To date, we have generated no revenues from the sale of any approved products. Unless and until we receive approval from the U.S. Federal Drug Administration and other regulatory authorities for our other product candidates, we cannot sell our other products and will not have product ~~revenues.~~revenues from them. Therefore, for the foreseeable future, we will have to fund all of our operations and capital expenditures from net proceeds from the sale of ~~future offerings~~NeutroSpec products and from cash, cash equivalents and investments on hand. We will need to seek additional sources of financing, which may not be available on favorable terms, if at all. If we do not succeed in raising additional funds on acceptable terms, we may be unable to complete planned pre-clinical and clinical trials or obtain approval of our product candidates from the FDA and other regulatory authorities. In addition, we could be forced to discontinue product development, reduce or forego sales and marketing efforts and forego attractive business opportunities, which ~~will~~would have a material adverse effect on our business.

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

We are ~~a development-stage~~an emerging company and have not yet demonstrated our ability to perform the functions necessary for the continued success of the commercialization of NeutroSpec or the successful commercialization of any of our other product candidates. The successful commercialization of our other product candidates will require us to perform a variety of functions, including:

~~continuing to undertake pre-clinical development and clinical trials;~~

~~participating in regulatory approval processes;~~

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	•	formulating and manufacturing products; ~~conducting sales and marketing activities; and~~ ~~obtain additional capital.~~
	•	conducting sales and marketing activities; and
	•	obtain additional capital.

Our operations have been limited to organizing and staffing our Company, acquiring, developing and securing our proprietary technology and undertaking pre-clinical trials and clinical trials of our principal product candidates. These operations provide a limited basis for you to assess our ability to commercialize our product candidates and the advisability of investing in our common stock.

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

Our other product candidates are at various stages of research and development, will require regulatory approval, 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~~NeutroSpec for other indications. PT-141 and MIDAS products will require significant further research, development and testing. You should evaluate ~~Palatin~~us in light of the uncertainties, delays, difficulties and expenses commonly experienced by early stage biopharmaceutical companies, which may include unanticipated problems and additional costs relating to:


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

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The regulatory approval process is lengthy, expensive and uncertain, and may prevent us from obtaining the ~~research, development and testing of products in animals and humans;~~

~~product~~ approval ~~or clearance;~~

~~regulatory compliance;~~

~~good manufacturing practices;~~

~~intellectual property rights;~~

~~product introduction; and~~

~~marketing and competition.~~

we require.

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

~~completion of pre-clinical laboratory tests, pre-clinical trial and formulation studies;~~

~~submission to the FDA of an investigational new drug application, or IND, for a new drug or antibiotic, which must become effective before clinical trials may begin;~~

•

completion of pre-clinical laboratory tests, pre-clinical trial and formulation studies;

•

submission to the FDA of an investigational new drug application, or IND, which must become effective before clinical trials may begin;

•

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

~~the submission of a new drug application, or NDA, to the FDA; and~~

~~FDA review and approval of the NDA before any commercial marketing, sale or shipment of the drug.~~

Pre-clinical tests include laboratory evaluation of product chemistry formulation and stability, as well as studies to evaluate toxicity. The results of pre-clinical testing together with manufacturing information and analytical data are submitted to the FDA as part of an IND application. The FDA requires a 30-day waiting period after the filing of each IND application before clinical trials may begin, in order to ensure that human research subjects will not be exposed to unreasonable health risks. At any time during this 30-day period or at any time thereafter, the FDA may halt proposed or ongoing clinical trials, or may authorize trials only on specified terms. The IND application process may become extremely costly and substantially delay development of our products. Moreover, positive results of pre-clinical tests will not necessarily indicate positive results in clinical trials.

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~~Clinical trials to support new drug applications are typically conducted in three sequential phases that may overlap. These phases generally include the following:~~

~~Phase I: The drug is usually first introduced into healthy humans or, on occasion, into patients, and is tested for safety, dosage tolerance, absorption, distribution, excretion and metabolism.~~

~~Phase II: The drug is introduced into a limited patient population to:~~

~~– assess the~~ efficacy of the drug ~~in specific, targeted indications;~~for each proposed indication;

•

~~– assess dosage tolerance~~the submission of a new drug application, or NDA, to the FDA; and ~~optimal dosage; and~~

•

~~– identify possible adverse effects~~FDA review and ~~safety risks.~~approval of the NDA before any commercial marketing or sale.

Phase III: These are commonly referred to as pivotal studies. If a compound is found to have an acceptable safety profile and to be potentially effective in Phase II clinical trials, new clinical trials will be initiated to further demonstrate clinical efficacy, optimal dosage and safety within an expanded and diverse patient population at geographically dispersed clinical study sites.

Clinical testing must meet requirements for Institutional Review Board, or IRB, oversight, informed consent and good clinical practices. The FDA, and the IRB at each institution at which a clinical trial is being performed, may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health risk.

The results of product development, pre-clinical studies and clinical studies are submitted to the FDA as part of a ~~new drug application, or~~ NDA. The NDA also must contain extensive manufacturing information. Once the submission has been accepted for filing, the FDA generally has 180 days to review the application and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved, but the FDA is not bound by the recommendation of an advisory committee. The FDA may deny or delay approval of applications that do not meet applicable regulatory criteria or if the FDA determines that the clinical data do not adequately establish the safety and efficacy of the drug. Upon approval, a drug candidate may be marketed only in those dosage forms and for those indications approved in the NDA. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-market regulatory standards is not maintained or if problems occur after the product reaches the marketplace. In addition, the FDA may require post-marketing studies, referred to as Phase IV4 studies, to monitor the effect of approved products, and may limit further marketing of the product based on the results of these post-market studies. The FDA has broad post-market regulatory and enforcement powers, including the ability to levy fines and civil penalties, suspend or delay issuance of approvals, seize or recall products, and withdraw approvals.

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Satisfaction of FDA pre-market approval requirements for new drugs typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or disease. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon our activities. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market.

The FDA has required specific post-marketing studies for NeutroSpec, including additional clinical studies with pediatric patients and patients with specified conditions, and additional testing and development of assays. These post-marketing studies must be completed by various deadlines over the next two years.

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

With respect to post-market product advertising and promotion, the FDA imposes a number of complex regulations on entities that advertise and promote pharmaceuticals, which include, among others, standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet. The FDA has very broad enforcement authority under the Federal Food Drug and Cosmetic Act, and failure to abide by these regulations can result in penalties including the issuance of a warning letter directing us to correct deviations from FDA standards, a requirement that future advertising and promotional materials be pre-cleared by the FDA, and state and federal civil and criminal investigations and prosecutions.

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

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

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

Our rights to a key antibody used in ~~LeuTech~~NeutroSpec are dependent upon an exclusive license agreement with The Wistar Institute of Biology and Anatomy. Our rights to technology related to PT-141 are dependent upon an exclusive field-of-use 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 December 1999, the FDA accepted our LeuTech BLA for the diagnosis of appendicitis in patients with equivocal signs and symptoms. In July 2000, the FDA Medical Imaging Drugs Advisory Committee (MIDAC) unanimously voted that LeuTech is safe and effective for use in the diagnosis of appendicitis in patients with equivocal signs and symptoms and that the data presented support the clinical utility of LeuTech in managing these patients. In September 2000, we received a complete response letter from the FDA where they determined that the efficacy and safety data were complete, yet additional manufacturing and process validation data were required prior to final approval. We are working to resolve the outstanding issues. We commenced the BLA amendment filings to the FDA in the first half of calendar year 2003 and anticipate remitting the final BLA amendment filing to the FDA in the fourth quarter of calendar year 2003. We expect to receive a complete response from the FDA regarding our BLA amendment filings in the first half of calendar year 2004. FDA review of the application amendments can be a long and uncertain process. The amendments 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 information. We cannot know for certain whether we can provide the requested 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.

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

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

Production and supply of LeuTech dependsNeutroSpec and PT-141 depend on contract manufacturers over whom we have no control.

We do not have the facilities to manufacture ~~LeuTech.~~NeutroSpec or PT-141. We depend on DSM N.V. of the Netherlands for the manufacture of the antibody used in ~~LeuTech, and~~NeutroSpec, on Ben Venue Laboratories of Cleveland, Ohio for the manufacture of ~~LeuTech kits.~~NeutroSpec kits, and on UCB Bioproducts, SA in Belgium for the manufacture of PT-141. Our contract manufacturers must perform ~~LeuTech~~these 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 continued FDA approval of ~~LeuTech.~~NeutroSpec or receive FDA approval of our other potential products. The failure ~~of either~~ of these manufacturers to supply these key components of ~~LeuTech,~~NeutroSpec, 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.

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We have limited or no 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 and sale, we will~~We depend on our arrangement with ~~Tyco Healthcare (formerly~~ Mallinckrodt ~~Inc.), a division of Tyco International, Ltd.,~~ to market, sell and distribute ~~LeuTech.~~NeutroSpec. Tyco Healthcare is our worldwide (excluding Europe) marketing, ~~sale~~distribution and ~~distribution~~sale partner for ~~LeuTech.~~NeutroSpec. If Tyco Healthcare fails to market ~~LeuTech~~NeutroSpec or devote enough resources to ~~LeuTech,~~NeutroSpec, our potential revenues from the sale of ~~LeuTech~~NeutroSpec 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.

~~Table~~ In addition, if the FDA approves PT-141 for marketing and sale, we will depend on our arrangements with potential partners for the potential marketing, distribution and sale of ~~Contents~~PT-141. If these potential partners fail to market PT-141 or devote enough resources to PT-141, our potential revenues from the sale of PT-141 will be adversely affected. If the arrangements with these potential partners fail, we may have difficulty establishing new marketing relationships, and in any event, we will have limited control over these activities.

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

Approval of ~~LeuTech~~NeutroSpec for marketing and sale does not assure the product’s commercial success. ~~LeuTech, if successfully developed,~~NeutroSpec will compete with other diagnostic imaging modalities and drugs manufactured and marketed by major pharmaceutical and other biotechnology companies. Imaging agents such as ~~LeuTech~~NeutroSpec generally take longer to achieve market acceptance following marketing approval than other drugs. The degree of market acceptance of ~~LeuTech~~NeutroSpec will depend on a number of factors, including:

~~perceptions by members of the health care community, including physicians, about the safety and effectiveness of LeuTech;~~

~~cost-effectiveness of LeuTech relative to competing products;~~

~~availability of reimbursement for our products from government or other healthcare payors;~~

~~the establishment and demonstration of the clinical efficacy and safety; and~~

~~potential advantage over alternative treatment methods.~~


	•	perceptions by members of the health care community, including physicians, about the safety and effectiveness of NeutroSpec;
	•	cost-effectiveness of NeutroSpec relative to competing products and technologies;
	•	availability of reimbursement for our products from government or other healthcare payors;
	•	the establishment and demonstration of the clinical efficacy and safety; and
	•	potential advantage over alternative treatment methods.

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

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

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

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We are aware that there are ~~two~~three oral FDA-approved drugs for the treatment of erectile dysfunction. ~~Both of these~~These products ~~and another oral drug~~ are also approved in Europe, Japan and most of the world’s pharmaceutical markets. In addition, we are aware of at least two 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~~In order to achieve approval and market acceptance, PT-141 may potentially be required to demonstrate efficacy and safety equivalent or superior to these other products.

The biopharmaceutical and diagnostic industries are highly competitive. We are likely to encounter significant competition with respect to ~~LeuTech,~~NeutroSpec, PT-141 and our other potential products. Many of our competitors have substantially greater financial and technological resources than we do. Many of them also have significantly greater experience in research and development, marketing, distribution and sales than we do. Accordingly, our competitors may succeed in developing, marketing, distributing and selling products and underlying technologies more rapidly than ~~us.~~we may. These competitive products or technologies may be more effective and useful and less costly than ~~LeuTech,~~NeutroSpec, 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.

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

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

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

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


	•	the degree and range of protection any patents will afford us against competitors, including whether third parties will find ways to invalidate or otherwise circumvent our patents; ~~if and when patents will issue;~~ ~~whether or not others will obtain patents claiming aspects similar to those covered by our patents and patent applications; or~~ ~~whether we will need to initiate litigation or administrative proceedings which may be costly whether we win or lose.~~
	•	if and when patents will be issued;
	•	whether or not others will obtain patents claiming aspects similar to those covered by our patents and patent applications;
	•	whether we will need to initiate litigation or administrative proceedings which may be costly whether we win or lose.

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

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

~~redesign our products or processes to avoid infringement;~~

~~stop using the subject matter claimed in the patents held by others;~~

~~pay damages; or~~


	•	obtain licenses, which may not be available on commercially reasonable terms, if at all;
	•	redesign our products or processes to avoid infringement;
	•	stop using the subject matter claimed in the patents held by others;
	•	pay damages; or
	•	defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial diversion of our management resources.

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

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

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Our collaboration agreements may fail or be terminated unexpectedly, which could result in asignificant delays and substantial ~~diversion~~increases in the cost of our ~~management resources.~~

research, development and the commercialization of our potential products.

We are party to various arrangements with academic, governmental and corporate partners. The successful development and commercialization of the potential products covered by these arrangements will depend upon the ability of these third parties to fully perform their contractual responsibilities. If any of these parties breaches or unexpectedly terminates their agreement with us, or otherwise fails to conduct their activities in a timely manner, the development or commercialization of our potential products may be delayed. For example, we have an agreement with Mallinckrodt under which they have agreed to sell NeutroSpec. If Mallinckrodt were to become unwilling or unable to provide these services, we would have to quickly make alternative arrangements with third parties, which could significantly delay and increase the expenses associated with the commercialization of NeutroSpec.

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

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

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

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

Our research and development of ~~LeuTech,~~NeutroSpec, 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.

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

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

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 for the 12 month period ended September ~~26, 2003~~8, 2004 was approximately ~~90,000~~440,000 shares. 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 57%30% of our voting securities, a concentration of ownership which could delay or prevent a change in control.

~~Our~~As of June 30, 2004, our executive officers and directors beneficially own approximately 5% of our voting securities and our 5% or greater stockholders beneficially own approximately ~~52%~~25% 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.

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Corporate GovernanceWe will face increased costs as a result of changes to the regulations governing public companies, including the Sarbanes-Oxley Act of 2002.

~~Recently enacted~~Enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules proposed by the Securities and Exchange Commission and by the ~~Nasdaq~~American Stock ~~Market,~~Exchange, could result in increased costs to us ~~as we~~to evaluate the implications of any new rules and respond to their requirements. The new rules could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs.

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

As of June 30, ~~2003,~~2004, our cash and cash equivalents were ~~$14,294,603~~$17.9 million and investments, which consisted of ~~commercial paper,~~corporate debt securities and mutual funds, were ~~$4,088,384.~~$2.5 million. Due to the average maturity and conservative nature of our investment portfolio, we do not believe that short term fluctuations in interest rates would materially affect the value of our securities.

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Item 8. Financial Statements and Supplementary Data

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Consolidated Financial Statements

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

		Page

	Report of Independent ~~Auditors' Report~~Registered Public Accounting Firm	41

	Report of Independent Public Accountants	42

	Consolidated Balance Sheets	43

	Consolidated Statements of Operations	44

	Consolidated Statements of Stockholders' Equity (Deficit)	45

	Consolidated Statements of Cash Flows	50

	Notes to Consolidated Financial Statements	52

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REPORT OF INDEPENDENT ~~AUDITORS’ REPORT~~REGISTERED PUBLIC ACCOUNTING FIRM

The Board of ~~DirectorsPalatin~~Directors and Stockholders
Palatin Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Palatin Technologies, Inc. and subsidiary (a development stage ~~company) and subsidiaries~~enterprise) as of June 30, ~~2003~~2004 and ~~2002,~~2003, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years ~~then~~in the three-year period ended June 30, 2004 and for the period from January 28, 1986 (inception) ~~through~~to June 30, ~~2003.~~2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our ~~audit.~~audits. The ~~consolidated financial~~cumulative statements of ~~Palatin Technologies, Inc.~~operations, stockholders’ equity (deficit), and ~~subsidiaries~~cash flows for the ~~year ended~~period January 28, 1986 (inception) to June 30, ~~2001 and~~2004 include amounts for the period from January 28, 1986 (inception) ~~through~~to June 30, ~~2003, to~~2001 and for each of the ~~extent related to~~years in the three-year period ~~from January 28, 1986 (inception) through~~ending June 30, 2001, which were audited by other auditors who have ceased ~~operations. Those auditors expressed an unqualified~~operations and whose report has been furnished to us, and our opinion, ~~on those financial statements in their report dated September 10, 2001. Our opinion on the consolidated statements of operations, stockholders’ equity (deficit) and cash flows,~~ insofar as it relates to the amounts included for the period ~~from~~ January 28, 1986 (inception) through June 30, 2001 is based solely on the report of ~~the~~ other auditors.

