well-established technology. We currently contract with
third-party manufacturers for the production of peptides and anticipate doing so
in the future.

We intend to
package and ship our radiopharmaceutical products in the form of non-radioactive
kits. Prior to patient administration, the product would be radiolabeled with
the specified radioisotope, generally by a specialized radiopharmacy. We do not
intend to sell or distribute any radioactive substance.

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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 and marketing of our proposed products. We have liability
insurance providing up to $5,000,000 coverage per occurrence and in the
aggregate as to certain clinical trial risks, and we will seek to obtain
additional product liability insurance before the commercialization of our
products.

## Employees

We currently
employ 33 persons full time, of whom 26 are engaged in research and development
activities and seven are engaged in administration and management. Fourteen of
our employees hold Ph.D. degrees and one is an M.D. We have been successful in
attracting skilled and experienced scientific personnel, however, competition
for personnel in our industry is intense.

None of our
employees are covered by a collective bargaining agreement. Our employees have
executed confidentiality 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 most aspects of manufacturing and
some aspects of regulatory approval and clinical management. Our independent
advisors and consultants generally sign agreements that provide for
confidentiality of our proprietary information.

## History and Merger

Interfilm,
Inc. Palatin was incorporated as a Delaware corporation on November 21, 1986
under the name of Cinedco, Inc., which it later changed to Interfilm, Inc. From
1993 to 1995, Interfilm was primarily engaged in the interactive motion picture
business. Interfilm suspended its business activities in May 1995.

RhoMed
merger. On June 25, 1996, Interfilm merged with RhoMed Incorporated, a New
Mexico corporation engaged in biotechnology research and development. All of
RhoMed's outstanding equity securities were exchanged for equity securities of
Interfilm, and Interfilm changed its legal name to Palatin Technologies, Inc.
The business of RhoMed became the ongoing business of Palatin. RhoMed remains as
a wholly-owned, inactive subsidiary of Palatin.

New name and
capital restructuring. On July 19, 1996, we amended our certificate of
incorporation to:

|o | change our name from Interfilm, Inc. to Palatin Technologies, Inc.,           
|- | ------------------------------------------------------------------------------
|  |                                                                               
|o | increase our authorized common stock from 10,000,000 to 25,000,000 shares, and
|  |                                                                               
|o | effect a 1-for-10 reverse split of the common stock.                          

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On September 5, 1997, we again amended our certificate of
incorporation, to:

|o | increase our authorized common stock from 25,000,000 to 75,000,000 shares,      
|- | --------------------------------------------------------------------------------
|  |                                                                                 
|o | increase our authorized preferred stock from 2,000,000 to 10,000,000 shares, and
|  |                                                                                 
|o | effect a 1-for-4 reverse split of the common stock.                             

## Item 2.
Properties.

Our corporate
offices are located at 103 Carnegie Center, Suite 200, Princeton, New Jersey,
where we lease approximately 7,300 square feet under a lease which expires
December 15, 2004. Our research and development facility is located in Edison,
New Jersey, where we lease approximately 16,000 square feet under a lease which
expires July 31, 2007. The leased properties are in good condition.

During 2001, we
entered into an agreement to lease a new facility of approximately 28,000 square
feet in Cranbury, New Jersey that will combine both the corporate offices in
Princeton and the research and development facility in Edison. The lease is
subject to our approval of certain conditions of the lease and would expire 10
years from commencement. Subject to our acceptance or renegotiation of these
conditions, we would anticipate occupying the new space in the first quarter of
calendar year 2002. Should we be unable to negotiate acceptable final terms, we
could terminate the agreement. Our anticipated cash outlay related to the move
is projected at $1.6 million.

## Item 3. Legal
Proceedings.

On March 14,
2000 we announced that we would not be extending the merger closing date of
March 31, 2000 for our previously announced proposed merger with San Diego-based
Molecular Biosystems, Inc. and will not be proceeding with the merger. Our
decision not to proceed with the merger was based on management's view that the
merger was not in the best interests of our stockholders.

On or about
April 28, 2000, Molecular Biosystems commenced a legal action against us and
against Evergreen Merger Corporation, a wholly-owned subsidiary of the Company,
in the Superior Court of the State of Delaware, County of New Castle. In the
complaint, Molecular Biosystems seeks damages against us and Evergreen arising
from the alleged improper termination of the merger agreement dated November 11,
1999, among Molecular Biosystems, Palatin and Evergreen. Under the merger
agreement, Evergreen would have merged with and into Molecular Biosystems, which
would have become a wholly-owned subsidiary of ours.

As a consequence
of the claims alleged in the complaint, Molecular Biosystems contends that it is
entitled to an award of damages against us and Evergreen in amounts to be
determined at trial, but in any event, at least equal to $1,765,305. This figure
represents the amount of a "breakup fee" of $1,000,000 provided for in the
agreement and $765,305 for the purported costs

14

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and expenses allegedly incurred by Molecular Biosystems in
connection with the proposed merger. In addition, Molecular Biosystems seeks
consequential damages in an unstated amount plus interest and Molecular
Biosystems' costs and expenses of the action.

In our response
filed in June of 2000, we have denied the material allegations. Management
believes that we have good and meritorious defenses to the action and we intend
vigorously to defend the action. On January 3, 2001, Alliance Pharmaceutical
Corp. (NASDAQ: ALLP) announced that it had completed its acquisition of
Molecular Biosystems. This litigation is currently in the discovery and
deposition phase.

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

We did not
submit any matters to a vote of security holders during the fourth quarter of
the fiscal year ended June 30, 2001.

15

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# PART II

## Item 5. Market for Registrant's
Common Equity and Related Stockholder Matters.

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

The table below
provides, for the fiscal quarters indicated, the reported high and low closing
sales prices for the common stock on AMEX since December 21, 1999, and the
reported high and low bid prices for the common stock on Nasdaq before December
21, 1999.

`YEAR ENDED JUNE 30, 2001             HIGH              LOW
Fourth Quarter............................      $   6.560         $   2.250
Third Quarter.............................      $   4.625         $   2.000
Second Quarter............................      $   6.125         $   2.563
First Quarter.............................      $   8.188         $   4.938

               YEAR ENDED JUNE 30, 2000             HIGH              LOW
Fourth Quarter............................      $   7.375         $   3.250
Third Quarter.............................      $   9.750         $   2.625
Second Quarter............................      $   4.063         $   2.250
First Quarter.............................      $   5.188         $   2.969`

Holders of
common stock. On September 27, 2001, we had approximately 282 holders of
record of common stock. On September 27, 2001 the closing sales price of our
common stock as reported on the AMEX was $3.10 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 two outstanding series of preferred stock, Series A and C,
contain the following restrictions on our ability to pay dividends or make
distributions to stockholders.

|o | Series A: 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 Series A preferred
stock.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                   
|o | Series C: We may not pay a dividend or make any
distribution to holders of any class of stock while any Series C preferred stock
remains outstanding.                                                             

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Recent sales
of unregistered securities. There were no sales, which were not previously
disclosed, of securities of Palatin sold by Palatin during the year ended June
30, 2001, which were not registered under the Securities Act.

## Item 6. Selected Financial
Data.

The following
selected consolidated financial data has been derived from the consolidated
financial statements of Palatin Technologies, Inc. as of and for each of the
five years in the period ended June 30, 2001, which have been audited by Arthur
Andersen LLP, independent public accountants. This data should be read in
conjunction with our consolidated financial statements, including the notes to
the financial statements, and the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of this report.

Selected Financial Data

`(In thousands, except per share data)

                                                                       Year Ended June 30,
                                                                       -------------------
                                                     1997           1998          1999         2000         2001
                                                 --------------------------------------------------------------------
Statement of Operations Data:
REVENUES:
  Grants and contracts                         $       350     $        34   $        60  $     4,617  $     1,621
  License fees and royalties                           350              --           550          500          167
  Other                                                 22              --            --           --           --
                                                 --------------  ------------  -----------  -----------  ------------
    Total revenues                                     722              34           610        5,117        1,788
                                                 --------------  ------------  -----------  -----------  ------------
OPERATING EXPENSES:
  Research and development                           3,410           7,111         8,720        9,110       10,109
  General and administrative                         2,533           2,991         3,957        4,567        3,025
                                                 --------------  ------------  -----------  -----------  ------------
    Total operating expenses                         5,943          10,102        12,677       13,677       13,134
                                                 --------------  ------------  -----------  -----------  ------------
OTHER INCOME (EXPENSES)
  Interest income                                      296             409           172          405          788`

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Selected Financial Data(continued)

`(In thousands, except per share data)

                                                                       Year Ended June 30,
                                                                       -------------------
                                                     1997           1998          1999         2000         2001
                                                 --------------------------------------------------------------------


  Interest expense                                    (375)           (227)         (107)         (29)          (5)
                                                 --------------  ------------  -----------  -----------  ------------
    Total other income/(expense)                       (79)            182            65          376          783
                                                 --------------  ------------  -----------  -----------  ------------
   Loss before income taxes & cumulative
     effect of accounting change                    (5,300)         (9,886)      (12,002)      (8,184)     (10,563)

  Income tax benefit                                    --              --            --           --          325
                                                 --------------  ------------  -----------  -----------  ------------
   Loss before cumulative effect of accounting
      change                                        (5,300)         (9,886)      (12,002)      (8,184)     (10,238)

   Cumulative effect of accounting change (1)           --              --            --           --         (361)
                                                 --------------  ------------  -----------  -----------  ------------

NET LOSS                                            (5,300)         (9,886)      (12,002)      (8,184)     (10,599)

                                                 --------------  ------------  -----------  -----------  ------------
PREFERRED STOCK DIVIDEND                            (2,889)           (233)           --           --           --
                                                 --------------  ------------  -----------  -----------  ------------
NET LOSS ATTRIBUTABLE TO COMMON
  STOCKHOLDERS                                 $    (8,189)    $   (10,119)  $   (12,002) $    (8,184) $   (10,599)

                                                 ==============  ============  ===========  ===========  ============

Basic and diluted net loss before cumulative
  effectof accounting change                   $      (2.80)         (3.15)  $    (2.02)  $     (1.10)       (1.01)

Cumulative effect of accounting change (1)              --              --            --           --        (0.04)
                                                 --------------  ------------  -----------  -----------  ------------

Basic and diluted net loss per common share    $     (2.80)    $    (3.15)   $    (2.02)  $     (1.10)  $    (1.05)
                                                 ==============  ============  ===========  ===========  ============
Weighted average common shares
  outstanding                                        2,924           3,211         5,936        7,441       10,131
                                                 ==============  ============  ===========  ===========  ============
Pro forma amounts assuming accounting change
  applied retroactively:

  Net loss to common shareholders              $    (8,189)     $  (10,119)   $  (12,002)  $   (8,545)   $  (10,238)

  Basic and diluted net loss per common share  $     (2.80)     $    (3.15)   $    (2.02)  $    (1.15)   $    (1.01)`

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Selected Financial Data(continued)

`(In Thousands)
                                                                 June 30,
                                        1997          1998         1999         2000         2001
                                    -----------------------------------------------------------------
Balance Sheet Data:
Cash, cash equivalents and
   investments                    $   12,622     $    4,326   $    2,789   $    5,842   $   11,456

Property & equipment, net                922          1,610        1,458        1,573        1,925

Working capital                       10,142          2,069          554        4,995        9,360

Total assets                          14,063          6,475        4,723        8,885       14,244

Long term debt, net of
  current portion                        940              -        2,000            -            -

Stockholders' equity              $    9,835      $   3,390    $     341    $   6,905    $  11,916
____________________________________________________________________________________________________`

(1) In fiscal 2001, we recorded a non-cash charge for the
cumulative effect related to the adoption of SEC Staff Accounting Bulletin No.
101. See note 2 to the Consolidated Financial Statements.

## 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 financial statements filed as part of this
report.

## Significant Events in Fiscal Year 2001

In September and
October of 2000, we received aggregate gross proceeds of $15.15 million in a
private placement of common stock and warrants. Investors, consisting of
European financial institutions and other foreign accredited investors,
purchased approximately 2.5 million shares of common stock in two tranches:
1,800,000 shares at $6.00 per share and 732,368 shares at $5.94 per share. For
every five shares purchased, the investors also received a five-year warrant to
purchase one share of common stock at an exercise price of $7.50 for the first
tranche and $7.42 for the second tranche. The net proceeds of approximately
$14 million continue to be used primarily for general corporate purposes,
especially for the development and clinical trials of new products based on our
proprietary technologies.

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In July 2000,
the FDA MIDAC panel unanimously recommended the approval of LeuTech for use in
diagnosing appendicitis in patients with equivocal signs and symptoms.
Currently, we are responding to the FDA's request for additional manufacturing
and process validation information in accordance with their complete review
letter dated September 23, 2000. We anticipate completing the steps necessary
for the filing of amendments to the BLA in the latter part of calendar 2002.

## Results of Operations

Year Ended June 30, 2001 Compared to the Year Ended June 30,
2000

Grants and
contracts - Contract revenue, related to the shared development costs of
LeuTech pursuant to our collaboration agreement with Mallinckrodt, Inc.
decreased to $1,410,356 for the year ended June 30, 2001 as compared to
$4,141,480 reported for the year ended June 30, 2000. The decrease was
attributable to the cap on shared development costs of LeuTech pursuant to the
agreement. Grant revenue under the Small Business Innovation Research and the
Small Business Technology Transfer programs of the Department of Health and
Human Services decreased to $211,069 for the year ended June 30, 2001 compared
the $475,631 reported for the year ended June 30, 2000.