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

In our opinion, based on our audits and the report of other auditors, the ~~2003 and 2002~~ consolidated financial statements referred to above present fairly, in all material respects, the financial position of Palatin Technologies, Inc. and subsidiary (a development stage ~~company) and subsidiaries~~enterprise) as of June 30, ~~2003~~2004 and ~~2002,~~2003, and the results of their operations and their cash flows for each of the years ~~then~~in the three-year period ended June 30, 2004 and for the period ~~from~~ January 28, 1986 (inception) ~~through~~to June 30, ~~2003,~~2004, in conformity with ~~accounting principles~~U.S. generally accepted ~~in the United States of America.~~accounting principles.

/s/ KPMG LLP

Philadelphia, Pennsylvania
~~September 19, 2003~~August 13, 2004

Table of Contents (Financial)

The following report is a copy of a previously issued Arthur Andersen LLP (“Andersen”) report and the report has not been reissued by Andersen. The Andersen report refers to financial statements as of June 30, 2001 and 2000 and for the ~~year~~years ended June 30, 2001, 2000 and 1999, which are no longer included in the accompanying financial statements.

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 disclosure 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.

/s/ ARTHUR ANDERSEN LLP

Philadelphia, Pennsylvania
September 10, 2001

Table of Contents (Financial)

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


                                                                      June 30, 20032004         June 30, 2002
                                                                   -------------     -------------2003
                                                                    ----------------      ---------------
                              ASSETS
Current assets:

  Cash and cash equivalents                                          $   14,294,60317,947,076        $  7,944,26414,294,603

  Available for sale investments                                          2,465,350            4,088,384        1,160,773

  Prepaid expenses and other                                                447,510          349,883
                                                                    ------------     ------------428,917              347,510
                                                                    ----------------      ---------------
      Total current assets                                               18,830,497        9,454,92020,841,343           18,730,497

Property and equipment, net                                               2,934,739            3,399,181        2,416,499

Restricted cash                                                             428,075              433,844428,075

Other                                                                       63,381           52,953
                                                                    ------------     ------------174,930              163,381
                                                                    ----------------      ---------------
      Total assets                                                   $   24,379,087        $  22,721,134
                                                                    $ 12,358,216
                                                                    ============     ============================      ===============

               LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

  Current portion of long term debtcapital lease obligations                       $       33,491        $     188,015

  $          -
  Accounts payable                                                        2,019,970            1,344,789        1,579,336

  Accrued expenses                                                        2,067,183            1,619,382          661,883

  Accrued compensation                                                      599,600              428,500          236,200
  Accrued litigation settlement                                                -          400,000

  Deferred revenue                                                          242,000              407,420
                                                                    794,018----------------      ---------------
      Total current liabilities                                           4,962,244            3,988,106
                                                                    3,671,437
                                                                    ------------     ------------

Long term debt----------------      ---------------

Capital lease obligations                                                    30,203               76,432
                                                                    -
                                                                    ------------     ----------------------------      ---------------
Commitments and Contingenciescontingencies (Note 5)

Stockholders' equity:

  Preferred stock of $.01 par value - authorized 10,000,000 shares;

    Series A Convertible; 14,867 and 26,192 shares issued and outstanding 11,697 and 14,867
      shares as of June 30, 2004 and 2003, and 2002, respectively;                        117                  149              262
    Series C Convertible;  700,000 shares issued and outstanding
      as of June 30, 2002;                                                     -            7,000

  Common stock of $.01 par value - authorized 75,000,000 shares;

    Issued and outstanding 42,994,05052,790,589 and 17,423,07642,994,050 shares as of
      June 30, 2004 and 2003, and 2002 respectively;                                  527,906              429,941          174,231

  Additional paid-in capital                                            136,148,482          109,085,115       78,792,240

  Deferred compensation                                                     (78,407)             (37,977)         (53,942)

  Accumulated other comprehensive income (loss)                             (84,772)             (11,805)          10,604

  Deficit accumulated during development stage                         (117,126,686)         (90,808,827)
                                                                    $(70,243,616)
                                                                    ------------     ----------------------------      ---------------
      Total stockholders' equity                                         19,386,640           18,656,596
                                                                    8,686,779
                                                                    ------------     ----------------------------      ---------------
      Total liabilities and stockholders' equity                     $   24,379,087        $  22,721,134
                                                                    $ 12,358,216
                                                                    ============     ============================      ===============

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

Table of Contents (Financial)

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


                                                   Inception
                                                  (January 28,
                                                      1986)                       through                              Year Ended June 30,
                                                    --------------------------------------------------------------through
                                                 June 30, 20032004           2004              2003              2002
                                                 2001
                                 -------------------   -------------------   -------------------  ---------------------------------     -------------     -------------     -------------
REVENUES:
     Grants and contracts                        $  10,265,51112,415,249      $  2,149,738      $    641,417      $     80,929
     $  1,621,425
     License fees and royalties                      2,729,9872,895,407           165,420           628,598           200,426          166,667
     Other                                             318,917                 -                 -                 -
                                                 ---------------------------     -------------     -------------     -------------
          Total revenues                            13,314,41515,629,573         2,315,158         1,270,015           281,355
                                                 1,788,092
                                        ---------------------------     -------------     -------------     -------------

OPERATING EXPENSES:
     Research and development                       72,412,50495,745,833        23,333,329        17,439,191        12,117,026       10,108,999
     General and administrative                     32,247,90037,987,420         5,739,519         4,866,642         5,004,143        3,024,841
     Net intangibles write down                        259,334                 -                 -                 -
                                                 ---------------------------     -------------     -------------     -------------
          Total operating expenses                 104,919,738133,992,587        29,072,848        22,305,833        17,121,169
                                                 13,133,840--------------     -------------     --------------   --------------   ---------------------------     -------------
OTHER INCOME (EXPENSES)(EXPENSE):
     InterestInvestment income, 2,701,132net of realized losses       2,922,776           221,644           247,552           312,015
     787,574
     Interest expense                               (1,981,179)(2,003,828)          (22,649)          (22,038)           (3,188)          (5,104)
     Merger costs                                    (525,000)                 -                 -                 -
                                                 ---------------------------     -------------     -------------     -------------
          Total other income, 194,953net                      393,948           198,995           225,514           308,827
                                                 782,470
                                        ---------------------------     -------------     -------------     -------------
Loss before income taxes & cumu-
   lativeand cumulative
   effect of accounting change                    (91,410,371)(117,969,066)      (26,558,695)      (20,810,304)      (16,530,987)     (10,563,278)
Income tax benefit                                   962,6551,203,491           240,836           245,093           392,410
                                                 325,152
                                        ---------------------------     -------------     -------------     -------------
Loss before cumulative effect of
   accounting change                              (90,447,716)(116,765,575)      (26,317,859)      (20,565,211)      (16,138,577)     (10,238,126)
Cumulative effect of accounting change (Note 2)       (361,111)                -                 -                 (361,111)
                                        --------------
                                                 --------------     -------------     -------------     -------------

NET LOSS                                          (90,808,827)(117,126,686)      (26,317,859)      (20,565,211)      (16,138,577)     (10,599,237)

DEEMED DIVIDEND                                     (3,511,765)                -         (203,138)         (297,603)
                                                 -
                                        ---------------------------     -------------     -------------     -------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
                                                 $(94,320,592)$(120,638,451)     $(26,317,859)     $(20,768,349)     $(16,436,180)
                                                 $(10,599,237)
                                        ===========================     =============     =============     =============

Basic and diluted net loss attributable to common stockholders
per Commoncommon share                                                    Basic and diluted net loss before cumulative effect
     of accounting change$      (0.55)     $      (0.73)     $      (1.16)    $      (1.01)

  Cumulative effect of accounting change                            -                -            (0.04)
                                                         -------------    -------------    -------------
  Basic and diluted net loss                             $      (0.73)    $      (1.16)    $      (1.05)
                                                                    =============     =============     =============
Weighted average number of Commoncommon shares outstanding used in
computing basic and diluted net loss attributable to common
stockholders per Commoncommon share                                         47,687,679        28,362,121        14,195,466       10,131,195
                                                                    =============     =============     =============

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

Table of Contents (Financial)

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

                                                                               Preferred Stock
                                                      ------------------------------------------------------
                                                                                    Subscrip-
                                                         Shares         Amount       tions        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 Preferredpreferred shares                         4,000,000        4,000            -             -
   Issuance of Commoncommon shares onin
      $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 Preferredpreferred shares, net of expenses          137,780        1,378            -             -
   Net loss                                                     -            -            -             -
-----------    ------------   -----------    -----------

Balance, June 30, 1997                                    137,780        1,378            -             -
   Issuance of Preferredpreferred shares, net of expenses           18,875          189            -             -
   Conversion of Preferredpreferred shares into Commoncommon shares      (49,451)        (495)           -             -
   Net loss                                                     -            -            -             -
                                                       -----------     ------------   -----------    -------------------     --------      --------

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

Table of Contents (Financial)

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

                                                                               Preferred Stock
                                                      ------------------------------------------------------
                                                                                    Subscrip-
                                                         Shares         Amount       tions        Receivable
                                                       -----------     ------------   -----------    -------------------     --------      ----------
Balance, June 30, 1998                                    107,204      $ 1,072      $     -       $     -
   Conversion of Preferredpreferred shares into Commoncommon shares      (51,145)        (511)           -             -


   Net loss                                                     -             -           -             -
                                                       -----------     ------------   -----------    -------------------     --------      --------
Balance, June 30, 1999                                     56,059           561           -             -
   Issuance of Preferredpreferred shares, net of expenses          700,000         7,000           -             -

   Conversion of Preferredpreferred shares into Commoncommon shares      (22,498)         (225)          -             -
   Net loss                                                     -             -           -             -
                                                       -----------     ------------   -----------    -------------------     --------      --------
Balance, June 30, 2000                                    733,561         7,336           -             -
   Conversion of Preferredpreferred shares into Commoncommon shares       (4,244)          (43)          -             -
   Net loss                                                     -             -           -             -
                                                       -----------     ------------   -----------    -------------------     --------      --------
Balance, June 30, 2001                                    729,317         7,293           -             -
   Conversion of Preferredpreferred shares into Commoncommon shares       (3,125)          (31)          -             -
   Net loss                                                     -             -           -             -
                                                       -----------     ------------   -----------    -------------------     --------      --------
Balance, June 30, 2002                                    726,192         7,262           -             -
   Conversion of Preferredpreferred shares into Commoncommon shares     (711,325)       (7,113)          -             -
   Net loss                                                     -             -           -             -
                                                       -----------     --------     --------      --------
Balance, June 30, 2003                                     14,867           $             $              $
                                                                              149           -             -
   Conversion of preferred shares into common shares       (3,170)          (32)          -             -
   Net loss                                                     -             -           -             -
                                                       -----------     --------     --------      --------
Balance, June 30, 2004                                     11,697      $    117     $     -       $     -
                                                       ===========     ============   ===========    ===================     ========      ========

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

Table of Contents (Financial)

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

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

                                                                                                                       Accumulated     Other       Deficit
                                         Common Stock              Additional                              Deferred      Comprehen-Other Com-     Accumulated
                                 -------------------------------------------------------      Paid-In      Earned butBut    Treasury   Compensa-     siveprehensive   During Develop-
                                      Shares         Amount         Capital      notNot Issued     Stock        tion      Income/(loss)Income (Loss)   ment Stage         Total
                                 -------------- -------------- --------------- ------------- ----------- ------------- ------------  ----------  ---------  ------------  -------------------- --------------- ---------------- ---------
Balance at inception                         -   $               $                -$             $         $              $          $                $           $
                                                            -               $     -             $         -           $      -             $          -           $-               -                -
  Issuance of shares from
    inception            6,922,069      1,177,786         100,000       110,833           -             -           -               -        1,388,619
    inception
  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 Preferredpreferred shares               -              -               -             -           -             -           -               -            4,000
  Issuance of Commoncommon shares onin
    $10,395,400 private placemeplacement   41,581,600      9,139,303               -             -           -             -           -               -        9,139,303
  Shares earned but not issued               -              -               -       266,743           -             -           -               -          266,743
  Issuance of Commoncommon 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 Commoncommon 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 Preferredpreferred shares,
    net of expenses                          -              -      11,635,653             -           -             -           -               -       11,637,031
  Shares earned but not issued               -              -               -       250,141           -             -           -               -          250,141
  Issuance of Commoncommon shares            135,987          1,360         316,761      (303,171)          -             -           -               -           14,950
  Retirement of treasury shares           (308))            (3)         (1,664)            -       1,667             -           -               -                -
  Issuance of stock options below
    fair market value                        -              -       1,472,716             -           -    (1,472,716)          -               -                -

Table of Contents (Financial)

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



                                                                                                                       Accumulated     Deficit
                                         Common Stock              Additional                              Deferred      Other Com-     Accumulated
                                 -----------------------------      Paid-In      Earned But    Treasury   Compensa-     prehensive   During Develop-
                                      Shares         Amount         Capital      Not Issued     Stock        tion      Income (Loss)   ment Stage         Total
                                 -------------- -------------- --------------- ------------- ----------- ------------- ----------- --------------- ----------------
  Amortization of deferred
    compensation                             -              -               -             -           -       394,383           -               -          394,383
  Net loss                                   -              -               -             -           -             -           -      (5,300,164)      (5,300,164)
                                    ----------    ------------   -------------  ------------    ----------    --------  ------------   ---------  -------------  ---------------------------   --------------
Balance, June 30, 1997               3,020,373         30,204      24,314,401             -           -    (1,078,333)          -     (13,433,102)       9,834,548
  Issuance of Preferredpreferred shares,
    net of expenses                          -              -       1,573,295             -           -             -           -               -        1,573,295
  Issuance of Preferredpreferred shares
    expense Recapturerecapture                        -              -          49,733             -           -             -           -               -           49,733
  Issuance of Commoncommon shares             66,696            666          94,873             -           -             -           -               -           95,539
  Issuance of Commoncommon shares upon
    conversion of Preferredpreferred shares   1,012,554         10,126         (9,820)             -           -             -           -               -                -

~~Table of Contents (Financial)~~

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

  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 Commoncommon shares          1,842,101         18,421       7,594,182             -           -             -           -               -        7,612,603
  Issuance of Commoncommon shares upon
    conversion of Preferredpreferred shares   1,115,740         11,158         (10,655)            -           -             -           -               -               (9)
  Issuance of Commoncommon shares upon
    exercise of warrants                 9,874             99          18,676             -           -             -           -               -           18,775
  Issuance of Commoncommon shares upon
    exercise of options                 70,257            703          13,348             -           -             -           -               -           14,051
  Issuance of stock options below
    fair market value                        -              -         811,054             -           -      (811,054)          -               -                -

Table of Contents (Financial)

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



                                                                                                                       Accumulated     Deficit
                                         Common Stock              Additional                              Deferred      Other Com-     Accumulated
                                 -----------------------------      Paid-In      Earned But    Treasury   Compensa-     prehensive   During Develop-
                                      Shares         Amount         Capital      Not Issued     Stock        tion      Income (Loss)   ment Stage         Total
                                 -------------- -------------- --------------- ------------- ----------- ------------- ----------- --------------- ----------------
  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 Preferredpreferred shares,
    net of expenses                          -              -      12,999,058             -           -             -           -               -       12,999,058
  Issuance of Preferredpreferred shares               -              -               -             -           -             -           -               -            7,000
  Issuance of Commoncommon shares upon
    conversion of Preferred sharespreferred            572,374          5,724          (5,462)            -           -             -           -               -               37
shares
  Issuance of Commoncommon shares upon
    exercise of warrants               111,551          1,115         451,097             -           -             -           -               -          452,212
  Issuance of Commoncommon 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 baseddeferred
    compensation                             -              -               -             -           -        18,558           -               -           18,558
  Net loss                                   -              -               -             -           -             -           -      (8,183,438)      (8,183,438)
                                    ----------    ------------   -------------  ------------    ----------    --------  ------------   ---------  -------------  ---------------------------   --------------
Balance, June 30, 2000               7,902,372         79,024      50,324,603             -           -             -           -     (43,505,802)       6,905,161
  Issuance of Commoncommon shares, net
    of expenses                      2,532,369         25,324      13,954,928             -           -             -           -               -       13,980,252
  Issuance of Commoncommon 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

4849

Table of Contents (Financial)