License Fees
and Royalties - During the year ended June 30, 2001, we adopted U.S.
Securities and Exchange Commission Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB 101"), which requires up-front,
non-refundable license fees to be deferred and recognized over the performance
period. The cumulative effect of adopting SAB 101 resulted in a one-time,
non-cash charge of $361,111 or $0.04 per share, which reflects the deferral of
an up-front license fee received from Mallinckrodt, Inc. related to licensing of
LeuTech recognized in the year ended June 30, 2000. Previously, we had
recognized up-front license fees when they were received and we had no
obligations to return the fees under any circumstances. Under SAB 101 these
payments are recorded as deferred revenue to be recognized over the remaining
term of the related agreements. For the year ended June 30, 2001, we recorded
$166,667 of license revenue that was included in the cumulative effect
adjustment as of July 1, 2000. Our year ended June 30, 2000 and 1999 results
have not been restated to apply SAB 101 retroactively.

Research and
development - Research and development (R&D) expenses increased to
$10,108,999 for the year ended June 30, 2001 compared to $9,109,619 for the year
ended June 30, 2000. The increase in R&D is primarily related to our increased
development efforts and expanding clinical trials of PT-141 and research on our
MIDAS Technology.

General and
administrative  General and administrative ( G& A) expenses
decreased to $3,024,841 for the year ended June 30, 2001 compared to $4,567,273
for the year ended June 30, 2000. The decrease in G&A is mainly attributable
to the decrease in administrative salaries and payments made in fiscal 2000
related to a terminated merger and significant non-cash, stock based
compensation expense recorded in fiscal 2000.

Interest
income - Interest income increased to $787,574 for the year ended June 30,
2001 compared to $405,590 for the year ended June 30, 2000. The increase in
interest income is due

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to higher level of funds available for investment due to our
financing in September and October of 2000.

Interest
expense - Interest expense decreased to $5,104 for the year ended June 30,
2001 compared to $29,247 for the year ended June 30, 2000. The decrease in
interest expense was due to the repayment of debt that occurred during the three
months ended September 30, 1999.

Net Loss
- Increased to $10,599,237 for the year ended June 30, 2001 compared to
$8,183,438 for the year ended June 30, 2000. The increase is due to the
reduction in grant and contract revenue and the increase in research and
development expenses explained above.

Year Ended June 30, 2000 Compared to the Year Ended June 30,
1999

Grants and
contracts - We recorded $4,141,480 as contract revenue during the year ended
June 30, 2000 related to the shared development costs and product direct costs
of LeuTech, pursuant to our strategic collaboration agreement with Mallinckrodt.
We also recorded $475,631 as grant revenue for the year ended June 30, 2000. We
completed Phase I grants and a Phase II grant, previously awarded, under the
Small Business Innovative Research program with the National Institutes of
Health of the Department of Health and Human Services. We had no revenues from
contracts and recorded $59,977 as grant revenue for the year ended June 30,
1999.

License Fees
and Royalties - We recorded $500,000 in license fees as revenue for the year
ended June 30, 2000. We received these fees as a one-time, non-refundable
payment pursuant to our strategic collaboration agreement with Mallinckrodt. We
recognized $550,000 in license fees as revenue during the year ended June 30,
1999 related to our license option agreement with Nihon Medi-Physics. We
recognized this $550,000, previously recorded as "deferred revenue," because we
and Nihon changed the development emphasis and termination provisions of the
original agreement. We are not required to perform any future services under
this agreement.

Research and
development - Research and development expenses increased to $9,109,619 for
the year ended June 30, 2000 compared to $8,719,562 for the year ended June 30,
1999. The increase in R&D is primarily related to development of our LeuTech
product, including increased expenses for manufacturing scale-up, consulting and
clinical trials. We expect research and development expenses to continue to
increase in future quarters as we expand clinical trials and manufacturing
efforts on the LeuTech product and expand efforts to develop PT-141 and the
MIDAS technology.

General and
administrative - General and administrative expenses increased to $4,567,273
for the year ended June 30, 2000 compared to $3,957,401 for the year ended June
30, 1999. The increase in general and administrative expenses was mainly
attributable to the payment of approximately $625,000 of costs pursuant to the
proposed merger with Molecular Biosystems.

Interest
income - Interest income increased to $405,590 for the year ended June 30,
2000 compared to $172,241 for the year ended June 30, 1999. The increase in
interest income is the

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result of the receipt of funds pursuant to our strategic
collaboration agreement with Mallinckrodt, which enabled an increase in funds
available for investment purposes.

Interest
expense - Interest expense decreased to $29,247 for the year ended June 30,
2000 compared to $107,639 for the year ended June 30, 1999. The decrease in
interest expense is due to the repayment of debt due to Mallinckrodt.

Net loss
- Net loss decreased to $8,183,438 for the year ended June 30, 2000 compared to
$12,002,384 for the year ended June 30, 1999. The decrease is attributable to
revenues earned related to cost sharing provisions pursuant to the collaboration
agreement with Mallinckrodt.

## Liquidity and Capital Resources

Since inception,
we have incurred net operating losses. As of June 30, 2001, we had a deficit
accumulated during the development stage of $54,105,039. We have financed our
net operating losses through June 30, 2001 by a series of debt and equity
financings. At June 30, 2001, we had cash and cash equivalents of $11,456,424.

For the year
ended June 30, 2001, the net increase in cash and cash equivalents amounted to
$8,236,831. Net cash used for operating activities was $8,397,357, net cash
provided by investing activities was $1,525,718, and net cash provided by
financing activities was $15,108,470.

In September and
October of 2000, we received approximately $14 million in net proceeds from a
private offering consisting of common stock and warrants. Investors, consisting
of financial institutions based in Europe, purchased approximately 1.8 million
and 732,000 shares at $6.00 and $5.94 per share, which represented the closing
market price of Palatin shares on the American Stock Exchange on September 7,
2000 and October 2, 2000, respectively. For every five shares purchased, the
investors also received a five-year warrant to purchase one share of common
stock at a 25% premium to the closing price. The net proceeds will be used
primarily for general corporate purposes, especially for the development and
clinical trials of new products based on our proprietary technologies.

On March 15,
2000 we entered into an agreement with Watson Laboratories Inc. (f/k/a
TheraTech, Inc.) to terminate our License and Development Agreement with Watson
dated March 18, 1998. In connection with the termination, we paid Watson
approximately $500,000.

On August 16,
1999, we entered into a strategic collaboration agreement with Mallinckrodt,
Inc., a large international healthcare products company, to jointly develop and
market LeuTech. In October 2000, Tyco International, Ltd. acquired Mallinckrodt.
Under the terms of this agreement, we received $500,000 in connection with a
licensing fee; $13 million pursuant to the issuance of 700,000 shares of Series
C convertible preferred stock; and approximately $5.6 million from shared
development costs of LeuTech. We are currently negotiating an amendment to the
agreement with Mallinckrodt to provide for, among other things, additional
funding by Mallinckrodt, amending the reimbursement and expense sharing
provisions and payment schedules, as well as providing Mallinckrodt with
additional rights.

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During 2001, we
entered into an agreement to lease a new facility of approximately 28,000 square
feet in Cranbury, New Jersey that will combine both the research and development
facility in Edison, New Jersey and the corporate offices in Princeton, New
Jersey. The lease is subject to our approval of certain conditions of the lease
and would expire 10 years from commencement. Subject to our acceptance or
renegotiation of these conditions, we would anticipate occupying the new space
in the first quarter of calendar year 2002. Should we be unable to negotiate
acceptable final terms, we could terminate the agreement. Our anticipated cash
outlay related to the move is projected at $1.6 million.

As of April
2000, we entered into an amendment to our research and development facility
lease, which increased our rentable space from approximately 10,500 square feet
to approximately 15,800. Our aggregate future annual minimum lease payments
escalate from approximately $203,000 until July 13, 2002 to $300,000 from July
14, 2002 through July 13, 2007.

As of December
7, 1999, we entered into a five-year lease on administrative offices in
Princeton, New Jersey. Minimum future lease payments range from approximately
$187,000 in year one to approximately $202,000 in year five. We have entered
into a sublease agreement with Derma Sciences, Inc. on our previous
administrative offices. Under the sublease agreement Derma reimburses us 100% of
all rents and utility charges.

In March 1997,
we entered into a ten-year lease on research and development facilities in
Edison, New Jersey, which commenced August 1, 1997. Minimum annual future lease
payments escalate from approximately $116,000 per year to $200,000 per year
after the fifth year of the lease term. The lease will expire in fiscal year
2007.

We have three
license agreements that require minimum yearly payments. Future minimum payments
under the license agreements are: 2002 - $300,000, 2003 - $300,000, 2004 -
$200,000, 2005 - $200,000 and 2006 - $200,000.

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

We have incurred
negative cash flows from operations since our inception, and have expended, and
expect to continue to expend in the future, substantial funds to complete our
planned product development efforts. We plan to continue to refine our
operations, control expenses, evaluate alternative methods to conduct our
business and seek available and attractive sources of financing and sharing of
development costs through strategic collaboration agreements or other resources.
We believe that through one or a combination of such factors, we will obtain
adequate financing to fund our operations through fiscal year 2002, based on
current expenditure levels. Should appropriate sources of financing not be
available, we would delay certain clinical

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trials and research activities until such time as appropriate
financing was available. There can be no assurance that our financing efforts
will be successful.

We anticipate
incurring additional losses over at least the next several years, and we expect
our losses to increase as we expand our research and development activities
relating to LeuTech, PT-141 and our MIDAS technology. To achieve profitability,
we, alone or with others, must successfully develop and commercialize our
technologies and proposed products, conduct pre-clinical studies and clinical
trials, obtain required regulatory approvals and successfully manufacture and
market such technologies and proposed products. The time required to reach
profitability is highly uncertain, and we do not know whether we will be able to
achieve profitability on a sustained basis, if at all.

## Factors Affecting our Business Condition

In addition to
the other information included in this report, the following factors should be
considered in evaluating our business and future prospects:

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

We have never
been profitable and we may never become profitable. As of June 30, 2001, we had
an accumulated deficit of $54,105,039 and a loss for the year then ended of
$10,599,237. We anticipate substantial losses over the next few years associated
with the manufacturing and marketing of LeuTech, and continued research and
development of PT-141 and MIDAS. In addition, Mallinckrodt Inc., which has
provided substantial funding for LeuTech development since August 1999, was
acquired by Tyco International, Ltd. in October 2000. Although we are currently
negotiating an amendment to the collaboration agreement with Tyco/Mallinckrodt,
we do not know whether additional funding will be provided or that expenses will
continue to be shared. If additional funding is not provided or obtained, our
losses will continue to accumulate. There can be no assurance that additional
funds will be available when needed, or on terms acceptable to us. If we are
unable to obtain additional financing as needed, we may be required to reduce
the scope of our operations, which will have a material adverse effect on our
business.

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

Our proposed
products are at various stages of research and development and may never be
successfully developed or commercialized. We will need regulatory approval to
market LeuTech for diagnosis of appendicitis, and we are still conducting
clinical trials on the use of LeuTech for other indications. PT-141 and MIDAS
will require significant further research, development and testing. You should
evaluate Palatin in light of the uncertainties, delays,

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difficulties and expenses commonly experienced by early stage
pharmaceutical companies, which may include unanticipated problems and
additional costs relating to:

|o | the development and testing of products in animals and humans;
|- | --------------------------------------------------------------
|  |                                                               
|o | product approval or clearance;                                
|  |                                                               
|o | regulatory compliance;                                        
|o | good manufacturing practices;                                 
|  |                                                               
|o | product introduction; and                                     
|  |                                                               
|o | marketing and competition.                                    

We could lose our rights to LeuTech and PT-141, which would
adversely affect our potential revenues.

Our rights to a
key antibody used in LeuTech are dependent upon an exclusive license agreement
with The Wistar Institute of Biology and Anatomy. Our rights to PT-141 are
dependent upon an exclusive license agreement with Competitive Technologies,
Inc. These agreements contain specific performance criteria and require us to
pay royalties and make milestone payments. Failure to meet these requirements,
or any other event of default under the license agreements, could lead to
termination of the license agreements. If a license agreement is terminated we
may be unable to make or market the covered product, in which case we may lose
the value of our substantial investment in developing the product, as well as
any future revenues from selling the product.

The FDA may not approve the marketing of LeuTech, which would
adversely affect our potential revenues.

We completed
clinical trials of LeuTech for the diagnosis of equivocal appendicitis in the
spring of 1999. In November 1999, we filed an application with the FDA for
approval to market LeuTech for that indication. The FDA has done a complete
review of our LeuTech application and on September 23, 2000 sent us a complete
review letter requesting additional data on LeuTech manufacturing, product
development and process validation. The FDA will not take any further action on
our application until we provide the requested information. We are currently in
the process of obtaining the data requested by the FDA. This process is
uncertain, costly and could require substantial time. If we are able to obtain
the requested manufacturing, product development and validation data, we will
provide it to the FDA as an amendment to our marketing application. FDA review
of the application amendment can be a long and uncertain process. The amendment
must demonstrate that we have satisfactorily addressed all of the issues
contained in the complete review letter, before the FDA can approve LeuTech for
commercial use. We will need to rely on our contract manufacturers to obtain a
substantial part of the requested application. We cannot know for certain
whether we can provide the requested

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information, how long it will take, or whether the data we
provide will be satisfactory to the FDA. Failure to obtain regulatory approval
of LeuTech, or delays in obtaining regulatory approval of LeuTech, would
eliminate or delay our potential revenues from sales of LeuTech. This could make
it more difficult to attract investment capital for funding our other research
and development projects.

Production and supply of LeuTech depends on contract
manufacturers over whom we have no control.

We do not have
the facilities to manufacture LeuTech. We depend on Dutch State Mines of the
Netherlands for the manufacture of the antibody used in LeuTech, and on Ben
Venue Laboratories of Cleveland, Ohio for the manufacture of LeuTech kits. Our
contract manufacturers must perform LeuTech manufacturing activities in a manner
that complies with FDA regulations. Failure to conduct their activities in
compliance with FDA regulations could negatively impact our ability to receive
FDA approval of LeuTech. The failure of either of these manufacturers to supply
these key components of LeuTech, or their inability to comply with FDA
manufacturing regulations, could force us to seek other manufacturers and could
interfere with our ability to deliver product. Establishing relationships with
new suppliers, any of whom must be FDA-approved, is a time-consuming and costly
process.