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



                                                                                                                       Accumulated     Deficit
                                         Common Stock              Additional                              Deferred      Other Com-     Accumulated
                                 -----------------------------      Paid-In      Earned But    Treasury   Compensa-     prehensive   During Develop-
                                      Shares         Amount         Capital      Not Issued     Stock        tion      Income (Loss)   ment Stage         Total
                                 -------------- -------------- --------------- ------------- ----------- ------------- ----------- --------------- ----------------
  Issuance of Common shares upon
    exercise of warrants              173,015          1,730       486,736           -         -              -          -              -        488,466
  Issuance of Commoncommon 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 baseddeferred
    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
  Issuance of Commoncommon shares, net
    of expenses                      5,997,578         59,976      12,380,727             -           -             -           -               -       12,440,703
  Issuance of Commoncommon shares upon
    conversion of Preferredpreferred shares      76,590            766            (735)            -           -             -           -               -                -
  Issuance of Commoncommon shares upon
    exercise of options                149,250          1,492         339,098             -           -             -           -               -          340,590
  Stock based compensation                   -              -          91,582             -           -       (21,147)          -               -           70,435
  Amortization of stock baseddeferred
    compensation                             -              -               -             -           -        47,324           -               -           47,324
  Unrealized gain on investments             -              -               -             -           -             -      10,604               -           10,604
  Net loss                                   -              -               -             -           -             -           -     (16,138,577)      (16,138,577)
                                    ----------    ------------   -------------  ------------    ----------    --------  ------------   ---------  -------------  ---------------------------   --------------
Balance, June 30, 2002              17,423,076        174,231      78,792,240             -           -       (53,942)     10,604     (70,243,616)        8,686,779
  Issuance of Commoncommon shares, net of expenses    24,352,099        243,521      30,127,905             -           -             -           -               -        30,371,426
    of expenses
  Issuance of Commoncommon shares upon     1,121,576
    conversion of Preferred shares         11,216          (4,103)            -           -             -           -               -                -
    conversion of preferred shares
  Issuance of Commoncommon shares upon
    exercise of options and warrants             97,299            973         127,445             -           -             -           -               -          128,418
    warrants
  Stock based compensation                   -              -          41,628             -           -       (13,153)          -               -           28,475

Table of Contents (Financial)

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



                                                                                                                       Accumulated     Deficit
                                         Common Stock              Additional                              Deferred      Other Com-     Accumulated
                                 -----------------------------      Paid-In      Earned But    Treasury   Compensa-     prehensive   During Develop-
                                      Shares         Amount         Capital      Not Issued     Stock        tion      Income (Loss)   ment Stage         Total
                                 -------------- -------------- --------------- ------------- ----------- ------------- ----------- --------------- ----------------
  Amortization of stock based
    compensationdeferred                   -              -               -             -           -        29,118           -               -           29,118
    compensation
  Unrealized loss on investments             -              -               -             -           -             -     (22,409)              -          (22,409)
  Net loss                                   -              -               -             -           -             -           -     (20,565,211)     (20,565,211)
                                    ----------    ------------   -------------  ------------    ----------    --------  ------------   ---------  -------------  ---------------------------   --------------
Balance, June 30, 2003              42,994,050        429,941     109,085,115                                 (37,977)    (11,805)    (90,808,827)      18,656,596
  Issuance of common shares, net     6,992,500         69,925      20,889,594             -           -             -           -               -       20,959,519
    of expenses
  Issuance of common shares upon       120,465          1,205          (1,173)            -           -             -           -               -                -
    conversion of preferred shares
  Issuance of common shares upon
    exercise of options and          2,683,574         26,835       5,385,934             -           -             -           -               -        5,412,769
    warrants
  Stock based compensation                   -              -         789,012             -           -       (86,157)          -               -          702,855
  Amortization of deferred                   -              -               -             -           -        45,727           -               -           45,727
    compensation
  Unrealized loss on investments             -              -               -             -           -             -     (72,967)              -          (72,967)
  Net loss                                   -              -               -             -           -             -           -     (26,317,859)    (26, 317,859)
                                    ----------    ------------   -------------    ----------    --------  ------------   ---------  --------------   --------------
Balance, June 30, 2004              52,790,589    $   429,941    $109,085,115527,906    $136,148,482     $       -     $     -   $   (37,977)   (11,805)   (90,808,827)    18,656,596(78,407)   $(84,772)  $(117,126,686)   $  19,386,640
                                   ===========    ============   =============    ============  ==========    ========  =========================   =========  =============  ===========================   ==============

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

4951

Table of Contents (Financial)

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

                                                                Inception
                                                               (January 28,
                                                                  1986)                         Year Ended June 30,
                                                                 through       --------------------------------------------------------------------------------------------
                                                              June 30, 20032004         2004            2003            2002
                                                              2001
                                                      ---------------------------   -------------   -------------   -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                    $(90,808,827)$(117,126,686)   $(26,317,859)   $(20,565,211)   $(16,138,577)    $(10,599,237)
  Adjustments to reconcile net loss to net cash used forin
    operating activities:
      Cumulative effect of accounting change                        361,111               -               -               361,111-
      Depreciation and amortization                               3,109,9883,781,977         671,989         579,258       1,156,874
      288,086Realized loss on investments                                  129,355         129,355               -               -
      License fee                                                   500,000               -               -               -
      Interest expense and accrued interest on note payable
        72,691                -                -                -
   Accrued interest on long-term financing                 796,038                -                -                -
   Accrued interest on short-term financing                  7,936and financings                                              876,665               -               -               -
      Intangibles and equipment write down                          278,318               -               -               -
      Common stock and notes payable issued for expenses            751,038               -               -               -
      Settlement with consultant                                   (28,731)               -               -               -
      Deferred revenue                                         46,309         (386,598)         599,574         (166,667)
   Acceleration of options previously granted                  1,505,315               -               -               335,315-
      Stock based compensation                                    4,455,3744,863,366         748,582          57,593         458,349          165,990117,759
      Changes in certain operating assets and liabilities:
        Accounts receivable                                         -                -                -          953,163
     Prepaid expenses and other                               (1,243,211)(1,346,173)       (102,962)        (91,858)         34,079
        111,053
     Accounts payable                                          1,344,7892,019,970         675,181        (234,547)        449,676          117,590
        Accrued expenses and other                                1,586,7152,205,616         618,901         749,799         293,678
        36,239
                                                      -------------Deferred revenue                                           (119,111)       (165,420)       (386,598)        599,574
                                                              --------------   -------------   -------------   -------------
            Net cash used forin operating activities              (77,265,147)(101,347,970)    (23,742,233)    (19,891,564)    (13,146,347)      (8,397,357)
                                                      -------------(13,486,937)
                                                              --------------   -------------   -------------   -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Sale/(Purchases)maturities of investments                                  net                  (4,142,460)      (2,970,453)3,539,313       1,420,712           9,464               -
  Purchase of investments                                        (6,261,061)              -      (2,979,917)     (1,172,007)       2,155,617
  Purchases of property and equipment                            (5,941,750)(6,139,291)       (197,541)     (1,134,015)     (1,634,509)
                                                              (629,899)
                                                      ---------------------------   -------------   -------------   -------------
            Net cash provided/(used) for(used in) provided by investing
              activites (10,084,210)activities                                         (8,861,039)      1,223,171      (4,104,468)     (2,806,516)
                                                              1,525,718--------------   -------------   -------------   -------------
-------------activities
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from notes payable related party               302,000and other long-term debt            6,103,327               -               -               -
  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)and other long-term debt             (4,103,327)              -               -               -
  Payments on capital lease obligations                            (354,226)       (200,753)       (153,473)        (153,473)               -                -
  Proceeds from notes payable and
    long-term debt                                       3,951,327                -                -                -
  Payments on notes payable and
    long-term debt                                      (1,951,327)               -                -              -
  Proceeds from common stock, stock option and
    warrant issuances, net                                      75,588,774102,301,652      26,372,288      30,499,844      12,440,703       15,108,47012,781,293
  Proceeds from preferred stock, net                             24,210,326               -               -               -
  Purchase of treasury stock                                         (1,667)              -               -               -
                                                              ---------------------------   -------------   -------------   -------------
            Net cash provided by financing activities           101,643,960128,156,085      26,171,535      30,346,371      12,440,703       15,108,470
                                                      -------------12,781,293
                                                              --------------   -------------   -------------   -------------
NET INCREASE (DECREASE) IN CASH
    AND CASH EQUIVALENTS                                         14,294,60317,947,076       3,652,473       6,350,339      (3,512,160)       8,236,831
CASH AND CASH EQUIVALENTS, beginning of period                            -      14,294,603       7,944,264      11,456,424
                                                              3,219,593
                                                      ---------------------------   -------------   -------------   -------------
CASH AND CASH EQUIVALENTS, end of period                      $  14,294,60317,947,076    $ 17,947,076    $ 14,294,603    $  7,944,264
                                                              $ 11,456,424
                                                      ===========================   =============   =============   =============

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

5052

Table of Contents (Financial)

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


                                                     Inception
                                                    (January 28,
                                                       1986)
                                                      through                 Year Ended June 30,
                                                      through       -----------------------------------------------
                                                      June 30,       2003-------------------------------------
                                                        2004           2004           2003          2002
                                                     2001
                                                      -------------    -------------    -------------    ----------------------       --------       --------      --------
SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash paid for interest                            $ 657,920680,569       $ 22,649       $ 22,038      $  3,188
                                                     $      5,104
                                                      =============    =============    =============    ======================       ========       ========      ========

NON-CASH TRANSACTION:
   Settlement of accounts payable with
      Equipmentequipment                                      $     900       $      -       $      -      $      -
                                                     =============    =============    =============    ======================       ========       ========      ========

NON-CASH STOCK ACTIVITY:
   Conversion of loans from employees to
      Commoncommon stock                                   $  74,187       $      -       $      -      $      -
                                                     =============    =============    =============    ======================       ========       ========      ========
   Conversion of note payable to Commoncommon stock        $  16,000       $      -       $      -      $      -
                                                     =============    =============    =============    ======================       ========       ========      ========
   Common stock issued for equipment                 $   2,32     $2,327       $      -       $      -      =============    =============    =============    =============$      -
                                                     =========       ========       ========      ========
   Common stock and warrants issued for expenses     $ 960,909       $      -       $ 20,000      $ 14,144
                                                     $     31,200
                                                      =============    =============    =============    ======================       ========       ========      ========
   Common stock issued for accrued salaries
      and bonuses                                    $  16,548       $      -       $      -      $      -
                                                     =============    =============    =============    ======================       ========       ========      ========
   Accrued interest payablepaid in Commoncommon stock             $ 679,097       $      -       $      -      $      -
                                                     =============    =============    =============    ======================       ========       ========      ========

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

5153

Table of Contents (Financial)

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 biopharmaceutical company. The Company ~~does not currently offer any products for sale. The Company~~ is primarily focused on discovering and developing melanocortin (MC) ~~based~~-based therapeutics, which the Company believes is one of the fastest growing areas of pharmaceutical research and development. The MC family of receptors has been identified with a variety of conditions and diseases, including sexual dysfunction, obesity, ~~anorexia,~~ cachexia ~~inflammation~~(extreme wasting, generally secondary to a chronic disease) and ~~drug abuse.~~inflammation. The Company’s objective is to become a worldwide leader in ~~melanocortin-based~~MC-based therapeutics by pursuing a strategy based on commercializing the Company’s products under development and identifying new product targets through the utilization of the Company’s patented drug discovery platform.

In July 2004, the Company announced the receipt of full approval from the U.S. Food and Drug Administration (“FDA”) to market NeutroSpec™, the Company’s proprietary radiolabeled monoclonal antibody product, for imaging equivocal appendicitis in patients (see Note 11). The Company is currently conducting additional clinical trials with NeutroSpec to expand its market potential as an imaging agent for other indications such as osteomyelitis (infection deep inside a bone), fever of unknown origin, post surgical abscess, inflammatory bowel disease and pulmonary imaging.

PT-141, is the ~~Company's~~Company’s lead therapeutic drug candidate, ~~and~~ is ~~now~~a patented, nasally administered peptide that is in clinical development for the treatment of both male and female sexual dysfunction. The Company ~~recently~~completed various Phase 1 safety studies and Phase 2A efficacy studies in male subjects and patients. The Company completed a Phase 2B ~~trial~~at-home dose-ranging study with PT-141 in male patients for which it expects to announce results in the fourth quarter of calendar year 2003. LeuTech®, is the Company's proprietary radiolabled monoclonal antibody for imaging and diagnosing infections.patients. The Company ~~commenced the biologics license application (BLA) amendment filings to the FDA~~also completed a Phase 1 safety study in the first half of calendar year 2003 and anticipates remitting the final BLA amendment filing to the FDA in the fourth quarter of calendar year 2003. The Company expects to receive a complete response from the FDA regarding its BLA amendment filings in the first half of calendar year 2004. The Company is also conducting additional clinical trials for LeuTech to expand its market potential as a diagnostic agent.female subjects. In addition, the Company has several preclinical drug candidates under investigation based on the MC family of receptors for various therapeutic indications including sexual dysfunction, obesity, cachexia and inflammation.

In August 2004, the Company entered into a collaborative agreement with King Pharmaceuticals, Inc. (“King”), for the purpose of developing and commercializing PT-141 (see Note 11).

Key elements of the Company’s business strategy include: entering into alliances and partnerships with pharmaceutical companies to facilitate the development, manufacture, marketing, sale and distribution of the Company’s product candidates under investigation, expansion of the Company’s pipeline through the utilization of its MC expertise and patented drug discovery platform, opportunistic acquisition of synergistic products and technologies and partial funding of the Company’s development and discovery programs with the cash flow from our ~~LeuTech~~NeutroSpec and PT-141 collaboration ~~agreement.~~agreements.

Table of Contents (Financial)

Business Risk and Liquidity – As shown in the accompanying financial statements, the Company incurred a ~~substantial~~ net loss of ~~$20,565,211~~$26,317,859, for the year ended June 30, ~~2003~~2004 and has a deficit accumulated in the development stage of ~~$90,808,827,~~$117,126,686, cash and cash equivalents of ~~$14,294,603~~$17,947,076 and investments of ~~$4,088,384~~$2,465,350 as of June 30, ~~2003.~~2004. The Company anticipates incurring additional losses in the future as it continues development of ~~LeuTech~~NeutroSpec for diagnosis of appendicitis and expands clinical trials for other indications of ~~LeuTech~~NeutroSpec and continues research and development of PT-141 and its ~~MIDAS~~MIDAS™ (Metal Ion-induced Distinctive Array of Structures) 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.

~~Table of Contents~~

The Company has incurred negative cash flows from operations since its inception, ~~the Company~~and has expended and expects to continue to expend in the future, substantial funds to complete its planned product development efforts. The Company expects that its existing capital resources, including the funds received from King in August 2004, will be adequate to fund the Company’s projected operations ~~into~~through its fiscal year ending June 30, 2005, based on current and projected expenditure levels. Management plans to continue to refine its operations, control expenses, evaluate alternative methods to conduct its business, and seek available and attractive sources of financing and sharing of development costs through strategic collaboration agreements or other resources. Should appropriate sources of financing not be available, management would delay certain clinical trials and research activities until such time as appropriate financing was available. There can be no assurance that the Company’s financing efforts will be successful. If adequate funds are not available, ~~our~~the Company’s financial condition and results of operations will be materially and adversely affected.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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

Use of Estimates – The preparation of consolidated financial statements in conformity with ~~accounting principles~~U.S. generally accepted ~~in the United States of America~~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.

Statements of Cash Flows – Cash and cash equivalents include cash on hand, cash in banks and all highly liquid investments with a purchased maturity of less than three months. As of June 30, 2004 and 2003, ~~and 2002, approximately $428,000 and $434,000, respectively,~~$428,075 of cash was restricted to secure letters of credit for security deposits on leases.

Table of Contents (Financial)

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 principally of corporate debt securities ~~with a minimum credit rating of A2~~ and mutual ~~funds with average durations ranging from one to three years and credit ratings of AAA.~~funds. Unrealized holding gains and losses, net of the related tax effect, if any, are excluded from earnings and are reported in other comprehensive income (loss) and as a separate component of stockholders’ equity until realized. Interest on securities classified as available for sale is included in interest income. Realized gains and losses are recorded in the statement of operations in the period that the transaction occurs.

The following is a summary of available for sale investments as of June 30, ~~2003:~~

~~Table of Contents~~2004:

                                             Gross          Gross
                                          Unrealized     Unrealized
                              Cost           Gains          Losses      Fair Value
                          ---------------------------------------------------------
Corporate debt
securities                $    100,00050,000    $       2,243521    $         -    $    102,24350,521

Mutual Fundsfunds              $ 4,000,1892,500,122    $         -    $   14,048(85,293)   $ 3,986,141
                    -------------    ---------    ----------    -------------2,414,829
                          ---------------------------------------------------------
Total                     $ 4,100,1892,550,122    $       2,243521    $   14,048(85,293)   $ 4,088,384
                    =============    =========    ==========    =============2,465,350
                          =========================================================

The following is a summary of available for sale investments as of June 30, ~~2002:~~2003:

                                             Gross          Gross
                                          Unrealized     Unrealized
                              Cost           Gains          Losses      Fair Value
                          Government
securities          $     50,000     $    672     $       -     $     50,672---------------------------------------------------------
Corporate debt
securities                $   100,000    860$     2,243              -    100,860$   102,243

Mutual funds              1,000,169        9,072             -        1,009,241
                    -------------    ---------    ----------    -------------$ 4,000,189    $              $   (14,048)   $ 3,986,141
                          ---------------------------------------------------------
Total                     $ 1,150,1694,100,189    $              10,604     $   -(14,048)   $ 1,160,773
                    =============    =========    ==========    =============4,088,384
                          =========================================================

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

Table of Contents (Financial)

Impairment of Long-Lived Assets – The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine recoverability of 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~~If impairment is ~~measured at~~indicated, the long-lived asset would be written down to fair value. Fair value is determined by an evaluation of available price information at which assets could be bought or sold including quoted market prices, if available, or the present value of the estimated future discounted cash flows based on reasonable and supportable assumptions.