We have limited experience in marketing, distributing and
selling diagnostic imaging products and will rely on our marketing partner to
provide these capabilities.

If the FDA
approves LeuTech for marketing, we will depend on our arrangement with Tyco
Healthcare, a division of Tyco International, Ltd., to market, sell and
distribute LeuTech. Tyco Healthcare is our exclusive marketing, sale and
distribution partner for LeuTech. If Tyco Healthcare fails to market LeuTech,
our potential revenues from the sale of LeuTech will be adversely affected. If
the arrangement with Tyco Healthcare fails, we may have difficulty establishing
new marketing relationships, and in any event, we will have limited control over
these activities.

If LeuTech does not achieve market acceptance, our business
will suffer.

Approval of
LeuTech for marketing and sale does not assure the product's commercial success.
LeuTech, if successfully developed, will compete with drugs manufactured and
marketed by major pharmaceutical and other biotechnology companies. Physicians,
patients or the medical community in general may not accept and utilize LeuTech.
Imaging agents such as LeuTech generally take longer to achieve market
acceptance following marketing approval than other drugs. The degree of market
acceptance of LeuTech will depend on a number of factors, including:

|o | the establishment and demonstration of the clinical efficacy and safety;
|- | ------------------------------------------------------------------------
|  |                                                                         
|o | potential advantage over alternative treatment methods; and             
|  |                                                                         

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|o | reimbursement policies of government and third-party payors.
|- | ------------------------------------------------------------

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

Competing products and technologies may make LeuTech and our
other potential products noncompetitive.

We are aware of
one company developing an antibody-based product which may compete with LeuTech
as to certain indications. The competing product is marketed in some European
countries and regulatory approval is pending in the United States. Palatin is
also aware of at least one other company developing a peptide-based product
which may also compete with LeuTech as to certain indications. In addition,
other technologies may also be used to diagnose appendicitis, including
computerized tomography or CT scan, and ultrasound technologies.

We are aware
that there is already an FDA-approved treatment for erectile dysfunction. This
product is also approved in Europe, Japan and most of the world's pharmaceutical
markets. In addition, we are aware of at least three other products treating
erectile dysfunction that have been submitted for approval in the United States,
Europe and most of the world's pharmaceutical markets. Potentially, in order to
achieve approval and market acceptance, PT-141 may be required to demonstrate
efficacy and safety equivalent or superior to these other products.

The
pharmaceutical and diagnostic industries are highly competitive. We are likely
to encounter significant competition with respect to LeuTech, PT-141 and our
other potential products. The intellectual property issues discussed above may
affect the extent of competition that we may face. (See "Business of
Palatin--Patents and Proprietary Information.") Many of our competitors have
substantially greater financial and technological resources than we do. Many of
them also have significantly greater experience in research and development,
marketing, distribution and sales than we do. Accordingly, our competitors may
succeed in developing, marketing, distributing and selling products and
underlying technologies more rapidly than us. These competitive products or
technologies may be more effective and useful and less costly than LeuTech,
PT-141 or our other potential products. In addition, academic institutions,
hospitals, governmental agencies and other public and private research
organizations are also conducting research and may develop competing products or
technologies on their own or through strategic alliances or collaborative
arrangements.

Contamination or injury from hazardous materials used in the
development of LeuTech, PT-141 and MIDAS could result in liability exceeding our
financial resources.

Our research and
development of LeuTech, PT-141 and MIDAS 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.

Our stock price has ranged from $2.00 to $8.188 over the last
12 months, 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:

27

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|o | continued operating losses;                                                         
|- | ------------------------------------------------------------------------------------
|  |                                                                                     
|o | announcements of technological innovations or new therapeutic products;             
|  |                                                                                     
|o | announcement or termination of collaborative relationships by us or our competitors;
|  |                                                                                     
|o | announcements of mergers and acquisitions involving our suppliers and collaborators;
|  |                                                                                     
|o | FDA approval or disapproval for marketing LeuTech;                                  
|  |                                                                                     
|o | governmental regulation;                                                            
|  |                                                                                     
|o | clinical trial results;                                                             
|  |                                                                                     
|o | developments in patent or other proprietary rights; and                             
|  |                                                                                     
|o | public concern as to the safety of our products                                     

Trading in our stock over the last 12 months has been
limited, so investors may not be able to sell as much stock as they want at
prevailing prices.

The average
daily trading volume in our common stock was approximately 29,000 shares and
the average daily number of transactions was approximately 20 over the last 12
months. If limited trading in our stock continues, it may be difficult for
investors to sell their shares in the public market at any given time at
prevailing prices.

Our management and principal stockholders together control
approximately 34% of our voting securities, a concentration of ownership
which could delay or prevent a change in control.

Our executive
officers and directors beneficially own approximately 11% of our voting
securities and our 5% or greater stockholders beneficially own approximately 23%
of our voting securities. These stockholders, acting together, will be able to
influence and possibly control most matters submitted for approval by our
stockholders, including the election of directors, delaying or preventing a
change of control, and the consideration of transactions in which stockholders
might otherwise receive a premium for their shares over then current market
prices.

## Item 7A. Quantitative and Qualitative
Disclosures about Market Risk.

Interest Rate
Risk. Our exposure to market risk related to changes in interest rates relates
primarily to our investment portfolio. We invest in instruments that meet high
credit quality

28

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standards, and we limit the amount of credit exposure as to any
one issue, issuer and type of investments.

As of June 30,
2001, our cash and cash equivalents consisted of $11,456,424, most of which were
short term investments having an original maturity of less than three months.
Due to the average maturity and conservative nature of our investment portfolio,
we do not believe that short term fluctuations in interest rates would
materially affect the value of our securities.

29

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## Item 8.

## Table of
ContentsConsolidated Financial Statements

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

| |                                                           | Page
| | --------------------------------------------------------- | ----
| |                                                           |     
| | Report of Independent Public Accountants                  | 31  
| |                                                           |     
| | Consolidated Balance Sheets                               | 32  
| |                                                           |     
| | Consolidated Statements of Operations                     | 33  
| |                                                           |     
| | Consolidated Statements of Stockholders' Equity (Deficit) | 34  
| |                                                           |     
| | Consolidated Statements of Cash Flows                     | 39  
| |                                                           |     
| | Notes to Consolidated Financial Statements                | 41  

30

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(Financial)

# REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS

To Palatin Technologies, Inc.:

We have audited
the accompanying consolidated balance sheets of Palatin Technologies, Inc. (a
Delaware corporation in the development stage) and subsidiaries as of June 30,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended June 30, 2001 and the period from January 28, 1986 (inception)
through June 30, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our
audits in accordance with auditing standards generally accepted in the 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
subsidiaries as of June 30, 2001 and 2000 and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2001 and the period from January 28, 1986 (inception) through June 30, 2001, in
conformity with accounting principles generally accepted in the United States.

| | ARTHUR ANDERSEN LLP
| | -------------------

Philadelphia, Pennsylvania
September 10, 2001

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(Financial)

PALATIN TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)Consolidated Balance Sheets

`June 30,
                                                                   --------------------------------
                                                                         2001               2000
                                                                   ---------------  ---------------
                                  ASSETS
Current assets:
  Cash and cash equivalents                                          $ 11,456,424     $  3,219,593
  Short-term investments                                                        -        2,155,617
  Accounts receivable                                                           -          953,163
  Prepaid expenses and other                                              204,731          179,792
                                                                   ---------------  ---------------
      Total current assets                                             11,661,155        6,508,165


Property and equipment, net                                             1,924,962        1,573,140

Restricted cash                                                           613,075          263,075
Other                                                                      45,017          541,017
                                                                   ---------------  ---------------
                                                                     $ 14,244,209     $  8,885,397
                                                                   ===============  ===============

                   LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                   $  1,129,660     $  1,012,070
  Accrued expenses                                                        397,119          584,833
  Accrued compensation                                                    607,286          383,333
  Deferred license revenue                                                166,666                -
                                                                   ---------------  ---------------
      Total current liabilities                                         2,300,731        1,980,236
                                                                   ---------------  ---------------

Deferred license revenue                                                   27,778                -
                                                                   ---------------  ---------------

Commitments and contingencies (Note 4)

Stockholders' equity:
  Preferred stock of $.01 par value - authorized 10,000,000 shares;
    Series A Convertible;  29,317 and 31,561 shares issued and
      outstanding as of June 30, 2001 and 2000, respectively;                 293              316
    Series B Convertible; 2,000 shares issued and outstanding
      as of June 30, 2000;                                                      -               20
    Series C Convertible;  700,000 shares issued and outstanding
      as of June 30, 2001 and 2000, respectively;                           7,000            7,000
  Common stock of $.01 par value - authorized 75,000,000 shares;
    Issued and outstanding 11,199,658 and 7,902,372 shares as of
      June 30, 2001 and 2000 respectively;                                111,997           79,024
  Additional paid-in capital                                           65,981,568       50,324,603
  Deferred compensation                                                   (80,119)               -
  Deficit accumulated during development stage                        (54,105,039)     (43,505,802)

                                                                   ---------------  ---------------
                                                                       11,915,700        6,905,161
                                                                   ---------------  ---------------
                                                                     $ 14,244,209     $  8,885,397
                                                                   ===============  ===============`

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

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(Financial)

PALATIN TECHNOLOGIES, INC.
                      (A Development Stage Enterprise)Consolidated Statements of Operations

`Inception
                                             (January 28, 1986)                 Year Ended June 30,
                                                   through      ------------------------------------------------
                                                June 30, 2001          2001             2000           1999
                                               ---------------  ---------------  ---------------  ---------------
REVENUES:
     Grants and contracts                        $  9,543,165     $  1,621,425     $  4,617,111     $     59,977
     License fees and royalties                     1,900,963          166,667          500,000          550,000
     Other                                            318,917                -                -                -
                                               ---------------  ---------------  ---------------  ---------------
          Total revenues                           11,763,045        1,788,092        5,117,111          609,977
                                               ---------------  ---------------  ---------------  ---------------

OPERATING EXPENSES:
     Research and development                      42,856,287       10,108,999        9,109,619        8,719,562
     General and administrative                    22,377,115        3,024,841        4,567,273        3,957,401
     Net intangibles write down                       259,334                -                -                -
                                               ---------------  ---------------  ---------------  ---------------
          Total operating expenses                 65,492,736       13,133,840       13,676,892       12,676,963
                                               ---------------  ---------------  ---------------  ---------------
OTHER INCOME (EXPENSES):
     Interest income                                2,141,564          787,574          405,590          172,241
     Interest expense                              (1,955,953)          (5,104)         (29,247)        (107,639)
     Merger costs                                    (525,000)               -                -                -
                                               ---------------  ---------------  ---------------  ---------------
          Total other income/(expenses)              (339,389)         782,470          376,343           64,602
                                               ---------------  ---------------  ---------------  ---------------

      Loss before income taxes & cumulative
      effect of accounting change                 (54,069,080)     (10,563,278)      (8,183,438)     (12,002,384)

Income tax benefit                                    325,152          325,152                -                -
                                               ---------------  ---------------  ---------------  ---------------

        Loss before cumulative effect of
        accounting change                         (53,743,928)     (10,238,126)      (8,183,438)     (12,002,384)

Cumulative effect of accounting change (Note 2)      (361,111)        (361,111)               -                -
                                               ---------------  ---------------  ---------------  ---------------

NET LOSS                                          (54,105,039)     (10,599,237)      (8,183,438)     (12,002,384)

PREFERRED STOCK DIVIDEND                           (3,121,525)               -                -                -
                                               ---------------  ---------------  ---------------  ---------------

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS     $(57,226,564)    $(10,599,237)    $ (8,183,438)    $(12,002,384)

                                               ===============  ===============  ===============  ===============

Basic and diluted net loss per Common share
   Basic and diluted net loss before cumulative
      effect of accounting change                                 $      (1.01)    $      (1.10)    $      (2.02)
   Cumulative effect of accounting change                                (0.04)               -                -
                                                                ---------------  ---------------  ---------------
   Basic and diluted net loss                                     $      (1.05)    $      (1.10)    $      (2.02)
                                                                ===============  ===============  ===============
Weighted average number of Common shares
     outstanding used in computing basic and
     diluted net loss per Common share                              10,131,195        7,441,082        5,936,498
                                                                ===============  ===============  ===============`

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

33

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(Financial)

PALATIN TECHNOLOGIES, INC.
                      (A Development Stage Enterprise)Consolidated Statements of Stockholders' Equity (Deficit)

`Preferred Stock
                                                 ----------------------------------------------------------------------------------
                                                       Shares               Amount           Subscriptions          Receivable
                                                 -------------------  -------------------  -------------------  -------------------
Balance at inception                                              -           $        -           $        -           $        -
   Preferred stock subscriptions                                  -                    -                4,000               (4,000)
   Net loss from inception                                        -                    -                    -                    -
                                                 -------------------  -------------------  -------------------  -------------------
Balance, August 31, 1995                                          -                    -                4,000               (4,000)
   Preferred stock subscriptions                                  -                    -               (4,000)               4,000
   Issuance of Preferred shares                           4,000,000                4,000                    -                    -
   Issuance of Common shares on
      $10,395,400 private placement                               -                    -                    -                    -
   Shares earned but not issued                                   -                    -                    -                    -
   Net loss                                                       -                    -                    -                    -
                                                 -------------------  -------------------  -------------------  -------------------

Balance, June 25, 1996                                    4,000,000                4,000                    -                    -
  Conversion to Palatin Technologies, Inc.               (4,000,000)              (4,000)                   -                    -
Adjusted balance, June 25, 1996                                   -                    -                    -                    -
  Shares outstanding of Palatin
    Technologies, Inc.                                            -                    -                    -                    -
  Purchase of treasury stock                                      -                    -                    -                    -
   Net loss                                                       -                    -                    -                    -
                                                 -------------------  -------------------  -------------------  -------------------