~~Table of Contents~~

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. Revenue from corporate collaborations and licensing agreements consists of up-front fees, research and development funding, and milestone payments. Non-refundable up-front fees are deferred and amortized to revenue over the related performance period. The Company estimates the performance period as the initial research term. The actual performance period may vary. The Company ~~will adjust~~adjusts the performance period estimate based upon available facts and circumstances. Periodic payments for research and development activities and government grants are recognized over the period that the Company performs the related activities under the terms of the agreements. Revenue resulting from the achievement of milestone events stipulated in the agreements is recognized when the milestone is achieved. Milestones are based on the occurrence of a substantive element specified in the contract or as a measure of substantive progress towards completion under the contract.

The Company recognized $149,738, $137,417 ~~$80,929~~ and ~~$211,069,~~$80,929, respectively, in grant revenue pursuant to the Small Business Technology Transfer (“STTR”) programs of the Department of Health and Human Services for the years ended June 30, 2004, 2003 ~~2002~~ and ~~2001.~~2002.

The Company recognized $2,000,000 and $504,000, ~~for the year ended June 30, 2003~~respectively, in contract revenue related to the attainment of certain milestones and other shared development costs of ~~LeuTech~~NeutroSpec pursuant to our collaboration agreement, as amended, with Mallinckrodt, Inc., a division of Tyco International, Ltd. (“Mallinckrodt”), described ~~below.~~below for the years ended June 30, 2004 and 2003. The Company did not recognize any contract revenue related to the shared development costs of ~~LeuTech~~NeutroSpec for the year ended June 30, ~~2002, as compared to $1,410,356 recognized for the year ended June 30, 2001.~~2002.

In August 1999, the Company entered into a strategic collaboration agreement with Mallinckrodt ~~Inc.~~ to jointly develop and market one of its proposed products (see Note 8). Under the terms of the agreement, the Company granted a worldwide license, excluding Europe, for sales, marketing and distribution and received a non-refundable licensing fee of $500,000. The licensing fee was recognized as revenue in the period that such non-refundable 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, 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 the $500,000 up-front license fee received from Mallinckrodt in August 1999. Under SAB 101, this payment ~~has been~~was recorded as deferred revenue to be recognized as license revenue over the remaining development term of this agreement. For the years ended June 30, 2004, 2003 ~~2002~~ and ~~2001,~~2002, the Company recognized $11,569, $43,987 ~~$138,888~~ and ~~$166,667,~~$138,888, respectively, 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 year:


                                                        Year Ended
                                                      June 30, 2001
                                                      -------------
Net loss to common stockholders, as reported         $  (10,599,237)
                                                     ===============
Net loss per common share, as reported               $        (1.05)
                                                     ===============
Pro forma net loss to common stockholders            $  (10,238,126)
                                                     ===============
Pro forma net loss per common share                  $        (1.01)
                                                     ===============

5557

Table of Contents (Financial)

In May 2002, the Company entered into an agreement with Mallinckrodt to amend the original agreement. Under the terms of this amended agreement, Mallinckrodt committed, among other things, up to an additional ~~$3.2 million,~~$3,200,000, subject to certain conditions and attainment of certain milestones, to cover half of the Company’s estimated expenses associated with completing the FDA review process of ~~LeuTech.~~NeutroSpec. Pursuant to this amendment, $800,000 was received upon execution of this agreement. Under SAB 101, this payment ~~has been~~was recorded as deferred revenue to be recognized as license revenue over the remaining development term of this agreement. For the years ended June 30, 2004, 2003 and 2002, the Company recognized $153,851, $584,611 and $61,538, respectively, in license revenue under this agreement.

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

Stock Options – The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations, to account for its fixed-plan stock options. Under this method, compensation ~~expense~~cost is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As ~~allowed~~permitted by SFAS 123, as amended in Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an Amendment of FASB Statement No. 123” (“SFAS 148”), the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS 123.

The Company applies APB 25 and the related interpretations in accounting for its stock ~~option plans.~~options. Had compensation cost for the Company’s common stock options been determined based upon the fair value of the options at the date of grant, as prescribed under SFAS 123, as amended by SFAS 148, the Company’s net loss attributable to common stockholders and net loss per common share would have been ~~reduced~~equal to the following pro forma amounts:


                                                                   For the year ended June 30,
                                                       --------------------------------------------------------------------------------------------------
                                                          2004              2003               2002
                                                       2001
                                                 --------------------------------------------------------------------------------------------------
Net loss attributable to common stockholders:

  As reported                                           $(20,737,349)$(26,317,859)     $(20,768,349)     $(16,436,180)

  $(10,599,237)Stock-based employee compensation expense
included in the determination of  net loss as
reported                                                     626,639                 -                 -

  Impact of total stock-based compensation
expense determined under fair-value-based
method                                                    (1,801,218)       (1,297,069)       (1,660,290)
                                                       (1,609,113)
                                                 -------------    -------------    ----------------------------------------------------------------
  Pro forma                                             $(22,034,418)$(27,492,438)     $(22,065,418)     $(18,096,470)
                                                       $(12,208,350)
                                                 =============    =============    ================================================================

Table of Contents (Financial)

Basic and diluted net loss attributable to common
stockholders per common share:

  As reported                                           $      (0.55)     $      (0.73)     $      (1.16)
                                                       $      (1.05)
                                                 =============    =============    =============
  Impact of stock-based compensation, net of
   tax                                                  (0.05)           (0.11)           (0.16)
                                                 =============    =============    ================================================================
  Pro forma                                             $      (0.58)     $      (0.78)     $      (1.27)
                                                       $    (1.21)
                                                 =============    =============    ================================================================

~~Table of Contents~~

The assumptions used in the Black-Scholes option-pricing model are as follows: dividend yield of 0%, weighted average risk-free interest rate of 3.72% in 2004, 3.54% in 2003, and 4.5% in 2002, ~~and 5.78% in 2001,~~ expected volatility of 90.5% in 2004, 101% in 2003 and 60% in 2002, and ~~2001, and~~ an expected option life of 7seven years.

The Company accounts for options granted to consultants in accordance with EITF 96-18, “Accounting for Equity Instruments with Variable Terms That Are Issued for Consideration Other Than Employee Services.” The Company determines the value of consultant’s stock options utilizing the Black-Scholes option pricing model.

Income Taxes – The Company and its ~~subsidiaries~~subsidiary 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.~~carryforwards.

Net Loss per Common Share – The Company applies Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”)~~. SFAS 128~~, which 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) attributable to common stockholders 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~~common stock, such as stock ~~options.~~options and warrants. For the years ended June 30, 2004, 2003 ~~2002~~ and ~~2001,~~2002, 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 ~~15,140,115~~12,392,034 shares of ~~Common Stock~~common stock at prices ranging from $0.01 to $21.70 per share were outstanding at June 30, ~~2003 (See~~2004 (see Note 6).

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~~The Company’s financial instruments ~~whether or not recognized in~~consist primarily of cash and cash equivalents, marketable securities and accounts payable. Management believes that 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 underlyingcarrying value of ~~the Company.~~these assets and liabilities are representative of their respective fair values.

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Table of Contents (Financial)

~~Recent Accounting Pronouncements~~Other Comprehensive Loss — ~~In December~~Other comprehensive loss consists of the following:



                                                        For the year ended June 30,
                                           --------------------------------------------------
                                                 2004              2003              2002
                                           the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation--------------------------------------------------
  Net loss                                  $(26,317,859)     $(20,565,211)     $(16,138,577)

  Unrealized gain (loss) on investments          (72,967)          (22,409)            10,604
                                           --------------------------------------------------
  Comprehensive loss                        $(26,390,826)     $(20,587,620)     $(16,127,973)
                                           ==================================================

Reclassifications — ~~Transition and Disclosure, an amendment of FASB Statement No. 123.” This Statement amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,”~~Certain prior year balances have been reclassified to ~~provide alternative methods of transition for a voluntary change~~conform to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements.current year presentation.

(3) PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

                                                                June 30,
                                                     ----------------------------------------------------------
                                                          2004             2003
                                                     2002
                                        ------------   -------------    --------------
             Office equipment                         $ 1,063,6101,120,467      $ 876,8931,063,610
             Laboratory equipment                       2,292,039        2,153,787       1,071,461
             Leasehold improvements                     3,089,365        3,086,932
                                                     2,804,040
                                        ------------   -------------    --------------
                                                        6,501,871        6,304,329       4,752,394
             Less: Accumulated depreciation and
                  amortization                         (3,567,132)      (2,905,148)
                                                     (2,335,895)
                                        ------------   -------------    --------------
                                                      $ 2,934,739      $ 3,399,181
                                                     $ 2,416,499
                                        ============   =============    ==============

For the years ended June 30, 2004, 2003 ~~2002~~ and ~~2001,~~2002, depreciation expense was $663,208, $569,253 and $1,146,566, ~~and $278,078,~~ respectively.

(4) ACCRUED EXPENSES:

Accrued expenses consist of the following:

                                                                 June 30,
                                                     -----------------------------------------------------------
                                                          2004             2003
                                                     2002
                                       -----------    -------------    --------------
             Product development costs                $ 784,0071,079,000      $   208,000784,007
             Accrued rent                                 464,095          397,872
100,000
      Other                               437,503         353,883
                                       -----------    -------------
                                       $1,619,382      $  661,883
                                       ===========    =============

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Table of Contents (Financial)


             Other                                        524,088          437,503
                                                     -------------    --------------
                                                      $ 2,067,183      $ 1,619,382
                                                     =============    ==============

(5) COMMITMENTS AND ~~CONTINGENCIES:~~CONTINGENCIES

Leases – The Company currently leases two facilities in New Jersey under non-cancelable operating leases and ~~is in the process~~have sublet to a third party one of ~~terminating the lease~~those leases, which is for the Company’s former ~~Corporate Offices~~corporate offices located in Princeton. In July 2002, the Company moved into a new facility in Cranbury, New Jersey that combined both the research and development facility in Edison, New Jersey and the corporate offices in Princeton, New Jersey. Future minimum lease payments under these two leases are as follows:


                         Fiscal Year Ending June 30,

                      ---------------------------
   20042005                   $  1,366,582
   2005                      1,482,1531,515,000

                      2006                      1,046,9561,047,000

                      2007                      1,604,3701,604,000

                      2008                      1,283,8481,284,000

                      2009                      1,301,000

                      2010 and thereafter       5,270,4943,968,000
                                             -------------
                                             $ 12,054,40310,719,000
                                             =============

~~The~~As of June 30, 2004, the Company has accrued approximately ~~$100,000~~$33,000 related to the Company’s share of estimated costs until termination of the Princeton lease, which is currently being subleased. For the years ended June 30, 2004, 2003 ~~2002~~ and ~~2001,~~2002, rent expense was $1,332,442, $1,554,838 ~~$656,850~~ and ~~$560,476,~~$656,850, respectively.

Capital Leases — In September 2002, the Company acquired $417,920 of laboratory equipment under capital leases. The term of these leases range from 24 to 60 months. As of June 30, ~~2003, $264,447~~2004, $63,694 remains outstanding pursuant to these lease obligations. The capitalized cost and accumulated depreciation for the equipment under capital leases is $417,920 and $146,272, respectively, as of June 30, 2004.

Employment Agreements – Effective October 1, 2003, Dr. Spana, Mr. Wills and ~~Dr. Molinoff~~Shubh D. Sharma, Ph.D. have each entered into an employment agreement with the Company for a two-year period commencing October 1, 2001 for Dr. Spana and Mr. Wills, and commencing September 4, 2001 for Dr. Molinoff. Each agreement automatically renews for a one-year period unless terminated at least 30 days before the anniversary date.period. The agreements do not contain automatic renewal provisions. Dr. Spana is serving as chief executive officer and president at a salary of ~~$290,000~~$320,000 per year. Mr. Wills is serving as chief financial officer at a salary of ~~$225,000~~$265,000 per year. Dr. ~~Molinoff~~Sharma is serving as ~~executive~~a vice president ~~of research~~ and ~~development~~chief technical officer at a salary of ~~$250,000~~$185,000 per year. Each agreement also provides for:

~~annual bonus compensation, in an amount to be decided by the compensation committee and approved by the board, based on achievement of yearly objectives; and~~

~~participation in all benefit programs that the Company establishes, to the extent the employee’s position, tenure, salary, age, health and other qualifications make him eligible to participate.~~

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Table of Contents (Financial)


	•	annual bonus compensation, in an amount to be decided by the compensation committee and approved by the board, based on achievement of yearly objectives; and
	•	participation in all benefit programs that the Company establish, to the extent the employee’s position, tenure, salary, age, health and other qualifications make him eligible to participate.

Each agreement allows the Company or the employee to terminate the agreement upon written notice, and contains other provisions for termination by the ~~company~~Company for ~~“cause,”~~“cause”, or by the employee for “good reason” or due to a “change in control” (as these terms are defined in the employment agreements). Early termination may, in some circumstances, result in severance pay at the salary then in effect, for a period of 24 months (Spana), 18 months (Wills) or 12nine months ~~(Molinoff)~~(Sharma) plus continuation of medical and dental benefits then in effect for 18 ~~months (Spana and Wills) or 12 months (Molinoff). For Dr. Spana and Mr. Wills, termination~~months. Termination following a change in control will result in a lump sum payment of two times (Spana) or one and one-half times (Wills) the salary then in effect, continuation of medical and dental benefits then in effect for 18 months, and immediate vesting of all stock options. For Dr. Molinoff, termination following a change in control will result in severance payments at the salary then in effect for 12 months, continuation of medical and dental benefits then in effect for 12 months, employment search expense reimbursement up to $25,000, and immediate vesting of all stock options. Each agreement includes non-competition, non-solicitation and confidentiality covenants. Although the agreements for Dr. Spana, Mr. Wills and Dr. Molinoff were automatically extended for a one year period pursuant to their terms, we are currently negotiating amendments to the agreements, except with respect to the base annual salary, and we anticipate that the amended terms will not be materially different than the existing terms.

License Agreements – The Company has three license agreements that require minimum annual payments. Future minimum payments under the license agreements for the years ending June 30 are: ~~2004 — $250,000,~~ 2005 — ~~$200,000,~~$500,000, 2006 — $200,000, 2007 — $200,000, 2008 — $200,000 and ~~2008~~2009 — $200,000.

~~Legal Proceedings~~ – Following the termination of the Company’s proposed merger with San Diego-based Molecular Biosystems, Inc. in March 2000, Molecular Biosystems commenced a legal action against the Company, seeking damages arising from the alleged improper termination of the merger agreement. The Company denied the material allegations. In August 2002, in order to avoid the ongoing costs of the litigation and consumption of the Company’s time, the Company settled this litigation with Molecular Biosystems for $400,000, which the Company had accrued as of June 30, 2002.

(6) STOCKHOLDERS’ EQUITY (DEFICIT):EQUITY:

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 $11,635,000, 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 option of the holder, into the number of shares of ~~Common Stock~~common stock equal to $100 divided by the “Series A Conversion Price”. The current Series A Conversion Price is $2.63, so each share of Series A Convertible Preferred Stock is currently convertible into approximately 38 shares of ~~Common~~common Stock. The Series A Conversion Price is subject to adjustment, under certain circumstances, upon the sale or issuance of ~~Common Stock~~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~~common stock as of the date of such sale or issuance. The Series A Conversion Price is also subject to adjustment upon the occurrence of a merger, reorganization, consolidation, reclassification, stock dividend or stock split which will result in an increase or decrease in the number of shares of ~~Common Stock~~common stock outstanding. During the fiscal year ended June 30, ~~2003, 11,325~~2004, 3,170 shares of the Series A Convertible Preferred Stock was converted into ~~421,575~~120,465 shares of ~~Common Stock.~~common stock. As of June 30, ~~2003, 14,867~~2004, 11,697 shares of Series A Convertible Preferred Stock, currently convertible into ~~565,285~~444,752 shares of ~~Common Stock,~~common stock, are ~~oustanding.~~outstanding.

6062

Table of Contents (Financial)

Series C Preferred Offering – As of August 16, 1999, pursuant to the strategic collaboration agreement with Mallinckrodt (see Note 8)2), the Company sold 700,000 restricted shares of Series C Convertible Preferred Stock for $13,000,000. During June 2003, the Series C Convertible Preferred Stock was converted into 700,000 shares of ~~Common Stock.~~common stock.

Common Stock Transactions – In January 2004, the Company concluded a private placement of common stock and warrants in which the Company sold 6,992,500 shares of its $.01 par value common stock and 1,048,875 warrants, which equates to 15% warrant coverage on the number of shares sold, at an offering price of $3.25 per share. Each five-year warrant entitles the holder to purchase one share of common stock at an exercise price of $4.06 per share. The gross proceeds were approximately $22,700,000 and the net proceeds were approximately $21,000,000. The Company made the private placement solely to financial institutions and accredited investors pursuant to Regulation D under the Securities Act of 1933. The investors represented that they were purchasing the securities for their own accounts for investment and not with a view toward resale or distribution to others. The certificates representing the shares of common stock and warrants bear restrictive legends. A registration statement covering the resale of the shares by the investors was filed and subsequently declared effective by the Security and Exchange Commission in April 2004. In connection with the private placement, the Company paid placement fees totaling approximately $1,700,000.

In private placements of ~~Common Stock~~common stock and warrants in July 2002, November 2002 and March ~~20,~~ 2003, the Company sold an aggregate of 24,352,099 shares of its ~~Common Stock~~common stock to investors consisting of domestic and European financial institutions and other accredited investors: 1,545,063 shares were sold at a market value of approximately $1.17 per share in the July ~~2002~~ offering, 9,373,940 shares of common stock were sold at a market value of approximately $1.23 per share in the November ~~2002~~ offering, and 13,433,096 shares of common stock were sold at a market value of approximately $1.42 per share in the March ~~2003~~ offering. For every five shares purchased in the July and the November offerings, and for every four shares purchased in the March offering, the investors received a ~~five year~~five-year warrant to purchase one share of common stock at an exercise price of $1.46 for the July offering, $1.54 for the November offering, and $1.77 for the March offering. Based on the sales price of the common stock in these private placements, the exercise prices of certain outstanding warrants were adjusted downward in accordance with the existing terms of those warrants. As a result, a deemed dividend of $203,138 has been reflected in the Company’s consolidated statement of operations for year the ended June 30, 2003.

In connection with these private placements, the Company paid cash placement agent fees of $126,000 for the July offering, $790,433 for the November offering and $985,250 for the March ~~2003~~ offering and issued five-year warrants to purchase (i) 103,004 shares of ~~Common Stock~~common stock at prices ranging from $1.37 to $1.46 per share pursuant to the July offering, and (ii) 458,647 shares of ~~Common Stock~~common stock at $1.54 per share pursuant to the November offering.

In private placements of ~~Common Stock~~common stock and warrants in November 2001 and June 2002, the Company sold an aggregate of 5,997,578 shares of its ~~Common Stock~~common stock to investors consisting of domestic and European financial institutions and other domestic accredited investors: 4,902,481 shares were sold at $2.25 per share in the November ~~2001~~ offering and 1,095,097 shares were sold at $2.20 per share in the June ~~2002~~ offering. For every four shares purchased in the November offering, and for every five shares purchased in the June offering, the investors received a ~~five year~~five-year warrant to purchase one share of common stock at an exercise price of $2.70 for the November offering and $2.75 for the June offering. Based on the sales price of the common stock in these private placements, the exercise prices of certain outstanding warrants were adjusted downward in accordance with the existing terms of those warrants. As a result, a deemed dividend of $297,603 has been reflected in the Company’s consolidated statement of operations for the year ended June 30, 2002.

Table of Contents (Financial)

In connection with these private placements, the Company paid placement agent’s fees of $771,879 for the November offering and $168,000 for the June offering and issued ~~five year~~five-year warrants to purchase (i) 356,060 shares of ~~Common Stock~~common stock at prices ranging from $2.66 to $2.70 per share pursuant to the November offering and (ii) 109,510 shares of ~~Common Stock~~common stock at $2.75 per share pursuant to the June offering.

~~Table of Contents~~

In a private placement of ~~Common Stock~~common stock and warrants in September and October 2000, the Company sold 2,532,368 shares of its ~~Common Stock~~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.~~$14,000,000. For every five shares purchased, the investors received an immediately exercisable five-year warrant to purchase one share of ~~Common Stock~~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 placement agent’s fee of $1,060,391 and issued ~~five year~~five-year warrants to the placement agent to purchase 216,000 shares of ~~Common Stock~~common stock at $6.60 per share and 87,884 shares of ~~Common Stock~~common stock at $6.53 per share.

Outstanding Stock Purchase Warrants – AtAs of June 30, ~~2003,~~2004, the Company had the following warrants outstanding (prices are rounded to the nearest cent).

                              Common         Exercise Price        Latest
                           Stock Shares          per Share      Termination Date
                              ------------          ---------     ----------------
                       15,125              $0.01$ 0.01          03/15/05
                              32,487                0.22          09/13/05
                              51,50238,627                1.37          07/29/07
                             360,514154,506                1.46          06/13/07
                           2,325,3121,450,473                1.54          11/29/07
                           3,358,2752,464,789                1.77          03/21/08
                              32,654                1.78          02/15/06
                             404,263                2.36          06/25/06
                             134,188                2.66          10/29/06
                           1,429,9841,057,864                2.70          04/30/07
                             328,529292,215                2.75          06/13/07
                              15,000                2.82          05/13/12
                              30,000                2.90          04/06/06
                              25,000                3.65          12/17/06

Table of Contents (Financial)


                              Common         Exercise Price        Latest
                           Stock Shares          per Share      Termination Date
                              15,000              $ 4.00          12/15/10
                           170,000              4.37           02/08/04
                      193,003              4.48           03/09/04
                      214,271              4.56           03/10/04
                      808,850              4.70           03/11/04
                       28,582              4.81           03/11/04
                      194,773              5.06           03/12/04
                       44,073              5.56           03/12/041,048,875                4.06          01/28/09
                              87,884                6.53          10/27/05
                             216,000                6.60          10/05/05
                               5,000                7.00          06/06/05
                             146,475                7.42          10/27/05
                             360,000                7.50          10/05/05
                             ----------             ------------                ----
                Total      11,031,7448,026,425        $0.01 - 7.50
                           ===================        ============

~~Table of Contents~~

In December 2002, the Company issued warrants to purchase 15,000 shares of its ~~Common Stock~~common stock at $2.82 per share to the Wistar Institute of Anatomy and Biology, as part of the consideration for a second agreement with Wistar to amend a technology license which Wistar previously granted to the Company. The warrants expire on May 13, 2012. The fair value of these warrants of approximately $20,000, as calculated by the Black-Scholes option pricing model, has been charged to expense in the statement of operations.

In April 2002, the Company issued warrants to purchase 15,000 shares of its ~~Common Stock~~common stock at $2.70 per share to Albert Fried, Jr. in consideration for a consulting agreement. The warrants expire on April 30, 2007. The fair value of these warrants of approximately $14,000, as calculated by the Black-Scholes option pricing model, has been charged to expense in the statement of operations. These options have been exercised in full as of June 30, 2004.

In April and December 2001, the Company issued warrants to purchase 30,000 shares of its ~~Common Stock~~common stock at $2.90 per share and 25,000 shares at $3.65 per share, respectively, to the Cedar Brook Corporate Center as part of the consideration for the lease agreement for the Cranbury, NJ facility. These warrants expire 5five years from the date of issuance. The fair value of these warrants of approximately $47,000, as calculated by the Black-Scholes option pricing model, will be charged ratably to expense in the statement of operations over the lease term of 10ten years.

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 $31,200 as calculated by the Black-Scholes option pricing model, has been charged to expense in the statement of operations.

Stock Option ~~Plans~~Plan – The Company has one stock option plan currently in effect under which future grants may be issued, the 1996 Stock Option Plan, as ~~amended,~~amended. This plan was approved by the Company’s stockholders on November 15, 2000, for which 5,000,000 shares of ~~Common Stock are~~common stock have been reserved. The Company has also granted options under agreements with individuals, and not under any plan. The options granted by the Company generally expire ten years from the date of grant and generally vest over three to four years. As of June 30, 2004, there were 355,956 options available for grant under the 1996 Stock Option Plan.

The status of the ~~plans~~plan and individual agreements during the three years ended June 30, ~~2003,~~2004 was as follows:

Table of Contents (Financial)

                                               Number of shares        Range of prices      Weighted average
                                              subject to options          per share         Prices per share

    ------------------     ---------------    ----------------
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,July 1, 2001                           3,385,175        $0.22$.22 - $360.00          $4.14
                                     ==========         ==============         =====
       Granted                                              695,000       $2.86 - $6.063
       Expired                                             or canceled                (411,832)(384,330)       $3.50 - $6.00
       Forfeitures                                          (27,500)       $3.50 - $6.00
       Exercised                                           (149,275)       $0.20$.22 - $3.875
                                                        ----------         --------------------------
    Outstanding at June 30, 2002                          3,519,068          $0.223,519,070         $.22 - $21.70          $4.30
                                     ==========         ==============         =====
       Granted                                              799,900        $1.16 - $3.53
       Expired                                             or canceled                (177,554)(114,216)      $2.50 - $21.70
       Forfeitures                                          (63,333)      $1.36 - $21.70$5.125
       Exercised                                             (5,184)        $.22 - $2.50
                                                        ----------         --------------------------
    Outstanding at June 30, 2003                          4,136,2304,136,237       $1.00 - $21.70           $3.79
       ==========         ==============         =====Granted                                              957,500        $1.16 - $4.70
       Expired                                             (290,021)      $1.36 - $21.70
       Forfeitures                                         (297,683)       $1.36 - $4.25
       Exercised                                           (140,432)      $1.36 - $3.063
                                                        -----------
    Outstanding at June 30, 2004                          4,365,601        $1.00 - $21.70          $3.58
                                                        ===========
    Exercisable at June 30, 2003         2,678,8592004                          3,353,207        $1.00 - $21.70          $4.25



63 
Table of Contents
$3.76
                                                        ===========



                          Shares        Weighted         Weighted                             Weighted
                       Purchasable    Average Option     Average             Shares         Average Price
        Range of          Under           Option Life           Exercise      Exercisable At     OfAs of    of Exercisable
    Exercise Prices      Options        (Years)           Price           June 30, 20032004        Shares
    - ---------------      ----------   -----------     --------     --------------     ---------------------        -------           -----           -------------        ------
$1.00 - $2.49               794,796      8.88732,663       7.84             $1.62            236,170             $1.59485,384             $1.64

$2.50 - $3.99             1,677,594      7.02          $3.16         1,096,335             $3.042,215,278       7.14             $3.21          1,561,232             $3.18

$4.00 - $5.99             1,269,375      6.50          $4.70           955,219             $4.791,136,071       5.62             $4.72          1,025,002             $4.76

$6.00 - $8.00               366,959      4.26          $6.94           363,624             $6.95281,387       3.11             $6.96            281,387             $6.96

$8.01 - $18.49            7,188      0.40         $18.34             7,188            $18.34
 $18.50 - $21.70                  20,323      0.46         $21.70            20,323            $21.70202       0.92            $15.77                202            $15.77

Table of Contents (Financial)



                          Shares        Weighted         Weighted                             Weighted
                       Purchasable    Average Option     Average             Shares         Average Price
        Range of          Under           Life           Exercise      Exercisable As of    of Exercisable
    Exercise Prices      Options        (Years)           Price           June 30, 2004        Shares
    ---------------      -------        -------           -----           -------------        ------
                                         all outstanding options:

------------------------
 $1.00 - $21.70            4,136,2354,365,601       6.93             $3.79         2,678,859             $4.25
                       =========                                  =========
$3.58          3,353,207             $3.76

During the year ended June 30, 2004, the Company made modifications to stock options held by an employee and a director. As a result of these modifications, the Company recorded an expense of $156,239 during the year ended June 30, 2004. In addition, there were stock options granted to certain officers which included vesting provisions which were contingent on achievement of certain performance objectives and one these objectives was met in September 2003. As a result, a compensation expense charge in the amount of $470,400 was recorded in connection with these performance based options.
(7) INCOME TAXES:

The Company has had no income tax expense or benefit since inception because of operating losses except for amounts recognized for sales of New Jersey State operating loss ~~carryforwards~~carry-forwards and research and development credits. Deferred tax assets and liabilities are determined based on the estimated future tax effect of differences between the financial statements and tax reporting basis of assets and liabilities, as well as for operating loss carryforwards and research and development costs, 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, ~~2003.~~2004 and has been recorded since inception.

As of June 30, 2004, the Company had Federal net operating loss carryforwards of approximately $112,000,000, which will expire in the years 2004 through 2024, if not utilized. At June 30, 2004 the Company had federal research and development credits of approximately $2,400,000 that will expire in year 2004 through 2024 if not utilized.

The Tax Reform Act of 1986 ~~imposes limitations~~(the "Act") provides for limitation on the use of net operating loss and research and development tax credit carryforwards iffollowing certain ~~stock~~ ownership changes ~~occur. As~~(as defined by the Act) that could limit the Company's ability to utilize these carryforwards. The Company may have experienced various ownership changes, as defined by the Act, as a result of past ~~changes in majority ownership,~~financings. Accordingly, the Company's ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes; therefore the Company ~~most likely will~~may not be able to ~~fully realize the benefit~~take full advantage of ~~its~~these carryforwards for federal income tax purposes.

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


                                                                June 30,
                                                    ---------------------------------
                                                         2004                2003
                                                    -------------       -------------
      Net operating loss carryforwards.

carryforwards ............ $ 38,097,000        $ 29,149,000
      Research and development tax credits ........    2,386,000           1,736,000
      Accrued expenses ............................      798,000             455,000
                                                    -------------       -------------
                                                      41,281,000          31,340,000
      Valuation allowances ........................  (41,281,000)        (31,340,000)
                                                    -------------       -------------
      Net deferred tax assets......................      $     -             $     -
                                                    =============       =============

6467

Table of Contents (Financial)

~~Significant components~~In assessing the realizability of ~~the Company's~~ deferred tax ~~asset for federal and state purposes~~assets, the Company considers whether it is ~~as follows:~~


                                                                  June 30,
                                                       ------------------------------
                                                            2003            2002
                                                        -------------   -------------
Net operating loss carryforwards ...................... $ 29,149,000    $ 24,267,000
Research and development tax credits ..................    1,736,000         866,000
Non-deductible expenses ...............................      455,000       1,138,000
                                                        -------------   -------------
                                                          31,340,000      26,271,000
Valuation Allowances ..................................  (31,340,000)    (26,271,000)
                                                        -------------   -------------
Net deferred tax assets................................            -               -
                                                        =============   =============

~~A valuation allowance was established for 100%~~more likely than not that some portion or all of the deferred tax assets aswill not be realized. The ultimate realization of ~~such benefits~~deferred tax assets is ~~not assured.~~dependent upon the generation of future taxable income during the periods in which the temporary differences representing future deductible amounts become deductible. Due to the Company's history of losses, the deferred tax assets are fully offset by a valuation allowance as of June 30, 2004 and 2003. The valuation allowance for the years ended June 30, 2004 and 2003 increased by $9,941,000 and $5,069,000, respectively, related primarily to additional net operating losses incurred by the Company.

During the years ended June 30, 2004, 2003 ~~2002~~ and ~~2001,~~2002, the Company sold New Jersey State operating loss carryforwards and research and development credits, which resulted in the recognition of $240,836, $245,093 ~~$392,410~~ and ~~$325,152,~~$392,410, respectively, in tax benefits.

(8) 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 ~~$3,875,000~~$4,025,000 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 May 13, 2002, the Company entered into an agreement with Mallinckrodt ~~Inc., a division of Tyco International, Ltd.,~~ to amend the strategic collaboration agreement dated as of August 17, 1999 for the development of ~~LeuTech.~~NeutroSpec. Under the terms of the original agreement, Mallinckrodt paid a licensing fee of $500,000 (see Note 2) and purchased 700,000 restricted unregistered shares of Series C Convertible Preferred Stock for $13,000,000 (see Note 6). The Company shared ~~LeuTech~~NeutroSpec development expenses prior to FDA approval equally with Mallinckrodt. Mallinckrodt agreed to pay the Company milestone payments of an additional ~~$10 million~~$10,000,000 on FDA approval of the first ~~LeuTech~~NeutroSpec indication and on attainment of certain sales goals following product launch. The Company agreed to arrange for the manufacture of ~~LeuTech~~NeutroSpec and would receive a transfer price on each product unit and a royalty on ~~LeuTech~~NeutroSpec net sales.

Under the terms of the amended agreement, Mallinckrodt ~~has~~ committed up to an additional ~~$3.2 million,~~$3,200,000 subject to certain conditions and attaining certain milestones, to offset a portion of the Company’s estimated expenses associated with completing the FDA review process. Additionally, timing of the ~~$10 million~~$10,000,000 in future milestone payments has been revised to coincide with ~~LeuTech’s anticipated~~NeutroSpec’s FDA approval and achievement of future sales goals (see Note 2). OfAll of the ~~$3.2 million, $1.2 million~~$3,200,000 has been paid ~~to date. The Company expects to receive the remaining $2 million in the fourth quarter~~as of ~~calendar year 2003.~~

~~Table of Contents~~June 30, 2004.