Balance, June 30, 1996                                            -                    -                    -                    -
   Issuance of Preferred shares, net of expenses            137,780                1,378                    -                    -
   Net loss                                                       -                    -                    -                    -
                                                 -------------------  -------------------  -------------------  -------------------

Balance, June 30, 1997                                      137,780                1,378                    -                    -
   Issuance of Preferred shares, net of expenses             18,875                  189                    -                    -
   Conversion of Preferred shares into Common shares        (49,451)                (495)                   -                    -
   Net loss                                                       -                    -                    -                    -
                                                 -------------------  -------------------  -------------------  -------------------
Balance, June 30, 1998                                      107,204                1,072                    -                    -
   Conversion of Preferred shares into Common shares        (51,145)                (511)                   -                    -
   Net loss                                                       -                    -                    -                    -
                                                 -------------------  -------------------  -------------------  -------------------`

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

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(Financial)

PALATIN TECHNOLOGIES, INC.
                      (A Development Stage Enterprise)Consolidated Statements of Stockholders' Equity (Deficit)- continued -

`Preferred Stock
                                                  ----------------------------------------------------------------------------------
                                                        Shares               Amount           Subscriptions          Receivable
                                                  -------------------  -------------------  -------------------  -------------------
Balance, June 30, 1999                                       56,059                  561                     -                    -
   Issuance of Preferred shares, net of expenses            700,000                7,000                     -                    -
   Conversion of Preferred shares into Common shares        (22,498)                (225)                    -                    -
   Net loss                                                       -                    -                     -                    -
                                                 -------------------  -------------------  -------------------  -------------------
Balance, June 30, 2000                                      733,561         $      7,336                     -                    -
   Conversion of Preferred shares into Common shares         (4,244)                 (43)                    -                    -
   Net loss                                                       -                    -                     -                    -
                                                 -------------------  -------------------  -------------------  -------------------
Balance, June 30, 2000                                      729,317         $      7,293            $        -           $        -
                                                 ===================  ===================  ===================  ===================`

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

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(Financial)

PALATIN TECHNOLOGIES, INC.
                      (A Development Stage Enterprise)Consolidated Statements of Stockholders' Equity (Deficit)- continued -

`Common Stock
                                  --------------------------------------------------------------------------------------------------
                                                                                                               Deficit
                                                                                                             Accumulated
                                                              Additional   Earned                              During
                                                               Paid-in     but not  Treasury    Deferred    Development
                                    Shares        Amount       Capital     Issued    Stock    Compensation      Stage       Total
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------
Balance at inception                      -      $      -   $        -   $      -   $     -    $       -    $         -   $       -
  Issuance of shares from
    inception                     6,922,069     1,177,786      100,000    110,833         -            -                  1,388,619
  Net loss from inception                 -             -            -          -              -             (4,235,059) (4,235,059)
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------
Balance, August 31, 1995          6,922,069     1,177,786      100,000    110,833         -             -    (4,235,059) (2,846,440)
  Issuance of Preferred shares            -             -            -          -         -             -             -       4,000
  Issuance of Common shares on
   $10,395,400 private placement 41,581,600     9,139,303            -          -         -             -             -   9,139,303
  Shares earned but not issued            -             -            -    266,743         -             -             -     266,743
  Issuance of Common shares       1,054,548       458,977      (100,000) (324,546)        -             -             -      34,431
  Net loss                                -             -            -          -         -             -    (3,897,879) (3,897,879)
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------
Balance, June 25, 1996           49,558,217    10,776,066            -     53,030         -             -    (8,132,938)  2,700,158
  Conversion to Palatin
    Technologies Inc.           (46,807,465)  (10,748,558)  10,752,558          -         -             -            -            -

Adjusted balance, June 25, 1996   2,750,752        27,508   10,752,558     53,030         -             -    (8,132,938)  2,700,158
  Shares outstanding of Palatin
    Technologies, Inc.              108,188         1,082       (1,082)         -         -             -            -            -
  Issuance of Common shares          25,754           257      139,459          -         -             -            -      139,716
  Purchase of treasury stock
                                          -             -            -          -    (1,667)            -            -       (1,667)
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------
Balance, June 30, 1996            2,884,694        28,847   10,890,935     53,030    (1,667)             -   (8,132,938)  2,838,207
  Issuance of Preferred shares,
     net of expenses                      -             -   11,635,653          -         -              -           -   11,637,031
  Shares earned but not issued            -             -            -    250,141         -              -                  250,141
  Issuance of Common shares         135,987          1,360      316,761  (303,171)        -              -           -       14,95
  Retirement treasury shares           (308)            (3)      (1,664)        -     1,667              -           -            -
  Issuance of stock options below
     fair market value                    -             -     1,472,716         -        -     (1,472,716)           -            -
  Amortization of deferred
        compensation                      -             -             -         -        -        394,383            -      394,383
  Net loss                                -             -             -         -         -             -    (5,300,164) (5,300,164)
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------`

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

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(Financial)

PALATIN TECHNOLOGIES, INC.
                      (A Development Stage Enterprise)Consolidated Statements of Stockholders' Equity (Deficit)- continued -

`Common Stock
                                  --------------------------------------------------------------------------------------------------
                                                                                                               Deficit
                                                                                                             Accumulated
                                                              Additional   Earned                              During
                                                               Paid-in     but not  Treasury    Deferred    Development
                                    Shares        Amount       Capital     Issued    Stock    Compensation      Stage       Total
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------
Balance, June 30, 1997            3,020,373        30,204   24,314,401          -         -    (1,078,333)  (13,433,102)  9,834,548

  Issuance of Preferred shares,
   net of expenses                        -             -    1,573,295          -         -             -             -   1,573,295
  Issuance of Preferred shares
   expense recapture                      -             -       49,733          -         -             -             -      49,733
  Issuance of Common shares          66,696           666       94,873          -         -             -             -      95,539
  Issuance of Common shares upon
   conversion of Preferred shares 1,012,554        10,126       (9,820)         -         -             -             -           -
  Issuance of stock options below
   fair market value                      -             -    1,161,156          -         -    (1,161,156)            -           -
  Amortization of deferred
   compensation                           -             -            -          -         -     1,723,310                 1,723,310
  Net loss                                -             -            -          -         -             -    (9,886,878) (9,886,878)
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------
Balance, June 30, 1998            4,099,623       40,995   27,183,638          -         -      (516,179)  (23,319,980)  3,389,547
  Issuance of Common shares       1,842,101        18,421    7,594,182          -         -             -             -   7,612,603
  Issuance of Common shares upon
   conversion of Preferred shares 1,115,740        11,158      (10,655)         -         -             -             -          (9)
  Issuance of Common shares upon
     exercise of warrants             9,874            99       18,676          -         -             -             -      18,775
  Issuance of Common shares upon
     exercise of options             70,257           703       13,348          -         -             -             -      14,051
  Issuance of stock options below
     fair market value                    -             -      811,054          -         -      (811,054)            -           -
  Amortization of deferred
        compensation                      -             -            -          -         -     1,308,675                 1,308,675
  Net loss                                -             -            -          -         -             -   (12,002,384)(12,002,384)
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------
Balance, June 30, 1999            7,137,595        71,376   35,610,243                            (18,558)  (35,322,364)    341,258
                                                                     -
  Issuance of Preferred shares,
     net of expenses                      -             -   12,999,058          -         -             -                12,999,058
  Issuance of Preferred shares            -             -            -          -         -             -               -     7,000
  Issuance of Common shares upon
     conversion of Preferred                                                                                                     37
     shares                         572,374         5,724       (5,462)         -         -             -               -
  Issuance of Common shares upon
     exercise of warrants           111,551         1,115      451,097          -         -             -               -   452,212
  Issuance of Common shares upon
     exercise of options             80,852           809       99,667          -         -             -               -   100,476
  Acceleration of options
        previously granted                -             -    1,170,000          -         -             -                 1,170,000
  Amortization of stock based                                                                      18,558               -    18,558
        compensation                      -             -            -          -         -
  Net loss                                -             -            -          -         -             -    (8,183,438) (8,183,438)
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------`

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

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(Financial)

PALATIN TECHNOLOGIES, INC.
                      (A Development Stage Enterprise)Consolidated Statements of Stockholders' Equity (Deficit)- continued -

`Common Stock
                                  --------------------------------------------------------------------------------------------------
                                                                                                               Deficit
                                                                                                             Accumulated
                                                              Additional   Earned                              During
                                                               Paid-in     but not  Treasury    Deferred    Development
                                    Shares        Amount       Capital     Issued    Stock    Compensation      Stage       Total
                                 -----------  ------------  -----------  ---------  --------   -----------  ------------  ----------
Balance, June 30, 2000            7,902,372     $  79,024  $50,324,603     $    -   $      -    $       -  $(43,505,802) $6,905,161
  Issuance of Common shares,
     net of expenses              2,532,369        25,324   13,954,928          -          -            -             -  13,980,252
  Issuance of Common shares upon
     conversion of Preferred
     shares                         104,886         1,049       (1,006)         -          -            -             -           -
  Issuance of Common shares upon
     exercise of warrants           173,015         1,730      486,736          -          -            -             -     488,466
  Issuance of Common shares upon
     exercise of options            487,016         4,870      634,883          -          -            -             -     639,753
  Stock based compensation                -             -      246,109          -          -     (105,534)            -     140,575
  Acceleration of options
     previously granted                   -             -      335,315          -          -            -             -     335,315
  Amortization of stock based
     compensation                         -             -            -          -          -       25,415             -      25,415
   Net loss                               -             -            -          -          -            -   (10,599,237)(10,599,237)
                                 -----------  ------------  -----------  ---------  --------   -----------  ------------  ----------

Balance, June 30, 2001           11,199,658    $  111,997  $65,981,568   $      -   $      -   $  (80,119) $(54,105,039)$11,915,700
                                 =========     ==========  ===========   =========  ========   =========== ============= ===========`

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

38

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(Financial)

PALATIN TECHNOLOGIES, INC.
                      (A Development Stage Enterprise)Consolidated Statements of Cash Flows

`Inception
                                                  (January 28, 1986)                   Year Ended June 30,
                                                       through        ===================================================
                                                    June 30, 2001          2001               2000             1999
                                                  ------------------  ---------------- ------------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:

  Net loss                                           $(54,105,039)     $(10,599,237)      $ (8,183,438)    $(12,002,384)

  Adjustments to reconcile net loss to net cash
    used for operating activities:
      Cumulative effect of accounting change              361,111           361,111                  -                -
      Depreciation and amortization                     1,373,856           288,086            248,491          232,625
      License fee                                         500,000                 -                  -                -
      Interest expense on note payable                     72,691                 -                  -                -
      Accrued interest on long-term financing             796,038                 -                  -                -
      Accrued interest on short-term financing              7,936                 -                  -                -
      Intangibles and equipment write down                278,318                 -                  -                -
      Common stock and notes payable issued for
         expenses                                         751,038                 -                  -          127,350
      Settlement with consultant                          (28,731)                -                  -                -
      Deferred revenue                                  (166,667)          (166,667)                  -        (550,000)
      Acceleration of options previously granted        1,505,315           335,315          1,170,000                -
      Stock based compensation                          3,610,916           165,990             18,558        1,308,675
      Changes in certain operating assets and
         liabilities:
        Accounts receivable                                     -           953,163          (953,163)                -
        Prepaid expenses and other                    (1,185,432)           111,053          (439,004)           50,985
        Accounts payable                                1,129,660           117,590          (104,824)          655,348
        Accrued expenses and other                        543,238            36,239          (296,727)          130,505
                                                  ----------------    --------------     --------------  ---------------
            Net cash used for operating
               activities                             (44,555,752)       (8,397,357)        (8,540,107)     (10,046,896)
                                                  ----------------    --------------     --------------  ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Sale/(Purchases) of short-term investments, net               -         2,155,617        (1,700,790)        (454,827)
  Purchases of property and equipment                  (3,173,226)         (629,899)          (354,019)         (69,145)
                                                  ----------------    --------------     --------------  ---------------
            Net cash provided/(used) for
               investing activities                   (3,173,226)         1,525,718        (2,054,809)        (523,972)
                                                  ----------------    --------------     --------------  ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from notes payable, related party              302,000                 -                  -                -
  Payments on notes payable, related party               (302,000)                -                  -                -
  Proceeds from senior bridge notes payable             1,850,000                 -                  -                -
  Payments on senior bridge notes payable              (1,850,000)                -                  -                -
  Proceeds from notes payable and
    long-term debt                                      3,951,327                                             2,000,000
  Payments on notes payable and
    long-term debt                                     (1,951,327)                -                  -         (939,588)
  Proceeds from common stock, stock option
    and warrant issuances, net                         32,976,743        15,108,470            480,708        7,518,070
  Proceeds from preferred stock, net                   24,210,326                 -         11,000,000                -
  Purchase of treasury stock                              (1,667)                 -                  -                -
                                                  ----------------    --------------     --------------  ---------------

            Net cash provided by financing
               activities                              59,185,402        15,108,470         11,480,708        8,578,482
                                                  ----------------    --------------     --------------  ---------------

NET INCREASE (DECREASE) IN CASH
    AND CASH EQUIVALENTS                               11,456,424         8,236,831            885,792       (1,992,386)

CASH AND CASH EQUIVALENTS, beginning of period                  -         3,219,593          2,333,801        4,326,187
                                                  ----------------    --------------     --------------  ---------------

CASH AND CASH EQUIVALENTS, end of period             $ 11,456,424      $ 11,456,424       $  3,219,593    $   2,333,801
                                                  ================    ==============     ==============  ===============`

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

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PALATIN TECHNOLOGIES, INC.
                      (A Development Stage Enterprise)Consolidated Statements of Cash Flows

`Inception
                                                  (January 28, 1986)                   Year Ended June 30,
                                                       through        ===================================================
                                                    June 30, 2001          2001               2000             1999
                                                  ------------------  ---------------- ------------------ ---------------

SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash paid for interest                                $ 632,694         $   5,104        $   29,247       $   87,536
                                                  ================   ===============   ===============  ===============
NON-CASH TRANSACTION:
   Settlement of accounts payable with
      Equipment                                          $     900         $       -        $        -       $        -
                                                  ================   ===============   ===============  ===============
NON-CASH STOCK ACTIVITY:
   Conversion of loans from employees to
      Common stock                                       $  74,187         $       -        $        -       $        -
                                                  ================   ===============   ===============  ===============
   Conversion of note payable to Common stock            $  16,000         $       -        $        -       $        -
                                                  ================   ===============   ===============  ===============
   Common stock issued for equipment                     $   2,327         $       -        $        -       $        -
                                                  ================   ===============   ===============  ===============
   Common stock and warrants issued for expenses
      (included above)                                   $ 915,765         $  31,200        $        -       $  127,350
                                                  ================   ===============   ===============  ===============
   Common stock issued for accrued salaries
      and bonuses                                        $  16,548         $       -        $        -       $        -
                                                  ================   ===============   ===============  ===============
   Accrued interest payable in Common stock              $ 679,097         $       -        $        -       $        -
                                                  ================   ===============   ===============  ===============`

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

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PALATIN TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)Notes to Consolidated Financial Statements

## (1)     ORGANIZATION
ACTIVITIES:

Nature of
Business -- Palatin Technologies, Inc. ("Palatin" or the "Company") is a
development-stage pharmaceutical company committed to the discovery, development
and commercialization of novel therapeutics. The Company's product portfolio
includes PT-141, a novel treatment currently in development for erectile
dysfunction, and LeuTech(TM), a radioimaging monoclonal antibody for the rapid
diagnosis and detection of equivocal appendicitis. Palatin's patented drug
discovery platform, MIDAS, streamlines the drug discovery process with an
efficient approach to identify lead compounds from protein targets for drugs.
The Company's pipeline includes preclinical candidates from its proprietary
MIDAS peptide-chemistry.