During the ~~year~~years ended June 30, 2004, 2003 ~~2002~~ and ~~2001,~~2002, the Company recognized $2,000,000, $504,000 $0 and ~~$1,410,356,~~$0, respectively, as contract revenue related to the development of ~~LeuTech.~~NeutroSpec.

68
Table of Contents (Financial)
(9)        RELATED PARTY TRANSACTIONS:
         One of the Company's directors is the president and sole stockholder of a company which provides strategic and technology consulting services. The Company paid the consulting firm $43,125, $112,500 and $119,333 during the years ended June 30, 2004, 2003 and 2002, respectively, for consulting services provided to the Company.
(10)        CONSOLIDATED QUARTERLY FINANCIAL DATA – UNAUDITED:

The following tables provide quarterly data for the fiscal years ended June 30, ~~2003~~2004 and ~~2002.~~2003:


                                                                         Three Months Ended
                                                    -------------------------------------------------------------------------------------------------------------------------------------
                                                    September 30,     December 31,       March 31,        June 30,
                                                        2003               2003            2004             2004
                                                    ------------      ------------     ------------     ------------
                                                         (amounts in thousands except share and per share data)

Total revenues                                      $     1,833       $       291      $       181      $   $    10
Total operating expenses                                  8,633             5,203            8,292            6,945
Total other income (expense)                                 81                80               84              (46)
                                                    ------------      ------------     ------------     ------------
    Loss before income taxes                             (6,719)           (4,832)          (8,027)          (6,981)

Table of Contents (Financial)


                                                                         Three Months Ended
                                                    ----------------------------------------------------------------
                                                    September 30,     December 31,       March 31,        June 30,
                                                        2002               2002            2003             2003
                                                    --------------   ---------------   --------------   ----------------------------      ------------     ------------     ------------
                                                         (amounts in thousands except share and per share data)
Income tax benefit                                            -               241                -                -
                                                    ------------      ------------     ------------     ------------
Net loss attributable to common stockholders        $    (6,719)      $    (4,591)     $    (8,027)     $    (6,981)
                                                    ============      ============     ============     ============
Basic and diluted net loss attributable to
common stockholders per common share                $     (0.16)      $     (0.10)     $     (0.16)     $     (0.13)
                                                    ============      ============     ============     ============
Weighted average number of common shares
outstanding, used in computing basic and
diluted net loss attributable to common
stockholders per common share                        43,161,281        44,531,302       50,455,484       52,687,077
                                                    ============      ============     ============     ============



                                                                         Three Months Ended
                                                    ----------------------------------------------------------------
                                                    September 30,     December 31,       March 31,        June 30,
                                                        2002               2002            2003             2003
                                                    ------------      ------------     ------------     ------------
                                                         (amounts in thousands except share and per share data)

Total revenues                                      $       624       $       234      $       330      $        82
Total operating expenses                                  4,768             4,875            6,025            6,638
Total other income (expense)                                 45                44               43               93
                                              --------------   ---------------   ---------------   ---------------94
                                                    ------------      ------------     ------------     ------------
       Loss before income taxes                          (4,099)           (4,597)          (5,652)          (6,463)(6,462)
Income tax benefit                                            -               245                -                -
                                                    --------------   ---------------   ---------------   ---------------------------      ------------     ------------     ------------
Net loss                                                 (4,099)           (4,352)          (5,652)          (6,463)(6,462)
Deemed dividend                                             (17)              (98)             (88)               -
                                                    --------------   ---------------   ---------------   ---------------------------      ------------     ------------     ------------
Net loss attributable to common sharesstockholders        $    (4,116)      $    (4,450)     $    (5,740)     $    (6,463)
                                              ==============   ===============   ===============   ===============(6,462)
                                                    ============      ============     ============     ============
Basic and diluted net loss attributable to
common stockholders per common share                $     (0.22)      $     (0.18)(0.17)     $     (0.19)     $     (0.15)
                                                    ==============   ===============   ===============   ===========================      ============     ============     ============

Table of Contents (Financial)



                                                                         Three Months Ended
                                                    ----------------------------------------------------------------
                                                    September 30,     December 31,       March 31,        June 30,
                                                        2002               2002            2003             2003
                                                    ------------      ------------     ------------     ------------
                                                         (amounts in thousands except share and per share data)
Weighted average number of common shares
outstanding, used in computing basic and
diluted net loss attributable to common
stockholders per common share                        18,497,853         24,871,723      30,162,510       42,039,097
                                                    ==============   ===============   ===============   ===============


                                                                         Three Months Ended
                                              --------------------------------------------------------------------
                                               September 30,     December 31,       March 31,         June 30,
                                                   2001              2001             2002              2002
                                              --------------   ---------------   ---------------   ---------------
                                                         (amounts============      ============     ============     ============

(11) SUBSEQUENT EVENTS:

In July 2004, the Company announced the receipt of full approval from the FDA to market NeutroSpec, the Company’s proprietary radiolabeled monoclonal antibody product for imaging equivocal appendicitis. NeutroSpec is marketed and distributed by our strategic collaboration partner, Mallinckrodt.

In August 2004, the Company entered into a collaboration agreement with King, a specialty pharmaceutical company, to jointly develop and commercialize PT-141. Pursuant to the terms of the agreement, Palatin has granted King a co-exclusive license with Palatin to PT-141 in ~~thousands except per~~North America and an exclusive right to collaborate in the licensing or sublicensing of PT-141 with Palatin outside North America. Palatin has the option to create a urology specialty sales force to co-promote the product in the U.S., upon commercialization.

King paid the Company $20,000,000 at closing, $5,000,000 of which was designated as an equity investment in Palatin. Certain of he proceeds received at closing will be recorded as an equity contribution based on the fair value of the common stock and common warrants issued in connection with the collaboration agreement with the remaining balance recorded as deferred revenue. The deferred revenue will be amortized to revenue over the related performance period. King may pay potential milestone payments to Palatin totaling up to $100,000,000 for achieving certain Erectile Dysfunction and Female Sexual Dysfunction development and regulatory approval targets, a portion of which would consist of an equity investment in Palatin. After regulatory approval and commercialization of PT-141, King may also pay potential one-time milestone payments to Palatin totaling up to $130,000,000 upon achieving specified annual North American net sales thresholds.

Under the terms of the agreement, King and Palatin will share ~~data) Total~~all collaboration development and marketing costs and all collaboration net profits derived from net sales of PT-141 in North America based on an agreed percentage. King and Palatin will seek a partner for PT-141 for territories outside of North America and will jointly share in collaboration revenues $ 41 $ 42 $ 99 $ 99 Total operating expenses 3,000 4,266 4,662 5,193 Total other income (expense) 101 79 64 65 -------------- --------------- --------------- --------------- Loss before income taxes (2,858) (4,145) (4,499) (5,029) Income tax benefit - 162 230 - -------------- --------------- --------------- --------------- Net loss (2,858) (3,983) (4,269) (5,029) Deemed dividend - (286) - (11) -------------- --------------- --------------- --------------- Net loss attributable to common shares $ (2,858) $ (4,269) $ (4,269) $ (5,040) ============== =============== =============== =============== Basic and diluted net loss per common share $ (0.26) $ (0.33) $ (0.26) $ (0.31) ============== =============== =============== =============== Weighted average number of common shares outstanding, used in computing basic and diluted net loss per common share 11,199,611 13,013,547 16,140,790 16,495,204 ============== =============== =============== ===============
generated from those territories.

6671

Table of Contents

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

On August 8, 2002, upon the recommendation and approval of our Audit Committee, we dismissed Arthur Andersen LLP (“Andersen”) as our principal independent public accountants and engaged KPMG LLP (“KPMG”) as our principal independent public accountants.

In connection with the audits for the most recent year ended June 30, 2001 and the subsequent interim period through the filing date of this Annual Report on Form 10-K, there were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures which, if not resolved to the satisfaction of Andersen, would have caused Andersen to make reference to the subject matter of such disagreements in connection with their reports on our consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.None.

The report of Andersen on our consolidated financial statements, as of and for the year ended June 30, 2001, did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles.

We provided Andersen with the foregoing disclosures and requested Andersen to furnish a letter addressed to the Securities and Exchange Commission stating whether it agrees with the above statements. While we have received no information from Andersen that Andersen has a basis for disagreement with such statements, we have been unable to obtain such a letter due to the fact that the personnel primarily responsible for our account (including the engagement partner and manager) have left Andersen.

During the year ended June 30, 2001 and through the filing date of this Annual Report on Form 10-K, neither we nor someone on our behalf consulted KPMG regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

Item 9A. Controls and Procedures

~~(A) Evaluation~~ The Company’s management, with the participation of ~~Disclosure Controls~~the Company’s Chief Executive Officer and ~~Procedures~~~~. Our principal executive officer and principal~~Chief financial ~~officer, after evaluating~~Officer, has evaluated the effectiveness of ~~our~~the Company’s disclosure controls and procedures ~~(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))~~ as of June 30, 2004. Based on that evaluation, the ~~end of the period covered by this Annual Report on Form 10-K, have~~Company’s Chief Executive Officer and Chief Financial Officer concluded that ~~based on such evaluation, our~~the Company’s disclosure controls and procedures were ~~adequate and~~ effective to ensure that material information relating to us, including our consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared.

~~Table~~as of ~~Contents~~

~~(B) Changes in Internal Controls~~.June 30, 2004. There were no changes ~~in our internal control over financial reporting, identified in connection with the evaluation of such internal control~~ that ~~occurred during our last fiscal quarter, that have~~ materially affected, or that are reasonably likely to materially affect ~~our~~the Company’s internal control over financial ~~reporting.~~reporting during the fourth quarter of the fiscal year ended June, 30, 2004.

Item 9B. Other Information

None.

~~[PART III BEGINS ON THE FOLLOWING PAGE]~~

~~Table of Contents~~

PART III

Item 10. Directors and Executive Officers of the Registrant

~~Directors and executive officers. The following table sets forth the names, ages and positions of our directors and executive officers.~~


Name                                          Age      Position with Palatin
- ----                                          ---      ---------------------
Carl Spana, Ph.D.                             41       President, chief executive officer and
                                                       director
Stephen T. Wills, CPA                         46       Executive vice president and chief
                                                       financial officer, secretary and treasurer
Perry B. Molinoff, M.D.                       63       Executive vice president of research and
                                                       development and director
Shubh D. Sharma, Ph.D.                        48       Vice president and chief technical officer
John K.A. Prendergast, Ph.D.                  49       Director, chairman of the board of
                                                       directors
Robert K. deVeer, Jr. (1) (2)                 57       Director
Kevin S. Flannery (1) (2)                     59       Director
Zola P. Horovitz, Ph.D. (2)                   68       Director
Robert I. Taber, Ph.D. (1)                    67       Director
Errol DeSouza, Ph.D.                          49       Director
________________________________

~~(1) Member of the audit committee~~

~~(2) Member of the compensation committee.~~

All directors hold office until the next annual meeting of stockholders or until their successors have been elected and qualified. All current directors were elected at our annual stockholders’ meeting on December 6, 2002, except for Dr. DeSouza, who was elected by the board and became a director on April 1, 2003. Executive officers are appointed by the board and serve at the discretion of the board. Each officer holds his position until his successor is appointed and qualified. All of the current executive officers hold office under employment agreements.

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

~~Table of Contents~~

PERRY B. MOLINOFF, M.D. has been executive vice president for research and development since September 2001 and a director since November 2001. Dr. Molinoff’s background includes more than 30 years of experience in both the industrial and educational sectors. From 1981 to 1994 he was a professor of pharmacology and chairman of the Department of Pharmacology at the University of Pennsylvania School of Medicine in Philadelphia. From January 1995 until March 2001, he was vice president of neuroscience and genitourinary drug discovery for the Bristol-Meyers Squibb Pharmaceutical Research Institute, where he was responsible for directing and implementing the Institute’s research efforts. Dr. Molinoff earned his medical degree from Harvard Medical School.

JOHN K. A. PRENDERGAST, Ph.D., co-founder of Palatin, has been chairman of the board since June 14, 2000, and a director since August 1996. Dr. Prendergast has been president and sole stockholder of Summercloud Bay, Inc., a biotechnology consulting firm, since 1993. He is a co-founder and/or a member of the board of Ingenex, Inc., Avigen, Inc., and AVAX Technologies, Inc. From October 1991 through December 1997, Dr. Prendergast was a managing director of The Castle Group Ltd. Dr. Prendergast received his M.Sc. and Ph.D. from the University of New South Wales, Sydney, Australia and a C.S.S. in administration and management from Harvard University.

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

KEVIN S. FLANNERY has been a director since March 2000. Since 1992, Mr. Flannery has served as president of Whelan Financial Corp., a consulting and investment firm, and from 1994 to 1997 Mr. Flannery also served as president of Whelan Securities Corp., an NASD member brokerage firm. From 1975 to 1992, Mr. Flannery was senior managing director at Bear, Stearns & Co., Inc. where he was the head of listed equity trading. From 1974 to 1975, Mr. Flannery was first vice president at White, Weld & Co., Inc. where he was the head of the arbitrage department and co-head of the equity trading department. Prior to this, Mr. Flannery was a senior trader at Goldman, Sachs & Co. He is currently a director of three other publicly held companies: Geneva Steel Holdings Corp., Raytech Corporation and TeleSpectrum Worldwide Inc., of which he is also chairman and CEO; and of four privately held companies: Sheffield Steel Corp., Sarcom Inc., Global Technology Finance Corp. and Centis Inc. Mr. Flannery is a graduate of Columbia University.

~~Table of Contents~~

ZOLA P. HOROVITZ, Ph.D. has been a director since February 2001. Before he retired from Bristol-Myers Squibb in 1994, Dr. Horovitz spent 34 years in various positions, including associate director of the Squibb Institute for Medical Research, vice president of development, vice president, scientific liaison, vice president of licensing, and vice president of business development and planning, for the pharmaceutical division of Bristol-Myers Squibb. He held advisory positions at the University of Pittsburgh, Rutgers College of Pharmacy and Princeton University. He is currently a director of seven other publicly held companies: Genaera Corporation, Biocryst Pharmaceuticals, Diacrin, Avigen, Synaptic Pharmaceutical, 3-Dimensional Pharmaceuticals and Dov Pharmaceuticals; and four non-public companies: Phyton, Epigenesis, Immunicon and Nitromed. Dr. Horovitz earned his Ph.D. in Pharmacology from the University of Pittsburgh.

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

ERROL DE SOUZA, Ph.D. has been a director since April 2003. Dr. De Souza has nearly two decades of experience in the field of drug discovery and development. Dr. DeSouza joined Archemix Corporation, a biopharmaceutical company focused on aptamer therapeutics, on April 1, 2003. Previously, he was president and chief executive officer and a director of Synaptic Pharmaceuticals. As a result of a merger effective March 2003, Synaptic Pharmaceuticals became a wholly owned subsidiary of H. Lundbeck A/S, an international pharmaceutical company. Prior to that, Dr. DeSouza held senior management positions with Aventis, and its predecessor company Hoechst Marion Roussel Pharmaceuticals, and was co-founder of Neurocrine Biosciences, Inc. He is currently a member of the board of directors of IDEXX, and a Professor at the Center for Molecular Biology and Behavioral Neurosciences at Rutgers University. Dr. DeSouza received his B.A. (Honors) in Physiology and his Ph.D. in Neuroendocrinology from the University of Toronto, Canada and he received his postdoctoral fellowship in Neuroscience from The John Hopkins School of Medicine, Baltimore, MD.

~~Section 16(a) Beneficial Ownership Reporting Compliance~~

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

•	Item 10 – Directors and Executive Officers of the Registrant

•	Item 11 – Executive Compensation

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

•	Item 13 – Certain Relationships and Transactions

•	Item 14 – Principal Accountant Fees and Services

is incorporated by reference from our definitive proxy statement relating to the 2004 Annual Meeting of Stockholders, which we will file with the SEC ~~(the Securities and Exchange Commission) require us to disclose late filings of reports of stock ownership and changes in stock ownership by~~within 120 days after our ~~directors and officers. To the best of our knowledge, all of the filings for our directors and officers were made on a timely basis in~~June 30, 2004 fiscal ~~2003, except that Messrs. Spana, Wills, Molinoff, deVeer, Flannery, Horovitz and Taber each filed one report on Form 4 late, each relating to one option grant transaction.~~year end.

~~Table of Contents~~

Item 11. Executive Compensation

Summary compensation table. The following table summarizes the compensation paid to our chief executive officer and the other named executive officers for the last three fiscal years. With respect to the persons and periods covered in the following table, we made no restricted stock awards, have no outstanding stock appreciation rights (“SARs”) and have no long-term incentive plan (“LTIP”).


                              SUMMARY COMPENSATION TABLE
                                                                 Long Term
                                                               Compensation
                                                               ------------
                                 Annual Compensation              Awards
                        -----------------------------------    ------------
                                                                                All other
Name and                                                          Option         Compen-
Principal Position      Year       Salary          Bonus          Shares(1)      sation
- ------------------      ----     -----------     ----------      ----------     ----------
Carl Spana, Ph.D.,      2003     $290,000        $50,000(2)      100,000        $3,543(3)
chief executive         2002     $291,042(4)           -         100,000(5)     $58,305(6)
officer                 2001     $268,358        $60,000         140,000         $2,319(7)


Stephen T. Wills,       2003     $225,000        $40,000(2)       80,000        $18,131(8)
CPA, MST, chief         2002     $226,833(4)           -          70,000(5)     $16,472(9)
financial officer       2001     $206,274        $45,000          65,000        $10,164(10)


Perry B. Molinoff,      2003     $250,000        $26,667(2)       60,000        $17,665(11)
M.D., executive         2002     $205,715              -               -        $46,192(12)
vice president of       2001        N/A            N/A           245,000          N/A
research &
development


Shubh D. Sharma,        2003     $165,000        $23,333(2)       30,000        $17,081(13)
Ph.D., vice             2002     $162,083              -          35,000(5)     $13,091(14)
president and chief     2001     $140,912        $20,000          30,000        $11,628(15)
technical officer
_____________________________

~~(1)~~

~~The security underlying all options listed is common stock.~~

~~(2)~~

~~Bonus earned in fiscal year 2003 and paid in fiscal year 2004.~~

Table of Contents

~~(3)~~

~~Includes 401(k) matching contributions of $2,538 and life/disability insurance premiums of $1,005.~~

~~(4)~~

~~Includes one pay period of retroactive FY 2001 base salary earnings paid in FY 2002.~~

~~(5)~~

~~Options granted in fiscal year 2002 relate to compensation for fiscal year 2001. No options were granted relative to fiscal 2002.~~

~~(6)~~

~~Includes a relocation benefit of $55,000, 401(k) matching contributions of $2,300 and life/disability insurance premiums of $1,005.~~

~~(7)~~

~~401(k) matching contributions.~~

~~(8)~~

~~Includes health insurance premiums of $11,126, life/disability insurance premiums of $1,005 and 401(k) matching contributions of $6,000.~~

~~(9)~~

~~Includes health insurance premiums of $10,248, life/disability insurance premiums of $1,005 and 401(k) matching contributions of $5,219.~~

~~(10)~~

~~Includes health insurance premiums of $7,089 and 401(k) matching contributions of $3,075.~~

~~(11)~~

~~Includes Health insurance premiums of $10,660, life/disability insurance premiums of $1,005 and 401(k) matching contributions of $6,000.~~

~~(12)~~

~~Includes a relocation benefit of $32,809, health insurance premiums of $8,482, life/disability insurance premiums of $838 and 401(k) matching contributions of $4,063.~~

~~(13)~~

~~Includes health insurance premiums of $11,126, life/disability insurance premiums of $1,005 and 401(k) matching contributions of $4,950.~~

~~(14)~~

~~Includes health insurance premiums of $10,248, life/disability insurance premiums of $1,005 and 401(k) matching contributions of $1,838.~~

~~(15)~~

~~Includes health insurance premiums of $9,678 and 401(k) matching contributions of $1,950.~~

~~Option grants in last fiscal year~~. The following table shows options granted to our named executive officers during the fiscal year ended June 30, 2003. All of the options listed were granted under our 1996 stock option plan, and the underlying security is common stock. All options granted in fiscal 2003 vested as to one third of the shares on the date of grant, and will vest as to the remaining two thirds of the shares only upon achievement of performance objectives. The exercise price for each option is equal to the market price of common stock on the date of grant. We have not granted any SARs.

~~[TABLE APPEARS ON FOLLOWING PAGE]~~

~~Table of Contents~~


                                             OPTION GRANTS IN LAST FISCAL YEAR

                           INDIVIDUAL GRANTS
- --------------------------------------------------------------------------|
                                                                          |  Potential Realizable
                                                                          |    Value at Assumed
                      Number of      % of Total                           |    Annual Rates of
                      Securities       Options                            |      Stock Price
                      Underlying     Granted to    Exercise               |    Appreciation for
                       Options        Employees    or Base                |      Option Term*
                       Granted       in Fiscal      Price      Expiration | ---------------------
        Name             (#)            Year        ($/Sh)        Date    |   5%($)       10%($)
- ----------------------------------- -------------- --------- -------------| ----------  ---------
                                                                          |
Carl Spana             100,000          16.5%       $2.00      12/11/2012 |  $125,780    $318,750
                                                                          |
Stephen T. Wills        80,000          13.2%       $2.00      12/11/2012 |  $100,624    $255,000
                                                                          |
Perry B. Molinoff       60,000           9.9%       $2.00      12/11/2012 |  $75,468     $191,250
                                                                          |
Shubh D. Sharma         30,000           5.0%       $2.00      12/11/2012 |  $37,734      $95,625
__________________________

* "Potential realizable value" is shown in response to SEC rules which require the information, for illustration purposes only. The values shown are not representations or projections of future stock prices or the future value of our common stock.

~~Aggregated option exercises in last fiscal year and fiscal year-end option values~~. No executive officer exercised any options during the fiscal year ended June 30, 2003. We have not granted any SARs. Fiscal year-end values in the following table are based on the closing price for the common stock, as reported on AMEX on June 30, 2003, of $3.19 per share.


                               aggregated option exercises in last fiscal year
                                      and fiscal year-end option values


                                                                                           Value of
                                                        Shares Underlying                 Unexercised
                                                          Unexercised                    In-the-Money
                       Shares                              Options at                      Options at
                      Acquired                          Fiscal Year End,                Fiscal Year End,
                         on         Value          -------------------------       -------------------------
      Name            Exercise     Realized        Exercisable Unexercisable       Exercisable Unexercisable
      ----            --------     --------        ----------- --------------      ----------- -------------
Carl Spana               0            $0             650,962      130,000           $216,114      $79,334
Stephen T. Wills         0            $0             457,916      113,334            $85,359      $63,466
Perry B. Molinoff        0            $0             117,500      187,500            $23,800      $47,600
Shubh D. Sharma          0            $0              82,630      63,335             $18,800      $23,800

~~Ten-year option repricings~~. We did not adjust or amend the exercise price of any stock options during the fiscal year ended June 30, 2003. We have not granted any SARs. The following table shows all option repricings for all executive officers at any time during the last 10 years, except for repricings which may have been effected before we became a publicly held company in 1993:

~~Table of Contents~~


                                            TEN-YEAR OPTION REPRICINGS


                                 Number of       Market                                     Length of
                                Securities      Price of       Exercise                     Original
                                Underlying      Stock at       Price at                    Option Term
                                  Options       Time of         Time of        New        Remaining at
                                Repriced or   Repricing or   Repricing or    Exercise        Date of
                                  Amended      Amendment       Amendment      Price       Repricing or
Name                   Date         (#)           ($)             ($)          ($)          Amendment
- -------------------   -------   -----------   ------------   ------------    --------   ----------------
Carl Spana            3/24/98     74,196         $6.25           $4.96        $1.00     8 years 3 months
Charles Putnam (1)    3/24/98     74,196         $6.25           $4.96        $1.00     8 years 3 months
Edward J. Quilty (2)  3/24/98      7,803         $6.25           $4.96        $0.20     9 years 2 months
Edward J. Quilty      9/27/96     70,257         $10.50          $5.42        $0.20     8 years 3 months
- --------------------------

~~(1) Former executive vice president and chief operating officer.~~

~~(2) Former president and chief executive officer.~~

~~Compensation of Directors~~

~~Non-employee directors’ initial option grants~~. When a non-employee director is first elected to the board, he receives an option to purchase an amount of common stock determined by the board, up to 10,000 shares, at the market value on the date of grant. These options vest as to 25% of the option per year, starting on the date of grant. They expire 10 years from the date of grant.

~~Non-employee directors’ annual option grants~~. Each non-employee director receives annually an option to purchase 25,000 shares of common stock at the closing price on the date of the board’s annual meeting. These options vest in 12 monthly installments, starting on the last day of January. They expire 10 years from the date of grant. Messrs. deVeer, Flannery, Horovitz and Taber each received an option to purchase 25,000 shares at $1.59 per share, the closing price on December 6, 2002. Mr. DeSouza received an option to purchase 18,750 shares, representing the prorated portion of his annual option grant, at $1.70 per share, the closing price on April 1, 2003, the date he became a director.

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

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

~~Table of Contents~~

Employment Agreements

Carl Spana, Ph.D., Stephen T. Wills and Perry B. Molinoff, M.D. Dr. Spana, Mr. Wills and Dr. Molinoff have each entered into an employment agreement with us for a two-year period commencing October 1, 2001 for Dr. Spana and Mr. Wills, and commencing September 4, 2001 for Dr. Molinoff. Each agreement automatically renews for a one-year period unless terminated at least 30 days before the anniversary date. Dr. Spana is serving as chief executive officer and president at a salary of $290,000 per year. Mr. Wills is serving as chief financial officer at a salary of $225,000 per year. Dr. Molinoff is serving as executive vice president of research and development at a salary of $250,000 per year. Each agreement also provides for:

~~annual bonus compensation, in an amount to be decided by the compensation committee and approved by the board, based on achievement of yearly objectives; and~~

~~participation in all benefit programs that we establish, to the extent the employee’s position, tenure, salary, age, health and other qualifications make him eligible to participate.~~

Each agreement allows us or the employee to terminate the agreement upon written notice, and contains other provisions for termination by the company for “cause,” or by the employee for “good reason” or due to a “change in control” (as these terms are defined in the employment agreements). Early termination may, in some circumstances, result in severance pay at the salary then in effect, for a period of 24 months (Spana), 18 months (Wills) or 12 months (Molinoff) plus continuation of medical and dental benefits then in effect for 18 months (Spana and Wills) or 12 months (Molinoff). For Dr. Spana and Mr. Wills, termination following a change in control will result in a lump sum payment of two times (Spana) or one and one-half times (Wills) the salary then in effect, continuation of medical and dental benefits then in effect for 18 months, and immediate vesting of all stock options. For Dr. Molinoff, termination following a change in control will result in severance payments at the salary then in effect for 12 months, continuation of medical and dental benefits then in effect for 12 months, employment search expense reimbursement up to $25,000, and immediate vesting of all stock options. Each agreement includes non-competition, non-solicitation and confidentiality covenants. Although the agreements for Dr. Spana and Mr. Wills were automatically extended for a one year period pursuant to their terms, we are currently negotiating amendments to the agreements, except with respect to the base annual salary, and we anticipate that the amended terms will not be materially different than the existing terms.

~~Shubh D. Sharma, Ph.D~~. When we merged with RhoMed Incorporated (now our wholly-owned subsidiary) in 1996, we assumed RhoMed’s employment agreement with Dr. Sharma, which automatically renews for one-year periods, unless terminated by either party at least six months before the anniversary date. Dr. Sharma is serving as a vice president and chief technical officer at a salary of $165,000 per year. His agreement also provides for:

~~bonus compensation based on completion of proprietary peptide libraries, and discretionary incentive bonuses in an amount to be decided by the company; and~~

~~participation in all benefit programs that we establish, to the extent the employee’s position, tenure, salary, age, health and other qualifications make him eligible to participate.~~

~~Table of Contents~~

The agreement allows us or the employee to terminate the agreement upon written notice, and contains other provisions for termination by the company for “cause” (as defined in the agreement). Early termination may, in some circumstances, result in severance pay at the salary then in effect, for a period of six months. The agreement includes non-competition and confidentiality covenants.

Compensation Committee Interlocks and Insider Participation in Compensation Decisions.

~~During the fiscal year ended June 30, 2003, Mr. Flannery, Mr. deVeer and Dr. Horovitz served on the compensation committee.~~

~~There are no compensation committee interlocks with other companies.~~

~~COMPENSATION COMMITTEE REPORT~~

The compensation committee of the board makes recommendations to the board about compensation of executive officers. The committee also administers the 1996 stock option plan and may grant options to non-management employees and consultants, but it is the board’s policy to have the full board review and approve all option grants which the committee recommends for executive officers and directors. The committee also reviews and makes recommendations to the board concerning proposed employment agreements with executive officers. The committee evaluates performance and determines compensation policies and levels for executive officers. The members of the compensation committee are not, and have never been, employees or executive officers of Palatin. Mr. deVeer and Mr. Flannery have served on the committee since August 2000, and Dr. Horovitz has served on the committee since February 2001.

~~Executive compensation policy~~. Competition for qualified senior management personnel in Palatin’s industry is intense. In order to attract and retain qualified personnel, Palatin must offer compensation which is both comparable to similarly situated companies in current salary and benefits, and includes the potential for substantial rewards if Palatin is successful over the long term. Palatin’s aim is to attract, retain and reward executive officers and other key employees who contribute to its long-term success and to motivate those individuals to enhance long-term stockholder value. It is Palatin’s policy to enter into employment agreements with executive officers, preferably with an initial term of two years. To establish this relationship between executive compensation and creation of stockholder value, the board has adopted a total compensation package comprised of base salary, bonus and stock option awards. Key elements of the compensation philosophy are:

~~Palatin pays compensation at levels competitive with other biotechnology companies with which Palatin competes for talent.~~

~~Palatin maintains annual incentive opportunities sufficient to provide motivation to achieve specific operating goals and to generate rewards that bring total compensation to competitive levels.~~

Palatin provides significant equity-based incentives for executives and other key employees to ensure that they are motivated over the long-term to respond to Palatin’s business challenges and opportunities as owners and not just as employees.

Determining executive compensation. The committee usually meets twice per year to review how well management compensation is serving Palatin’s goals, to make recommendations to the board for any adjustments, and to recommend annual compensation for the coming year. Palatin’s chief financial officer and human resources manager gather and report on information about compensation levels in comparable companies. We review the performance of each executive officer and the financial condition of the company. We then consider the following major components of executive compensation:

~~Table of Contents~~

~~Base salary~~. The employment agreement with each executive sets an initial base salary, which is competitive in our industry, given the executive’s experience and qualifications, at the time we enter into the agreement. The committee annually reviews each executive officer’s base salary. Among the factors taken into consideration are (1) individual and corporate performance, (2) levels of responsibility, (3) prior experience, (4) breadth of knowledge of the industry, and (5) competitive pay practices. If salaries at comparable companies appear to have increased, we recommend similar increases, but only if each executive’s historical performance warrants an increase and if the increase is prudent in view of Palatin’s financial condition.

~~Annual bonus~~. In addition to the competitive base salary, we intend to reward executives each year for the achievement of specific goals, which may be financial, operational or technological. We consider objectively measurable goals, such as obtaining new investment capital, negotiating valuable contracts, or meeting regulatory requirements, and more subjective goals, such as quality of management performance and consistency of effort. Palatin’s objectives consist of operating, strategic and financial goals that the board considers to be critical to Palatin’s overall goal: building stockholder value. Our recommendations for cash bonuses also take into account Palatin’s liquidity and capital resources at the time. Until Palatin’s operations generate substantial income, we may recommend bonuses which consist partly or mainly of stock options. Stock options granted as part of bonus compensation will usually be immediately exercisable, or will vest over a shorter time than other incentive options.

~~Long-term incentives~~. At present, Palatin’s only long-term incentive program is its 1996 stock option plan. Palatin does not have a defined benefit pension plan, and contributions to executives’ accounts under Palatin’s 401K plan are limited by federal tax regulations. Through option grants, executives receive significant equity incentives to build long-term stockholder value. The exercise price of options granted under the plan is at least 100% of fair market value of the common stock on the date of grant. Employees receive value from these grants only if the common stock appreciates over the long-term. We determine the size of option grants based on competitive practices at leading companies in the biotechnology industry and Palatin’s philosophy of significantly linking executive compensation with stockholder interests.

~~Fiscal year 2003 compensation~~. During the fiscal year ended June 30, 2003, we continued compensation under our employment agreements with Dr. Spana, Mr. Wills, Dr. Molinoff and Dr. Sharma, with no change in base salaries. The base salaries for these executive officers, as provided in their employment agreements, reflect comparable salary figures for the industry, necessary to engage and retain individuals with their skills. Stock option grants for the executive officers reflected achievement of corporate and development goals. Starting December of 2002, we have made the vesting of a majority of the options granted to our executive officers contingent on achievement of performance objectives. Due to insufficient liquidity and other factors, we did not grant cash bonuses to executive officers with respect to fiscal 2002. We have resumed the granting of cash bonuses with respect to fiscal 2003, but did not pay out these bonuses until the first quarter of fiscal 2004.

~~Table of Contents~~

The base salary, bonus and grants of stock options for our CEO, Carl Spana, Ph.D., were determined in accordance with the criteria described above under “Determining executive compensation.” Dr. Spana’s compensation reflects the board’s subjective assessment of (1) his performance, (2) his skills in relation to other CEOs in Palatin’s industry, and (3) the board’s assessment of Palatin’s performance. Considering these factors, the committee set Dr. Spana’s base annual salary at $290,000 when we entered into our employment agreement with him effective October 1, 2001.