Business Risk
and Liquidity - As shown in the accompanying financial statements, the
Company incurred substantial net losses of $10,599,237 for the year ended June
30, 2001 and has a deficit accumulated in the development stage of $54,105,039
as of June 30, 2001. The Company anticipates incurring additional losses in the
future as it continues development of LeuTech and expands clinical trials for
other indications and for PT-141, and continues research and development of
PT-141 and its MIDAS technology. To achieve profitability, the Company, alone or
with others, must successfully develop and commercialize its technologies and
proposed products, conduct pre-clinical studies and clinical trials, obtain
required regulatory approvals and successfully manufacture and market such
technologies and proposed products. The time required to reach profitability is
highly uncertain, and there can be no assurance that the Company will be able to
achieve profitability on a sustained basis, if at all.

Management plans
to continue to refine its operations, control expenses, evaluate alternative
methods to conduct its business, and seek available and attractive sources of
financing and sharing of development costs through strategic collaboration
agreements or other resources. Management believes that through one or a
combination of such factors that it will be able to obtain adequate financing to
fund the Company's operations through fiscal year 2002, based on current
expenditure levels. Should appropriate sources of financing not be available,
management would delay certain clinical trials and research activities until
such time as appropriate financing was available. There can be no assurance that
the Company's efforts will be successful.

## (2)     SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:

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

Use of
Estimates -- The preparation of consolidated financial statements in
conformity with 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 maturity of three months or less at the
time of purchase. As of June 30, 2001 and 2000, approximately $613,000 and
$263,000, respectively, of cash was restricted to secure letters of credit for
security deposits on leases.

Short-Term
Investments -- The Company accounts for its investments in accordance with
Statement of Financial Accounting Standards No. 115 "Accounting For Certain
Investments in Debt and Equity Securities." The Company classifies such
investments as available for sale investments and as such all investments are
recorded at fair value. The investments consist of certificates of deposit.
Unrealized gains and losses are classified as a separate component of
stockholders' equity. As of June 30, 2001, all such investments had matured.
Realized gains and losses were recorded in the statement of operations in the
period that the transaction occurs.

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Property and
Equipment -- Property and equipment consists of office and laboratory
equipment, office furniture and leasehold improvements. Propety and equipment
are recorded at cost. Depreciation is recognized using the straight-line method
over the estimated useful lives of 5 years for equipment, 7 years for office
furniture and over the term of the lease for leasehold improvements. Maintenance
and repairs are charged to expense as incurred while expenditures that extend
the useful life of an asset are capitalized.

Impairment of
Long-Lived Assets -- The Company follows Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets, management evaluates the probability
that future undiscounted net cash flows, without interest charges, will be less
than the carrying amount of the assets. Impairment is measured at fair value.
Fair value is determined by an evaluation of available price information at
which assets could be bought or sold including quoted market prices, if
available, or the present value of the estimated future discounted cash flows
based on reasonable and supportable assumptions.

Revenue
Recognition -- Grant and contract revenues are recognized as the Company
provides the services stipulated in the underlying grants and/or contracts based
on the time and materials incurred. License revenues are recognized when the
license fee is received and the Company has no future performance obligations.

In August 1999,
the Company entered into a strategic collaboration agreement with Mallinckrodt,
Inc. to jointly develop and market one of its products (see Note 7). Under the
terms of the agreement, the Company granted a worldwide license for sales,
marketing and distribution and received a nonrefundable licensing fee of
$500,000. The licensing fee was recognized as revenue in the period that such
nonrefundable fees were received.

In fiscal 2001,
the Company adopted U.S. Securities and Exchange Commission Staff Accounting
Bulletin No. 101 Revenue Recognition in Financial Statements
(SAB 101) which requires up-front, nonrefundable license fees to be
deferred and recognized over the performance period. The cumulative effect of
adopting SAB 101 to this license fee resulted in a one-time, non-cash charge of
$361,111 or $0.04 per share, which reflects the deferral of the $500,000
up-front license fee received from Mallinckrodt in August 1999. Under SAB 101,
this payment has been recorded as deferred revenue to be recognized as license
revenue over the remaining development term of this agreement. For the year
ended June 30, 2001, the Company recognized $166,667 in license revenue that was
included in the cumulative effect adjustment as of July 1, 2000. Prior year
financial statements have not been restated to apply SAB 101 retroactively;
however the following pro forma amounts show the net loss to common stockholders
and net loss per share assuming the Company had retroactively applied SAB 101 to
the prior years:

`Year Ended June 30
                                                             ------------------
                                                    2001            2000          1999
                                                    ----            ----          ----

Net loss to common stockholders, as reported   $(10,599,237)   $(8,183,438)   $(12,002,384)
                                                ============    ===========    ============

Net loss per common share, as reported         $      (1.05)   $     (1.10)   $      (2.02)
                                                      ======         ======          ======

Pro forma net loss to common stockholders      $(10,238,126)   $(8,544,549)   $(12,002,384)
                                                ============    ===========    ============

Pro forma net loss per common share            $      (1.01)   $     (1.15)   $      (2.02)
                                                      ======         ======          ======`

Research and
Development Costs -- The costs of research and development activities are
charged to expense as incurred.

Stock
Options -- The majority of common stock options issued to employees and
non-employee directors have been issued at exercise prices greater than, or
equal to, their fair market value at the date granted. Accordingly, no value has
been assigned to these options. During the current fiscal year the vesting of
certain stock options were based upon performance milestones as determined by
the Board of Directors. Upon

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achievement of such milestones, the Company charged to expense
approximately $109,000, which represents the difference between the fair market
value of the Company's Common Stock in excess of the exercise price of the
option on the date the milestone was achieved. In December 2000, the Company
accelerated the vesting period of certain options granted to terminated
employees. This modification resulted in a charge to expense of approximately
$335,000, representing the difference between the fair market value in excess of
the exercise price on the date of the modification. In addition, during the
current fiscal year, stock options were granted to non-employees for services.
The fair value of these options, pursuant to the Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), as calculated by the Black-Scholes option pricing model, has been
recorded as deferred compensation and is being charged to expense over the
vesting period of such options.

Income
Taxes -- The Company and its subsidiaries file consolidated federal and
combined state income tax returns. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). SFAS 109 requires, among other things, the use
of the liability method in computing deferred income taxes.

The Company
provides for deferred income taxes relating to temporary differences in the
recognition of income and expense items (primarily relating to depreciation,
amortization and certain leases) for financial and tax reporting purposes. Such
amounts are measured using current tax laws and regulations in accordance with
the provisions of SFAS 109.

In accordance
with SFAS 109, the Company has recorded a valuation allowance against the
realization of its deferred tax assets. The valuation allowance is based on
managements estimates and analysis, which includes tax laws which may
limit the Companys ability to utilize its tax loss carry-forwards.

Net Loss per
Common Share -- The Company applies Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires dual
presentation of basic and diluted earnings per share ("EPS") for complex capital
structures on the face of the statement of operations. Basic EPS is computed by
dividing the income (loss) by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution from the
exercise or conversion of securities into Common stock, such as stock options.
For the years ended June 30, 2001, 2000 and 1999, there were no dilutive effects
of stock options or warrants as the Company incurred a net loss in each period.
Options and warrants to purchase 6,551,021 shares of Common Stock at prices
ranging from $0.01 to $360 per share were outstanding at June 30, 2001.

Fair Value of
Financial Instruments -- Statement of Financial Accounting Standards No. 107
"Disclosures about Fair Value of Financial Instruments" ("SFAS 107"), requires
disclosures of fair value information about financial instruments, whether or
not recognized in the balance sheet, for which it is practicable to estimate the
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. These
techniques are significantly affected by the assumptions used, including
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.

Reclassifications -- Certain reclassifications have been made to the
prior year financial statements to conform to the current year presentation.

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## (3)     PROPERTY AND
EQUIPMENT:

Property and
equipment consists of the following:

`June 30,
                                             --------------------------------
                                                  2001                2000
                                             ----------------- --------------
          Office equipment                     $ 570,954           $ 544,265
          Laboratory equipment                   959,258             449,857
          Leasehold improvements               1,587,673           1,493,864
                                              -----------         -----------

                                               3,117,885           2,487,986

          Less: Accumulated depreciation
               and amortization               (1,192,923)           (914,846)
                                              ------------          ---------

                                              $1,924,962          $1,573,140
                                              ============        ==========`

For the years ended June 30, 2001, 2000 and 1999, depreciation
expense was $278,078, $238,483 and $222,617, respectively.

## (4)     COMMITMENTS AND
CONTINGENCIES:

Leases --
The Company currently leases two facilities in New Jersey under non-cancelable
operating leases. Future minimum lease payments under these two leases are as
follows:

`Fiscal Year ending June 30,

          2002                            $  525,000

          2003                               584,000

          2004                               588,000

          2005                               463,000

          2006 and thereafter                746,000
                                          -----------
                                          $2,906,000
                                          ===========`

For the years ended June 30, 2001, 2000 and 1999, rent expense
was $560,476, $357,362 and $261,097, respectively.

During 2001, the
Company entered into an agreement to lease a new facility in Cranbury, New
Jersey that will combine both the research and development facility in Edison,
New Jersey and the corporate offices in Princeton, New Jersey. The lease is
subject to the Company's approval of certain conditions of the lease and would
expire 10 years from commencement. Subject to the Company's acceptance or
renegotiation of these conditions, the Company would anticipate occupying the
new space in the first quarter of calendar year 2002. Should the Company be
unable to negotiate acceptable final terms, the agreement could be terminated by
the Company. In connection with this proposed move, certain of the Company's
existing leasehold improvements at its Edison, New Jersey would be impaired.
This impairment would result in a non-cash charge of approximately $900,000 in
the first quarter of the fiscal year ending June 30, 2002.

Employment
Agreements - On July 17, 2001, the Company executed an employment agreement
with Perry B. Molinoff, M.D. effective May 1, 2001 and commencing on September
4, 2001. The agreement expires on the second anniversary of the commencement
date, provided, however, that on the second anniversary of the commencement date
and on each anniversary thereafter, such period shall be automatically extended
for additional one-year periods. Pursuant to the agreement, Dr. Molinoff is
serving as an executive vice president of the Company in charge of research and
development. Under the agreement, Dr. Molinoff was granted options to purchase
245,000 shares of the Company's Common Stock at an exercise price of $3.39.
These options vest

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over the next three anniversaries of the commencement date. The
agreement includes specific termination pay and vesting of stock options under
certain termination events.

On December 13,
2000, the Company entered into a separation agreement with Charles L. Putnam,
who resigned as executive vice president, director and chief operating officer
effective November 30, 2000. Pursuant to the agreement, Mr. Putnam's previously
granted options became fully vested with an expiration date of November 30,
2004. The agreement further provides for benefits as follows:

|o | $250,000 payable in 24 equal semi-monthly
     installments of $10,416.67 commencing on the effective date, less benefit
     deductions, tax withholding and other deductions required by
     law.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                     
|o | Payment by the Company of premiums necessary for
     the continuation of current group health insurance coverage under the
     Federal Law called COBRA for 12 months.                          
|  |                                                                                                                                                                                                     

Effective May
15, 2001, due to an alleged breach, the Company suspended all payments and
benefits. Mr. Putnam has initiated legal action against the Company. Management
believes that the Company has good and meritorious defenses to the action and
the Company intends vigorously to defend the action.

On June 13,
2000, the Company entered into a separation agreement with Edward J. Quilty, who
resigned as president, chairman and chief executive officer on that date.
Pursuant to the agreement, Mr. Quilty's previously granted options become fully
vested with an expiration date of June 13, 2004. The agreement further provides
for benefits as follows:

|o | $400,000 payable in 24 equal monthly
     installments of $16,666.66 less benefit deductions, tax withholding and
     other deductions required by law.                  
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                           
|o | Payment by the Company of premiums necessary for
     the continuation of current group health insurance coverage under the
     Federal Law called COBRA for 18 months.
|  |                                                                                                                                                                           
|o | Continuation of life and disability insurance
     substantially similar to that which Mr. Quilty was receiving immediately
     prior to such resignation for 24 months. 

The statement of operations for the year ended June 30, 2000
reflects $1,073,500 of expense, relating to the option acceleration and the
above separation agreement.

On June 13,
2000, the Board of Directors of the Company appointed Carl Spana, Ph.D. as
president and chief executive officer of the Company. The Board of Directors
also named John K.A. Prendergast to serve as Chairman of the Board of Directors,
at a compensation of $116,000 per year.

On October 12,
1998, the Board of Directors ratified employment agreements with three officers
of the Company, Carl Spana, Ph.D, Stephen T. Wills and Charles Putnam effective
September 11, 1998. Except for Mr. Putnam, pursuant to the agreements, each is
serving as an Executive Vice President of the Company. The agreements expired in
September 2001 and currently new contracts for Carl Spana, Ph.D. and Stephen T.
Wills are being negotiated. Pursuant to the agreements, each officer was granted
options to purchase 50,000 shares of the Companys Common Stock at an
exercise price of $2.50, the closing price of the Companys Common Stock on
September 11, 1998. These options vest over a two-year period with the first 33%
vested immediately, the next 33% vested on the first anniversary of the date of
grant and the remaining 34% vested on the second anniversary of the date of
grant. The agreements included specified termination pay and vesting of stock
options under certain termination events.

License
Agreements -- The Company has three license agreements that require minimum
yearly payments. Future minimum payments under the license agreements are: 2002
- $300,000, 2003 - $300,000, 2004 - $200,000, 2005 - $200,000 and 2006 -
$200,000.

On March 15,
2000 the Company entered into an agreement with Watson Laboratories Inc. (f/k/a
TheraTech, Inc.) to terminate a license and development agreement with Watson
dated March 18, 1998. In connection with the termination, the Company paid
Watson approximately $500,000.

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Legal
Proceedings - The Company is subject to various claims and litigation in the
ordinary course of its business. Management believes that the outcome of such
legal proceedings will not have a material adverse effect on the Company.

On March 14,
2000, the Company announced that it would not be extending the merger
closing date of March 31, 2000 for its previously announced proposed merger
with San Diego-based Molecular Biosystems, Inc. and would not be proceeding with
the merger. The Company's decision not to proceed with the merger was based on
management's view that the merger was not in the best interests of the Company's
stockholders.

On or about
April 28, 2000, Molecular Biosystems commenced a legal action against the
Company and against Evergreen Merger Corporation, a wholly owned subsidiary or
the Company, in the Superior Court of the State of Delaware, County of New
Castle. In the complaint, Molecular Biosystems seeks damages against the Company
and Evergreen arising from the alleged improper termination of the merger
agreement dated November 11, 1999, among Molecular Biosystems, the Company and
Evergreen. Under the merger agreement, Evergreen would have merged with and into
Molecular Biosystems, which would have become a wholly-owned subsidiary of the
Company.

As a consequence
of the claims alleged in the complaint, Molecular Biosystems contends that it is
entitled to an award of damages against the Company and Evergreen in amounts to
be determined at trial, but in any event, at least equal to $1,765,305. This
figure represents the amount of a "breakup fee" of $1,000,000 provided for in
the agreement and $765,305 for the purported costs and expenses allegedly
incurred by Molecular Biosystems in connection with the proposed merger. In
addition, Molecular Biosystems seeks consequential damages in an unstated amount
plus interest and Molecular Biosystems' costs and expenses of the action.

In the Company's
response filed in June of 2000, the Company has denied the material allegations.
Management believes that the Company has good and meritorious defenses to the
action and the Company intends vigorously to defend the action. On January 3,
2001, Alliance Pharmaceutical Corp. (NASDAQ: ALLP) announced that it had
completed its acquisition of Molecular Biosystems. This litigation is currently
in the discovery and deposition phase.

## (5)     STOCKHOLDERS' EQUITY
(DEFICIT):

Series C
Preferred Offering -- As of August 16, 1999, pursuant to the strategic
collaboration agreement with Mallinckrodt (see Note 7), the Company sold 700,000
restricted shares of Series C Convertible Preferred Stock for $13,000,000. The
Series C stock is convertible into 700,000 shares of Common Stock with certain
registration and anti-dilution rights, upon the occurrence of the earlier of
five years or the occurrence of a change in control of the Company (as defined
in the agreement).

Series B
Preferred Offering -- As of April 28, 1998, the Company completed a private
placement of 18,875 shares of Series B Convertible Preferred Stock at a price
per share of $100. The net proceeds to the Company were approximately
$1,600,000, after deducting the finder's fee and other expenses of the Series B
Preferred Offering. The Series B Convertible Preferred Stock has been converted
into 56,818 shares of Common Stock.

Series A
Preferred Offering -- On December 2, 1996, the Company commenced the Series
A Preferred Offering of units at a price of $100,000 per unit, each unit
consisting of 1,000 shares of Series A Convertible Preferred Stock. The final
closing on the Series A Preferred Offering was effective as of May 9, 1997, with
the Company having sold an aggregate total of 137.78 units, representing 137,780
shares of Series A Convertible Preferred Stock, for net proceeds to the Company
of approximately $11,637,000, after deducting commission and other expenses of
the Series A Preferred Offering.

Each share of
Series A Convertible Preferred Stock is convertible at any time, at the optionof
the holder, into the number of shares of Common Stock equal to $100 divided by
the Series A Conversion Price. The current Series A Conversion Price
is $4.67, so each share of Series A Convertible Preferred Stock is currently
convertible into approximately 21.4 shares of Common Stock. The Series A
Conversion Price is

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subject to adjustment, under certain circumstances, upon the
sale or issuance of Common Stock for consideration per share less than either
(i) the 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 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.

Common Stock
Transactions - In a private placement of Common Stock and warrants in
September and October 2000, the Company sold 2,532,368 shares of its Common
Stock to a total of nine investors in two tranches: 1,800,000 shares at $6.00
per share and 732,368 shares at $5.94 per share for total net proceeds of
approximately $14 million. For every five shares purchased, the investors
received an immediately exercisable five-year warrant to purchase one share of
Common Stock at 125% of the closing price. As a result, the Company issued
warrants to purchase 360,000 shares at an exercise price of $7.50 per share and
warrants to purchase 146,472 shares at an exercise price of $7.42 per share.

In connection
with the private placement, the Company paid a finder's fee of $1,060,391 and
issued five year warrants to the finder to purchase 216,000 shares of Common
Stock at $6.60 per share and 87,884 shares of Common Stock at $6.53 per share.

In March 1999,
the Company sold in a private placement, an aggregate of 514,215 shares of its
Common Stock and 565,629 detachable five-year non-redeemable warrants. Each
Warrant is exercisable for one share of Common Stock at an exercise price equal
to the per share Common Stock purchase price. The Common Stock purchase price,
which was based on the average closing bid price for the five business days
immediately prior to the respective closing dates, ranged from $4.48 per share
to $5.06 per share. The Company received net proceeds of approximately
$2,175,000, which was used for working capital and research and development
programs.

In connection
with the private placement, the Company paid compensation to third parties
consisting of an aggregate of approximately $222,000 in cash and agreed to issue
five-year warrants to purchase an aggregate of 114,073 shares of Common Stock at
not less than the exercise prices of the warrants sold in the private placement.

In February
1999, the Company sold in a private placement 651,750 shares of its Common
Stock, at $4.00 per share and 651,750 detachable five-year non-redeemable
warrants. Each Warrant is exercisable for one share of Common Stock at an
exercise price of $4.70. The Company received net proceeds of approximately
$2,350,000, which was used for working capital and research and development
programs.

In connection
with the private placement, the Company paid compensation to third parties
consisting of an aggregate of approximately $248,000 in cash and agreed to issue
five-year warrants to purchase an aggregate of 194,600 shares of Common stock at
$4.70.

On December 31,
1998, the Company sold in a private placement 287,500 shares of its Common
Stock, at $4.00 per share and 287,500 detachable five-year non-redeemable
warrants. Each Warrant is exercisable for one share of Common Stock at an
exercise price of $4.375 per share. The Company received net proceeds of
approximately $1,000,000, which was used for working capital and research and
development programs.

In connection
with the private placement, the Company paid compensation to third parties
consisting of an aggregate of $92,000 in cash and agreed to issue five-year
warrants to purchase an aggregate of 60,000 shares of Common stock at prices
ranging from $3.75 to $4.375.

On July 8, 1998,
the Company sold TheraTech 363,636 shares of Common stock at a sale price of
$5.50 per share or $2,000,000. The net proceeds of the offering, approximately
$1,964,000, were used for research and development of the dosage form of PT-14,
the Company's peptide hormone product for the treatment of male erectile
dysfunction.

In the fiscal
year ended June 30, 1999, the Company issued 25,000 shares of Common Stock in
exchange for services and recorded compensation expense for the fair market
value of $5.094 per share.

47

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(Financial)

Outstanding
Stock Purchase Warrants -- At June 30, 2001, the Company had the following
warrants outstanding.

`Common            Exercise Price            Latest
                     Stock Shares            per Share         Termination Date
                     ------------            ---------         ----------------
                        48,387             $      .22                9/13/05
                        26,751                   2.64                2/15/06
                         2,334                   5.43                2/15/06
                       212,329                   5.43                6/25/06
                        69,124                   8.68                6/24/02
                       278,958                  5.137                11/9/02
                       978,850           4.375 - 4.70               12/31/03
                       679,702            4.48 - 5.57                3/12/04
                        22,000                    .01                3/15/05
                       576,000            6.60 - 7.50               10/05/05
                       234,359           6.53 - 7.422               11/20/05
                         5,000                   7.00                6/05/05
                        15,000                   4.00               12/15/10
                        17,052            6.45 - 6.56                 5/9/02
                    ----------         --------------
         Total       3,165,846          $ .01 - $8.68
                    ==========         ==============`

In December
2000, the Company issued warrants to purchase 15,000 shares of its Common Stock
at $4.00 per share to the Wistar Institute of Anatomy and Biology, as part of
the consideration for an agreement with Wistar to amend a technology license
which Wistar previously granted to the Company. The warrants expire on December
15, 2010. The fair value of these warrants, of approximately $31,000 pursuant to
SFAS No. 123 as calculated by the Black-Scholes option pricing model, has been
charged to expense in the statement of operations.

Stock Option
Plans -- The Company has one stock option plan currently in effect under
which future grants may be issued, the 1996 Stock Option Plan, as amended,
approved by the Company's stockholders on November 15, 2000, for which 5,000,000
shares of Common Stock are reserved. The Company has also granted options under
agreements with individuals, and not under any plan. On March 24, 1998 the
Company's stockholders approved options to two executive officers to purchase a
total of 148,392 shares of Common Stock at an exercise price of $1.00 per share,
which options replaced previously granted options to purchase the same number of
shares at an exercise price of $5.42 per share.

The Company
applies disclosures required by SFAS 123. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under SFAS 123, the Company's net loss and basic and
diluted net loss attributable to common stockholders per share for the year
ended June 30, 2001 would have been $12,208,350 and $1.21 respectively. Net loss
and basic and diluted net loss attributable to common stockholders per share for
the year ended June 30, 2000 would have been $10,438,724 and $1.40,
respectively, while net loss and basic and diluted net loss attributable to
common stockholders per share for the year ended June 30, 1999 would have been
$12,883,151 and $2.17, respectively. Because the SFAS 123 method of accounting
has not been applied to options granted prior to September 1, 1995, the
resulting pro forma compensation cost, and thus pro forma net loss, may not be
representative of that to be expected in future years. The weighted average fair
market value at the date of grant for options granted during 2001, 2000 and 1999
is estimated as $2.93, $2.41 and $1.29 per share, respectively, using the
Black-Scholes option-pricing model. The assumptions used in the Black-Scholes
model are as follows: dividend yield of 0%, expected

48

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(Financial)

volatility of 60%, weighted average risk-free interest rate of
5.78% in 2001, 6.47% in 2000 and 4.66% in 1999, and an expected option life of 7
years.

The status of
the plans and individual agreements, including predecessor and replacement plans
under which options remain outstanding, during the three years ended June 30,
2001, was as follows:

`Number of shares     Range of prices   Weighted average
                                        subject to options       per share      Prices per share
                                        ------------------       ---------      ----------------
      Outstanding at June 30, 1998            1,144,136       $.20 - $360.00              $ 6.92
                                                                                          ======
         Granted                                940,088       $2.50 - $5.813
         Expired or canceled                   (38,559)       $.22 - $360.00
         Exercised                             (70,257)                 $.22
                                               --------       --------------
      Outstanding at June 30, 1999            1,975,408       $.20 - $360.00              $ 4.26
                                                                                          ======
         Granted                              1,238,210        $.20 - $6.625
         Expired or canceled                  (124,264)       $2.50 - $10.85
         Exercised                             (80,854)         $.22 - $6.25
                                               --------         ------------
      Outstanding at June 30, 2000            3,008,500       $.20 - $360.00               $3.92
                                              =========       ==============               =====
         Granted                                983,125       $2.86 - $6.063
         Expired or canceled                  (119,434)        $3.50 - $6.00
         Exercised                            (487,016)        $.20 - $3.875
                                              ---------        -------------
      Outstanding at June 30, 2001            3,385,175       $.22 - $360.00               $4.14
                                              =========       ==============               =====
      Exercisable at June 30, 2001            2,518,940       $.22 - $360.00               $4.27
                                              =========       ==============               =====`

## (6)     INCOME
TAXES:

The Company has
had no income tax expense or benefit since inception because of operating
losses. Deferred tax assets and liabilities are determined based on the
estimated future tax effect of differences between the financial statements and
tax reporting basis of assets and liabilities, given the provisions of the tax
laws. Based on the Company's historical losses, a valuation allowance for the
net deferred tax assets has been recorded at June 30, 2001.

The Tax Reform
Act of 1986 imposes limitations on the use of net operating loss carryforwards
if certain stock ownership changes occur. As a result of past changes in
majority ownership, the Company most likely will not be able to fully realize
the benefit of its net operating loss carryforwards.

Significant
components of the Palatin's deferred tax asset for federal and state purposes is
as follows:

`June 30
                                          ----------------------------------
                                                 2001              2000
                                          -----------------  ---------------
Net operating loss carryforwards.........     $17,820,000      $14,855,000
Research and development tax credits.....         716,000          551,000
Non-deductible expenses..................         780,000          276,000
                                          -----------------  ---------------
                                               19,316,000       15,682,000
Valuation Allowances.....................     (19,316,000)     (15,682,000
                                          -----------------  ---------------
Net deferred tax assets..................    $          -      $         -
                                          =================  ===============`

A valuation
allowance was established for 100% of the deferred tax assets as realization of
such benefits is not assured.

During 2001, the
Company sold New Jersey State operating loss carryforwards and research and
development credits, which resulted in the recognition of a $325,152 tax
benefit.

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## (7)     GRANTS AND
CONTRACTS:

The Company
applies for and has received grants and contracts under the Small Business
Innovative Research ("SBIR") program and other federally funded grant and
contract programs. Since inception, approximately $3,657,000 of the Company's
revenues has been derived from federally or state funded grants and contracts.
Under federal grants and contracts, there are no royalties or other forms of
repayment; however, in certain limited circumstances the government can acquire
rights to technology which is not being commercially exploited.

On August 16,
1999, the Company entered into a Strategic Collaboration Agreement with
Mallinckrodt, Inc., a large international healthcare products company, to
jointly develop and market LeuTech. In October 2000, Tyco International, Ltd.
acquired Mallinckrodt. Under the terms of the agreement, Mallinckrodt paid a
$500,000 license fee (see Note 2) and purchased 700,000 restricted shares of
Series C Convertible Preferred Stock for $13,000,000 (see Note 5). In addition,
Mallinckrodt agreed to make milestone payments totaling $10,000,000 upon FDA
approval of the first LeuTech indication and attainment of sales goals following
product launch, reimburse the Company for 50% of all ongoing LeuTech development
costs and pay the Company a transfer price on each LeuTech product unit and a
royalty on Mallinckrodt's future net sales of LeuTech. After offsetting the
$2,000,000 subordinated note to Mallinckrodt including interest of $46, 849, the
Company received net proceeds of $11, 453,151 on August 17, 1999. During the
years ended June 30, 2001 and 2000, the Company recognized $1,400,000 and
$4,150,000 respectively, as contract revenue related to the development costs of
LeuTech.

The Company is
currently negotiating an amendment to the agreement with Mallinckrodt to provide
for, among other things, additional funding by Mallinckrodt, amending the
reimbursement and expense sharing provisions and payment schedules, as well as
providing Mallinckrodt with additional rights.

## (8)     LICENSING FEES AND
ROYALTIES:

In December
1996, the Company entered into an Option Agreement with Nihon Medi-Physics
("Nihon"), pursuant to which the Company received, in January 1997, an initial
payment of $1,000,000 before Japanese withholding taxes of $100,000 (the
"Initial Payment"). The Company has accounted for the Initial Payment by
recognizing license fee revenue of $350,000, which represents the non-refundable
portion of the Initial Payment, and deferred license fee revenue of $550,000.

The Company
recognized $550,000 in license fees as revenue during the quarter ended December
31, 1998 related to its license option agreement with Nihon. This $550,000 was
recognized pursuant to a determination by both Nihon and the Company to change
the development emphasis and terminate the original agreement. The Company was
not required to perform any future services under this agreement.

In May 1997, the
Company entered into a License Agreement with The Wistar Institute of Anatomy
and Biology (Wistar) related to the antibody and cell line used for
LeuTech for a defined field of use. The agreement includes future payments to
Wistar based on milestones. The Company paid $50,000 in license fees during the
year ended June 30, 1999, such fee was accounted for as an expense in the
statement of operations during the year ended June 30, 1999.

On March 18,
1998, the Company entered into a License and Development Agreement with
TheraTech, Inc. (TheraTech) pursuant to which the Company paid, in
July 1998, $500,000 to TheraTech as a license fee. Such license fee was
accounted for as an expense in the statement of operations during the year ended
June 30, 1998. The development agreement includes additional payments to
TheraTech related to the joint effort under the product development program.

On March 31,
1998, the Company entered into a License Agreement with Competitive
Technologies, Inc. (CTI) pursuant to which the Company paid, in July
1998, $50,000 to CTI as a license fee. Such license fee was accounted for as an
expense in the statement of operations during the year ended June 30, 1998. The
agreement includes future payments to CTI in subsequent years based on certain
factors. The Company paid

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(Financial)

$50,000 in license fees during the year ended June 30, 1999,
such fee was accounted for as an expense in the statement of operations during
the year ended June 30, 1999.

On August 16,
1999, the Company received an exclusive worldwide license fee of $500,000
(excluding Europe) for sales, marketing and distribution of LeuTech from
Mallinckrodt, Inc. (See Note 7)

## (9)     CONSOLIDATED
QUARTERLY FINANCIAL DATA -- UNAUDITED:

The following
table provides quarterly data for the fiscal years ended June 30, 2001 and 2000.

`Three Months Ended
                                          ----------------------------------------------------
                                          Sept. 30,      Dec. 31,      Mar. 31,      June 30,
                                             2000          2000          2001          2001
                                          ----------   -----------   -----------   -----------
                                               (amounts in thousands except per share data)

Total revenues                            $      897   $       706   $       143   $        42

Total operating expenses                       3,162         3,093         3,013         3,865

Total other income (expense)                      85           278           264           155
                                           ----------   -----------   -----------   -----------
     Loss before income taxes and
       cumulative effect of accounting        (2,180)       (2,109)       (2,606)       (3,668)
       change

Income tax benefit                                 -           325             -             -
                                           ----------   -----------   -----------   -----------
     Loss before cumulative effect of
       accounting change                      (2,180)       (1,784)       (2,606)       (3,668)

Cumulative effect of accounting change          (361)            -             -             -
                                           ----------   -----------   -----------   -----------

Net loss                                  $   (2,541)  $    (1,784)  $    (2,606)  $    (3,668)
                                           ----------   -----------   -----------   -----------

Net loss per share:
   Basic and diluted net loss before
     cumulative effect of accounting      $    (0.27)  $     (0.17)  $     (0.24)  $     (0.33)
     change
   Cumulative effect of accounting             (0.04)            -             -             -
         change
                                           ----------   -----------   -----------   -----------

   Basic and diluted net loss per         $    (0.31)  $     (0.17)  $     (0.24)  $     (0.33)
         common share                      ==========   ===========   ===========   ===========

   Weighted average number of common
     shares outstanding, used in
     computing basic and diluted net
     loss per common share                 8,080,352    10,366,170   11,000,017   11,152,819
                                           ==========   ===========  ===========  ===========`

Amounts for each
of the first three quarters of fiscal 2001 have been restated to give effect for
the implementation of SAB 101 in the fourth quarter retroactively to July 1,
2000. The impact of the change resulted in an increase in total revenues and
corresponding decrease in loss before cumulative effect of change in accounting
principle of $41,667 for each of the quarters ended March 31, December 31, and
September 30 as compared to amounts previously reported in Form 10-Q filed with
the SEC.

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`Three Months Ended
                                          ----------------------------------------------------
                                          Sept. 30,      Dec. 31,      Mar. 31,      June 30,
                                             1999          1999          2000          2000
                                          ----------   -----------   -----------   -----------
                                               (amounts in thousands except per share data)

Total revenues                           $    1,750   $     1,010   $     1,428   $       929

Total operating expenses                      3,218         3,912         3,342         3,205

Total other income (expense)                     46           114           106           110
                                          ----------   -----------   -----------   -----------

Net loss                                 $   (1,422)  $    (2,788)  $    (1,808)  $    (2,166)
                                          ----------   -----------   -----------   -----------
Basic and diluted net loss per
   common share                          $    (0.20)  $     (0.38)  $     (0.24)  $     (0.28)
                                          ==========   ===========   ===========   ===========
Weighted average number of common
   shares outstanding, used in
   computing basic and diluted net loss
   per common share                       7,203,601     7,242,544     7,461,321     7,861,652
                                          ==========   ===========   ===========   ===========`

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

None.

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# PART III

The information required by Part III of Form 10-K (Item 10
 Directors and Executive Officers of the Registrant, Item 11 
Executive Compensation, Item 12  Security Ownership of Certain Beneficial
Owners and Management and Item 13  Certain Relationships and Transactions)
is incorporated by reference from our definitive proxy statement relating to the
2001 Annual Meeting of Stockholders, which we will file with the SEC within 120
days after our June 30, 2001 fiscal year end.

# PART IV

## Item 14. Exhibits, Financial
Statement Schedules and Reports on Form 8-K.

## (a) Documents filed as part of the
report:

| | 1. | Financial statements: the following
     financial statements are filed as a part of this report under Item 8--
     Financial Statements and Supplementary Data:                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                        
| |    | - Report of
     Independent Public Accountants                                                                                                                                                                                                                                                                        
| |    | -
     Consolidated Balance Sheets                                                                                                                                                                                                                                                                                     
| |    | -
     Consolidated Statements of Operations                                                                                                                                                                                                                                                                           
| |    | -
     Consolidated Statements of Stockholders' Equity (Deficit)                                                                                                                                                                                                                                                       
| |    | -
     Consolidated Statements of Cash Flows                                                                                                                                                                                                                                                                           
| |    | - Notes to
     Consolidated Financial Statements                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                        
| | 2. | Financial statement schedules:
     none.                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                        
| | 3. | Exhibits: The following exhibits are
     filed with this report, or incorporated by reference as noted. Exhibits
     filed with this report are marked with an asterisk (*). Exhibits which
     consist of or include a management contract or compensatory plan or
     arrangement are marked with an obelisk ().

`No.  Description
---- -----------
2.01 Agreement and Plan of Merger dated as of November 11, 1999, between
     Palatin, Molecular Biosystems, Inc. and Evergreen Merger Corporation.
     Incorporated by reference to Exhibit 99.2 of our current report on Form 8-K
     dated November 12, 1999, filed with the SEC on November 30, 1999. We agree
     to furnish supplementally to the SEC upon request a copy of any omitted
     schedule.

3.01 Certificate of incorporation. Incorporated by reference to Exhibit 3.01 of
     our Form 10-K for the year ended June 30, 2000, filed with the SEC on
     September 29, 2000.`

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`No.  Description
---- -----------
3.02 Bylaws. Incorporated by reference to Exhibit 3.2 of our Form 10-QSB for the
     quarter ended December 31, 1997, filed with the SEC on February 13, 1998.

10.01 RhoMed Incorporated 1995 Employee Incentive Stock Option Plan.
     Incorporated by reference to Exhibit 10.04 of our annual report on Form
     10-KSB for the period ended June 30, 1996, filed with the SEC on September
     27, 1996.

10.02 1996 Stock Option Plan, as amended effective July 1, 1999. Incorporated by
     reference to Exhibit 10.02 of our amended annual report on Form 10-KSB/A
     for the period ended June 30, 1999, filed with the SEC on December 28,
     1999.

10.03 Carl Spana Stock Option Agreement. Incorporated by reference to Exhibit
     4.15 of our Form S-8 filed with the SEC on June 17, 1998. +

10.04 Charles L. Putnam Stock Option Agreement. Incorporated by reference to
     Exhibit 4.16 of our Form S-8 filed with the SEC on June 17, 1998. +

10.05 Executive Officers Stock Option Agreement. Incorporated by reference to
     Exhibit 4.18 of our Form S-8 filed with the SEC on June 17, 1998. +

10.06 Employment Agreement dated as of October 9, 1998, between Palatin
     Technologies, Inc. and Charles Putnam. Incorporated by reference to Exhibit
     10.37 of our quarterly report on Form 10-QSB for the period ended September
     30, 1998, filed with the SEC on November 16, 1998. +

10.07 Employment Agreement dated as of October 9, 1998, between Palatin
     Technologies, Inc. and Carl Spana. Incorporated by reference to Exhibit
     10.38 of our quarterly report on Form 10-QSB for the period ended September
     30, 1998, filed with the SEC on November 16, 1998. +

10.08 Employment Agreement dated as of October 9, 1998, between Palatin
     Technologies, Inc. and Stephen T. Wills. Incorporated by reference to
     Exhibit 10.39 of our quarterly report on Form 10-QSB for the period ended
     September 30, 1998, filed with the SEC on November 16, 1998. +

10.09 Employment Agreement dated July 9, 1999 between Palatin Technologies, Inc.
     and Edward J. Quilty. Incorporated by reference to Exhibit 10.09 of our
     annual report on Form 10-KSB for the period ended June 30, 1999, filed with
     the SEC on September 28, 1999.+

10.10 Form of RhoMed Class A Warrant. Incorporated by reference to Exhibit 10.16
     of our annual report on Form 10-KSB for the period ended June 30, 1996,
     filed with the SEC on September 27, 1996.`

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`No.  Description
---- -----------
10.11 Form of Placement Agent Warrant for the RhoMed Class A Offering.
     Incorporated by reference to Exhibit 10.17 of our annual report on Form
     10-KSB for the period ended June 30, 1996, filed with the SEC on September
     27, 1996.

10.12 Form of RhoMed Class B Warrant. Incorporated by reference to Exhibit 10.19
     of our annual report on Form 10-KSB for the period ended June 30, 1996,
     filed with the SEC on September 27, 1996.

10.13 Form of Placement Agent Warrant for the RhoMed Class B Offering.
     Incorporated by reference to Exhibit 10.20 of our annual report on Form
     10-KSB for the period ended June 30, 1996, filed with the SEC on September
     27, 1996.

10.14 Form of Placement Agent Warrant for the RhoMed common stock offering.
     Incorporated by reference to Exhibit 10.22 of our annual report on Form
     10-KSB for the period ended June 30, 1996, filed with the SEC on September
     27, 1996.

10.15 Form of Placement Agent Warrant for the Series A Convertible Preferred
     Stock Offering. Incorporated by reference to Exhibit 10.29 of our
     registration statement on Form S-3, filed with the SEC on November 25,
     1997.

10.16 Convertible Preferred Stock Purchase Agreement dated as of April 28, 1998,
     between Palatin and the named purchasers, relating to Series B convertible
     preferred stock. Incorporated by reference to Exhibit 99.1 of our current
     report on Form 8-K dated April 28, 1998, filed with the SEC May 8, 1998.

10.17 Stock Purchase Agreement dated as of July 6, 1998, between Palatin and
     TheraTech, Inc. Incorporated by reference to Exhibit 99.1 of our current
     report on Form 8-K dated July 8, 1998, filed with the SEC on July 9, 1998.

10.18 Lease between Carnegie 214 Associates Limited Partnership and Palatin
     Technologies, Inc. dated May 6, 1997. Incorporated by reference to Exhibit
     10.26 of our annual report on Form 10-KSB for the year ended June 30, 1997,
     filed with the SEC on September 26, 1997.`

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`No.  Description
---- -----------
10.19 Lease between WHC-Six Real Estate, L.P. and Palatin Technologies, Inc.
     dated March 13, 1997. Incorporated by reference to Exhibit 10.27 of our
     Form 10-KSB for the year ended June 30, 1997, filed with the SEC on
     September 26, 1997.

10.20 Consulting Agreement between Palatin and Summercloud Bay, Inc.
     Incorporated by reference to Exhibit 10.36 of our annual report on Form
     10-KSB/A, Amendment No. 1, dated June 30, 1998, filed with the SEC on
     October 2, 1998. +

10.21 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 period ended June 30,
     1999, filed with the SEC on December 28, 1999.

10.22 Form of warrant and registration rights for the warrant issued in April
     2000 with an expiration date of March 15, 2005. Incorporated by reference
     to Exhibit 10.22 of our Form 10-K for the year ended June 30, 2000, filed
     with the SEC on September 29, 2000.

10.23 Separation Agreement dated as of June 13, 2000 between Palatin
     Technologies, Inc. and Edward J. Quilty. Incorporated by reference to
     Exhibit 10.23 of our Form 10-K for the year ended June 30, 2000, filed with
     the SEC on September 29, 2000. +

10.24 Letter agreement dated as of July 31, 2000 between Palatin Technologies,
     Inc. and Robert G. Moussa. Incorporated by reference to Exhibit 10.24 of
     our Form 10-K for the year ended June 30, 2000, filed with the SEC on
     September 29, 2000. +

10.25 Letter agreement dated as of July 31, 2000 between Palatin Technologies,
     Inc. and James T. O'Brien. Incorporated by reference to Exhibit 10.25 of
     our Form 10-K for the year ended June 30, 2000, filed with the SEC on
     September 29, 2000. +

10.26 Form of stock purchase agreement for our September-October 2000 private
     placement. Incorporated by reference to Exhibit 10.1 of our report on Form
     10-Q for the quarter ended September 30, 2000, filed on November 14,
     2000.

10.27 Form of registration rights agreement for the September-October 2000
     private placement. Incorporated by reference to Exhibit 10.2 of the
     registrant's report on Form 10-Q for the quarter ended September 30, 2000,
     filed on November 14, 2000.

10.28 Form of warrant issued to purchasers in the September-October 2000 private
     placement. Incorporated by reference to Exhibit 10.3 of the registrant's
     report on Form 10-Q for the quarter ended September 30, 2000, filed on
     November 14, 2000.

10.29 Separation Agreement and General Release between Palatin and Charles
     Putnam, dated as of November 30, 2000. Incorporated by reference to Exhibit
     10.1 of our report on Form 10-Q for the quarter ended December 31, 2000,
     filed on February 14, 2001. +

10.30 Employment Agreement dated as of July 17, 2001, between Palatin
     Technologies, Inc. and Perry B. Molinoff. + *

21   Subsidiaries of the registrant. *

23.01 Consent of Arthur Andersen LLP, Independent Auditors, with respect to the
     financial statements of Palatin. *
___________________________________________
*    Exhibit filed with this report.
+    Management contract`

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## (b) Reports on Form 8-K

During the last quarter of the fiscal year ended June 30, 2001,
we filed the following reports on Form 8-K: one report, under Item 5, dated May
2, 2001, relating to the progress on our product development programs and to
report our third quarter 2001 results of operations. One report, under Item 9,
dated June 1, 2001 to announce the plan to hold a teleconference originally
scheduled for June 5, 2001. One report, under Item 9, dated June 4, 2001 to
announce the rescheduling of the June 5, 2001 teleconference to June 7, 2001.

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# 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 28, 2001

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

|Signature                 | Title                                                | Date              
|------------------------- | ---------------------------------------------------- | ------------------
|                          |                                                      |                   
|/s/ Carl Spana            | President, Chief Executive Officer and Director      | September 28, 2001
|Carl Spana                | (principal executive officer)                        |                   
|                          |                                                      |                   
|/s/ Stephen T. Wills      | Executive Vice President and Chief Financial Officer | September 28, 2001
|Stephen T. Wills          | (principal financial and accounting officer)         |                   
|                          |                                                      |                   
|/s/ John K.A. Prendergast | Chairman and Director                                | September 28, 2001
|John K.A. Prendergast     |                                                      |                   
|                          |                                                      |                   
|/s/ Robert K. deVeer, Jr. | Director                                             | September 28, 2001
|Robert K. deVeer, Jr.     |                                                      |                   
|                          |                                                      |                   
|/s/ Kevin S. Flannery     | Director                                             | September 28, 2001
|Kevin S. Flannery         |                                                      |                   
|                          |                                                      |                   

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|/s/ Zola P. Horovitz | Director | September 28, 2001
|-------------------- | -------- | ------------------
|Zola P. Horovitz     |          |                   
|                     |          |                   
|/s/ Robert I. Taber  | Director | September 28, 2001
|Robert I. Taber      |          |                   

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# EXHIBIT INDEX

`No.  Description
---- -----------

2.01 Agreement and Plan of Merger dated as of November 11, 1999, between
     Palatin, Molecular Biosystems, Inc. and Evergreen Merger Corporation.
     Incorporated by reference to Exhibit 99.2 of our current report on Form 8-K
     dated November 12, 1999, filed with the SEC on November 30, 1999. We agree
     to furnish supplementally to the SEC upon request a copy of any omitted
     schedule.

3.01 Certificate of incorporation. Incorporated by reference to Exhibit 3.01 of
     our Form 10-K for the year ended June 30, 2000, filed with the SEC on
     September 29, 2000.

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

10.01 RhoMed Incorporated 1995 Employee Incentive Stock Option Plan.
     Incorporated by reference to Exhibit 10.04 of our annual report on Form
     10-KSB for the period ended June 30, 1996, filed with the SEC on September
     27, 1996.

10.02 1996 Stock Option Plan, as amended effective July 1, 1999. Incorporated by
     reference to Exhibit 10.02 of our amended annual report on Form 10-KSB/A
     for the period ended June 30, 1999, filed with the SEC on December 28,
     1999.

10.03 Carl Spana Stock Option Agreement. Incorporated by reference to Exhibit
     4.15 of our Form S-8 filed with the SEC on June 17, 1998. +

10.04 Charles L. Putnam Stock Option Agreement. Incorporated by reference to
     Exhibit 4.16 of our Form S-8 filed with the SEC on June 17, 1998. +

10.05 Executive Officers Stock Option Agreement. Incorporated by reference to
     Exhibit 4.18 of our Form S-8 filed with the SEC on June 17, 1998. +

10.06 Employment Agreement dated as of October 9, 1998, between Palatin
     Technologies, Inc. and Charles Putnam. Incorporated by reference to Exhibit
     10.37 of our quarterly report on Form 10-QSB for the period ended September
     30, 1998, filed with the SEC on November 16, 1998. +

10.07 Employment Agreement dated as of October 9, 1998, between Palatin
     Technologies, Inc. and Carl Spana. Incorporated by reference to Exhibit
     10.38 of our quarterly report on Form 10-QSB for the period ended September
     30, 1998, filed with the SEC on November 16, 1998. +

10.08 Employment Agreement dated as of October 9, 1998, between Palatin
     Technologies, Inc. and Stephen T. Wills. Incorporated by reference to
     Exhibit 10.39 of our quarterly report on Form 10-QSB for the period ended
     September 30, 1998, filed with the SEC on November 16, 1998. +

10.09 Employment Agreement dated July 9, 1999 between Palatin Technologies, Inc.
     and Edward J. Quilty. Incorporated by reference to Exhibit 10.09 of our
     annual report on Form 10-KSB for the period ended June 30, 1999, filed with
     the SEC on September 28, 1999.+

10.10 Form of RhoMed Class A Warrant. Incorporated by reference to Exhibit 10.16
     of our annual report on Form 10-KSB for the period ended June 30, 1996,
     filed with the SEC on September 27, 1996.

10.11 Form of Placement Agent Warrant for the RhoMed Class A Offering.
     Incorporated by reference to Exhibit 10.17 of our annual report on Form
     10-KSB for the period ended June 30, 1996, filed with the SEC on September
     27, 1996.

10.12 Form of RhoMed Class B Warrant. Incorporated by reference to Exhibit 10.19
     of our annual report on Form 10-KSB for the period ended June 30, 1996,
     filed with the SEC on September 27, 1996.

10.13 Form of Placement Agent Warrant for the RhoMed Class B Offering.
     Incorporated by reference to Exhibit 10.20 of our annual report on Form
     10-KSB for the period ended June 30, 1996, filed with the SEC on September
     27, 1996.

10.14 Form of Placement Agent Warrant for the RhoMed common stock offering.
     Incorporated by reference to Exhibit 10.22 of our annual report on Form
     10-KSB for the period ended June 30, 1996, filed with the SEC on September
     27, 1996.

10.15 Form of Placement Agent Warrant for the Series A Convertible Preferred
     Stock Offering. Incorporated by reference to Exhibit 10.29 of our
     registration statement on Form S-3, filed with the SEC on November 25,
     1997.

10.16 Convertible Preferred Stock Purchase Agreement dated as of April 28, 1998,
     between Palatin and the named purchasers, relating to Series B convertible
     preferred stock. Incorporated by reference to Exhibit 99.1 of our current
     report on Form 8-K dated April 28, 1998, filed with the SEC May 8, 1998.

10.17 Stock Purchase Agreement dated as of July 6, 1998, between Palatin and
     TheraTech, Inc. Incorporated by reference to Exhibit 99.1 of our current
     report on Form 8-K dated July 8, 1998, filed with the SEC on July 9, 1998.

10.18 Lease between Carnegie 214 Associates Limited Partnership and Palatin
     Technologies, Inc. dated May 6, 1997. Incorporated by reference to Exhibit
     10.26 of our annual report on Form 10-KSB for the year ended June 30, 1997,
     filed with the SEC on September 26, 1997.

10.19 Lease between WHC-Six Real Estate, L.P. and Palatin Technologies, Inc.
     dated March 13, 1997. Incorporated by reference to Exhibit 10.27 of our
     Form 10-KSB for the year ended June 30, 1997, filed with the SEC on
     September 26, 1997.

10.20 Consulting Agreement between Palatin and Summercloud Bay, Inc.
     Incorporated by reference to Exhibit 10.36 of our annual report on Form
     10-KSB/A, Amendment No. 1, dated June 30, 1998, filed with the SEC on
     October 2, 1998. +

10.21 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 period ended June 30,
     1999, filed with the SEC on December 28, 1999.

10.22 Form of warrant and registration rights for the warrant issued in April
     2000 with an expiration date of March 15, 2005. Incorporated by reference
     to Exhibit 10.22 of our Form 10-K for the year ended June 30, 2000, filed
     with the SEC on September 29, 2000.

10.23 Separation Agreement dated as of June 13, 2000 between Palatin
     Technologies, Inc. and Edward J. Quilty. Incorporated by reference to
     Exhibit 10.23 of our Form 10-K for the year ended June 30, 2000, filed with
     the SEC on September 29, 2000. +

10.24 Letter agreement dated as of July 31, 2000 between Palatin Technologies,
     Inc. and Robert G. Moussa. Incorporated by reference to Exhibit 10.24 of
     our Form 10-K for the year ended June 30, 2000, filed with the SEC on
     September 29, 2000. +

10.25 Letter agreement dated as of July 31, 2000 between Palatin Technologies,
     Inc. and James T. O'Brien. Incorporated by reference to Exhibit 10.25 of
     our Form 10-K for the year ended June 30, 2000, filed with the SEC on
     September 29, 2000. +

10.26 Form of stock purchase agreement for our September-October 2000 private
     placement. Incorporated by reference to Exhibit 10.1 of our report on Form
     10-Q for the quarter ended September 30, 2000, filed on November 14,
     2000.

10.27 Form of registration rights agreement for the September-October 2000
     private placement. Incorporated by reference to Exhibit 10.2 of our report
     on Form 10-Q for the quarter ended September 30, 2000, filed on November
     14, 2000.

10.28 Form of warrant issued to purchasers in the September-October 2000 private
     placement. Incorporated by reference to Exhibit 10.3 of our report on Form
     10-Q for the quarter ended September 30, 2000, filed on November 14, 2000.

10.29 Separation Agreement and General Release between Palatin and Charles
     Putnam, dated as of November 30, 2000. Incorporated by reference to Exhibit
     10.1 of our report on Form 10-Q for the quarter ended December 31, 2000,
     filed on February 14, 2001. +

10.30 Employment Agreement dated as of July 17, 2001, between Palatin
     Technologies, Inc. and Perry B. Molinoff. + *

21   Subsidiaries of the registrant. *

23.01 Consent of Arthur Andersen LLP, Independent Auditors, with respect to the
     financial statements of Palatin. *
___________________________________________
*    Exhibit filed with this report.
+    Management contract`