~~Certain Tax Considerations~~. Section 162(m) of the Internal Revenue Code limits the company to a deduction for federal income tax purposes of not more than $1 million of compensation paid to certain executive officers in a taxable year. Compensation above $1 million may be deducted if it is “performance-based compensation” within the meaning of the Code.

The committee believes that at the present time it is unlikely that the compensation paid to any executive officer in a taxable year will exceed $1 million. Therefore, the board has not established a policy for determining which forms of incentive compensation awarded to executive officers will be designed to qualify as “performance based compensation.”

~~SUBMITTED BY THE COMPENSATION COMMITTEE:~~

~~Kevin S. Flannery, Chairman~~
~~Robert K. deVeer, Jr.~~
~~Zola P. Horovitz, Ph.D.~~

~~Stock Performance Graph~~

The following graph compares the yearly change in the cumulative total shareholder return on our common stock with the cumulative total return on the Nasdaq Composite Index and the Nasdaq Biotechnology Index for our last five fiscal years. The graph assumes the investment of $100 in each stock or index on June 30, 1998, and the reinvestment of any dividends (we have never paid a dividend).

~~[GRAPH APPEARS ON FOLLOWING PAGE]~~

~~Table of Contents~~

~~GRAPH OMITTED~~


stock or index:          6/98         6/99        6/00        6/01        6/02         6/03
- --------------           ----         ----        ----        ----        ----         ----
Palatin common          $100.00      $92.41     $141.77      $87.09      $40.10       $64.61
Nasdaq composite        $100.00     $141.77     $209.32     $114.07      $77.22       $85.65
Nasdaq biotech          $100.00     $159.91     $383.59     $319.59     $160.79      $211.91

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

~~Securities Authorized for Issuance under Equity Compensation Plans~~

~~The information required by item 201(d) of Regulation S-K pursuant to the requirements of this Item 12 is contained in this report under the same heading of Part II, Item 5.~~

~~Security Ownership of Certain Beneficial Owners and Management~~

~~The tables below show the beneficial stock ownership and voting power, as of September 18, 2003, of:~~

~~each director, each of the named officers, and all current directors and officers as a group; and~~

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

“Beneficial ownership” here means direct or indirect voting or investment power over outstanding stock and stock which a person has the right to acquire now or within 60 days after September 18, 2003. Please see the footnotes for more detailed explanations of the holdings. Except as otherwise noted, to our knowledge, the persons named in the tables beneficially own and have sole voting and investment power over all shares listed.

The common stock has one vote per share and the Series A preferred stock has approximately 38 votes per share. Voting power is calculated on the basis of the aggregate of common stock and Series A preferred stock outstanding as of September 18, 2003. On September 18, 2003, 43,125,360 shares of common stock and 13,617 shares of Series A preferred stock were outstanding.

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

~~Table of Contents~~


                                                    MANAGEMENT:



                                                                                   Percent of
                                                                     Percent of      Voting
Class        Name of Beneficial Owner                    Shares        Class         Power
- ---------------------------------------------------------------------------------------------
Common       Carl Spana, Ph.D.                          730,968(1)      2.4%           *
Common       Stephen T. Wills                           525,916(2)      1.7%           *
Common       Perry B. Molinoff, M.D.                    176,250(3)       *             *
Common       Shubh D. Sharma, Ph.D.                     114,313(4)       *             *
Common       John K.A. Prendergast, Ph.D.               343,673(5)       *             *
Common       Robert K. deVeer, Jr.                      180,273(6)       *             *
Common       Kevin S. Flannery                          130,444(7)       *             *
Common       Zola P. Horovitz, Ph.D.                     70,833(8)       *             *
Common       Robert I. Taber, Ph.D.                      65,833(9)       *             *
Common       Errol DeSouza, Ph.D.                        17,083(10)      *             *
             All current directors and executive      2,355,586(11)     5.2%           *
             officers as a group (ten persons)
- ------------------

*Less than one percent.

~~(1) Includes 714,295 shares which Dr. Spana has the right to acquire under options.~~

~~(2) Includes 517,916 shares which Mr. Wills has the right to acquire under options.~~

~~(3) Includes 166,250 shares which Dr. Molinoff has the right to acquire under options.~~

~~(4) Includes 114,298 shares which Dr. Sharma has the right to acquire under options.~~

~~(5) Includes 330,000 shares which Dr. Prendergast has the right to acquire under options.~~

~~(6) Shares which Mr. deVeer has the right to acquire under options.~~

~~(7) Includes 110,444 shares which Mr. Flannery has the right to acquire under options.~~

~~(8) Includes 65,833 shares which Dr. Horovitz has the right to acquire under options.~~

~~(9) Includes 60,833 shares which Dr. Taber has the right to acquire under options.~~

~~(10) Shares which Mr. DeSouza has the right to acquire under options.~~

~~(11) Includes 2,277,225 shares which directors and officers have the right to acquire under options.~~

~~Table of Contents~~


                                         5% OR GREATER BENEFICIAL OWNERS:


                                                                                      Percent of
                                                                        Percent of      Voting
Class          Name of Beneficial Owner                   Shares          Class         Power
- ------------------------------------------------------------------------------------------------
Common         ProQuest(1)                               6,161,972(2)     13.9%         11.3%
Common         Albert Fried, Jr.(3)                      3,660,277(4)      8.3%          5.7%
Common         Lurie Investments(5)                      3,080,984(6)      7.0%          5.6%
Common         Federated Kaufmann Fund(7)                2,668,982(8)      6.1%          4.1%
Common         BVF Inc.(9)                               2,640,846(10)     6.0%          4.8%
Common         Credit Suisse Equity Fund Management
               Company S.A. on behalf of CS Equity
               Fund (Lux) Global Biotech(11)             2,599,489(12)     6.0%          4.9%
Common         Joseph Edelman(13)                        2,580,458(14)     5.9%          4.0%
Common         Pictet & Cie.(15)                         2,500,166(16)     5.7%          4.7%
Series A

Preferred      J.F. Shea Co., Inc.(17)                       5,000        36.7%           *(18)
- ------------------

*Less than one percent.

~~(1)~~

Includes the ownership of ProQuest Investments, L.P., ProQuest Investments II, L.P., ProQuest Investments II Advisors Fund, L.P. and ProQuest Companion Fund, L.P. ProQuest Associates LLC is the general partner of ProQuest Investments, L.P. and ProQuest Companion Fund, L.P. ProQuest Associates II LLC is the general partner of ProQuest Investments II, L.P. and ProQuest Investments II Advisors Fund, L.P. Address is 600 Alexander Park, Suite 204, Princeton, NJ 08540.

~~(2)~~

~~Includes 1,232,394 shares which the ProQuest entities have the right to acquire under warrants.~~

~~(3)~~

~~Address is c/o Albert Fried & Company LLC, 60 Broad St., 39th Floor, New York, NY 10004.~~

~~(4)~~

~~Includes 1,175,629 shares which Mr. Fried has the right to acquire under warrants.~~

~~(5)~~

Includes the ownership of Lurie Investment Fund, LLC, ALFATECH, LLC, and WASK Investments, LLC. Mark Slezak is the investment manager for all three entities. Address is c/o Lurie Investments, 2 N. Riverside Plaza, Suite 1500, Chicago, IL 60606.

~~(6)~~

~~Includes 616,197 shares which Lurie Investment Fund, LLC, ALFATECH, LLC, and WASK Investments, LLC have the right to acquire under warrants.~~

~~(7)~~

Includes the ownership of Federated Kaufmann Fund and Federated Kaufmann Small-Cap Fund. Lawrence Auriana is the portfolio manager for Federated Kaufmann Fund and Federated Kaufmann Small-Cap Fund. Address is 140 East 45th Street, New York, NY 10017.

~~Table of Contents~~

~~(8)~~

~~Includes 880,282 shares which Federated Kaufmann Fund and Federated Kaufmann Small-Cap Fund have the right to acquire under warrants.~~

~~(9)~~

Includes the ownership of Biotechnology Value Fund, L.P, Biotechnology Value Fund II, L.P, BVF Investments, L.L.C. and Investment 10, L.L.C. BVF Inc. is the general partner of BVF Partners LP, which is the general partner of Biotechnology Value Fund, L.P and Biotechnology Value Fund II, L.P., the manager of BVF Investments, L.L.C. and the investment adviser to Investment 10, L.L.C. Address is 227 West Monroe, Suite 4800, Chicago, IL 60606.

~~(10)~~

~~Includes 528,169 shares which Biotechnology Value Fund, L.P, Biotechnology Value Fund II, L.P, BVF Investments, L.L.C. and Investment 10, L.L.C. have the right to acquire under warrants.~~

~~(11)~~

~~Address is c/o Brown Brothers Harriman, P.O. Box 1536, Pine Street Station, New York, NY 10268.~~

~~(12)~~

~~Includes 325,300 shares which CS Equity Fund (Lux) Global Biotech has the right to acquire under warrants.~~

~~(13)~~

~~Address is c/o Perceptive Capital LLC, 5431 Connecticut Ave. NE, Suite 100, Washington, DC 20015.~~

~~(14)~~

Includes 813,932 shares which Mr. Edelman, or persons with whom he shares voting and investment power, have the right to acquire under warrants. Mr. Edelman shares voting and/or investment power as to 2,320,200 of the shares shown in the table with the following persons: Perceptive Life Sciences Master Fund, Ltd. as to 2,212,000 shares; and First New York Securities, LLC as to 108,200 shares. Mr. Edelman is the managing partner of Perceptive Life Sciences Master Fund, Ltd.

~~(15)~~

~~Address is 29 Blvd. Georges-Favon, 1204 Geneva, Switzerland.~~

~~(16)~~

~~Includes 280,000 shares which Pictet & Cie. has the right to acquire under warrants.~~

~~(17)~~

~~Address is 655 Brea Canyon Road, Walnut, CA 91789.~~

~~(18)~~

~~Includes 75,000 shares of common stock which J.F. Shea Co., Inc. has the right to acquire under warrants.~~

Item 13. Certain Relationships and Related Transactions.

~~John K. A. Prendergast, Ph.D~~. Dr. Prendergast is the president and sole stockholder of Summercloud Bay, Inc., a corporation with which we have a consulting agreement to provide strategic and technology consulting services. Under the agreement, we have agreed to pay Summercloud Bay a fee of $1,750 per diem for work which we request, and we reimburse Dr. Prendergast for direct expenses. During the fiscal year ended June 30, 2003, we paid a total of $112,500 to Summercloud Bay, Inc. for consulting services.

~~Table of Contents~~

Item 14. Principal Accountant Fees and Services.

~~Our principal accountant is KPMG LLP.~~

~~Audit Fees~~. For the fiscal year ended June 30, 2003, KPMG billed us a total of $69,928 for professional services rendered for the audit of our annual financial statements, review of financial statements in our Forms 10-Q and services provided in connection with regulatory filings. For the fiscal year ended June 30, 2002, the total was $47,161.

~~Audit-Related Fees~~. During the fiscal years ended June 30, 2003 and 2002, KPMG did not perform or bill us for assurance and related services related to audit or review of our financial statements, other than as stated in the preceding paragraph.

~~Financial Information Systems Design and Implementation Fees~~~~. During the fiscal years ended June 30, 2003 and 2002, KPMG did not perform or bill us for financial information systems design and implementation.~~

~~Tax Fees~~. For the fiscal year ended June 30, 2003, KPMG billed us a total of $12,000 for professional services rendered for tax compliance, tax advice and tax planning. For the fiscal year ended June 30, 2002, the total was $11,500.

~~All Other Fees~~~~. KPMG did not perform or bill us for any services other than those described above for the fiscal years ended June 30, 2003 and 2002.~~

~~[PART IV BEGINS ON THE FOLLOWING PAGE]~~

~~Table of Contents~~

PART IV

Item 16.15. 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 Registered Independent ~~Auditors’ Report~~Public Accounting Firm

— 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

3.01

Certificate of incorporation. Incorporated by reference to Exhibit 3.01 of our annual report on 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 quarterly report on 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 Form10-KSB for the ~~period~~year ended June 30, 1996, filed with the SEC on September 27, 1996.

10.02

1996 Stock Option Plan, as amended effective ~~July~~January 1, ~~1999.~~2001. Incorporated by reference to Exhibit ~~10.02~~4.1 of our ~~amended annual report~~registration statement on Form ~~10-KSB/A for the period ended June 30, 1999,~~S-8, Commission File No. 333-83876, filed with the SEC on ~~December 28, 1999.~~March 6, 2002.

10.03

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

10.04

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

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10.05

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~~year ended June 30, 1996, filed with the SEC on September 27, 1996.

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10.06

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.

~~10.07~~

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. +

~~10.08~~

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~~year ended June 30, 1999, filed with the SEC on December 28, 1999.

~~10.09~~10.07

Amendment To Strategic Collaboration Agreement dated as of May 13, 2002 between Palatin and Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.1 of our quarterly report on Form 10-Q for the ~~period~~quarter ended March 31, 2002, filed with the SEC on May 15, 2002. We have obtained confidential treatment of certain provisions contained in Exhibit 10.15. The copy filed as an exhibit omits the information subject to the confidentiality request.

~~10.10~~10.08

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 annual report on Form 10-K for the year ended June 30, 2000, filed with the SEC on September 29, 2000.

~~10.11~~10.09

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

~~10.12~~10.10

Employment Agreement dated as of July 17, 2001 between Palatin Technologies, Inc. and Perry B. Molinoff. Incorporated by reference to Exhibit 10.30 of our annual report on Form 10-K for the ~~period~~year ended June 30, 2001, filed with the SEC on September 28, 2001. †

~~10.13~~10.11

Employment Agreement dated as of October 1, ~~2001,~~2003, between Palatin Technologies, Inc. and Carl Spana. Incorporated by reference to Exhibit ~~10.4~~10.1 of our quarterly report on Form 10-Q for the ~~period~~quarter ended September 30, ~~2001,~~2003, filed with the SEC on November 14, ~~2001.~~2003. †

~~10.14~~10.12

Employment Agreement dated as of October 1, ~~2001,~~2003, between Palatin Technologies, Inc. and Stephen T. Wills. Incorporated by reference to Exhibit ~~10.5~~10.2 of our quarterly report on Form 10-Q for the ~~period~~quarter ended September 30, ~~2001,~~2003, filed with the SEC on November 14, ~~2001.~~2003. †

~~10.15~~10.13

Employment Agreement dated as of October 1, 2003, between Palatin Technologies, Inc. and Shubh D. Sharma. Incorporated by reference to Exhibit 10.3 of our quarterly report on Form 10-Q for the quarter ended September 30, 2003, filed with the SEC on November 14, 2003. †

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10.14

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

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~~10.16~~10.15

Form of registration rights agreement for our October 2001 private placement. Incorporated by reference to Exhibit 10.2 of ~~the registrant’s~~our quarterly report on Form 10-Q for the quarter ended September 30, 2000, filed with the SEC on November 14, 2000.

~~10.17~~10.16

Form of warrant issued to purchasers in our October 2001 private placement. Incorporated by reference to Exhibit 10.3 of ~~the registrant’s~~our quarterly report on Form 10-Q for the quarter ended September 30, 2000, filed with the SEC on November 14, 2000.

~~10.18~~10.17

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

~~10.28~~10.18

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

~~10.29~~10.19

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

~~10.30~~10.20

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

~~10.31~~10.21

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

~~10.32~~10.22

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

~~10.33~~10.23

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

~~10.34~~10.24

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

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10.25

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

~~10.35~~10.26

Development and Manufacturing Agreement between Palatin and DSM Biologics Company B.V. Incorporated by reference to Exhibit 10.30 of our annual report on Form 10-K for the year ended June 30, 2003, filed with the SEC on September 29, 2003. We have requested confidential treatment of certain provisions contained in ~~Exhibit 10.33.~~this exhibit. The copy filed as an exhibit omits the information subject to the confidentiality request.

10.27

Securities Purchase Agreement between Palatin and King Pharmaceuticals, Inc. We have requested confidential treatment of certain provisions contained in this exhibit. The copy filed as an exhibit omits the information subject to the confidentiality request. *

10.28

Collaborative Development and Marketing Agreement between Palatin and King Pharmaceuticals, Inc. We have requested confidential treatment of certain provisions contained in this exhibit. The copy filed as an exhibit omits the information subject to the confidentiality request. *

10.29

Form of warrant certificate issued to King Pharmaceuticals, Inc. *

Subsidiaries of the registrant. *

~~23.1~~23

Consent of KPMG ~~LLP, independent auditors.~~LLP. *

31.1

Certification of Chief Executive Officer *

31.2

Certification of Chief Financial Officer *

32.1

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

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32.2

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

~~_________________~~

* Exhibit filed with this report.

† Management contract

(b) Reports on Form 8-K:

On November 6, 2003, we filed a current report on Form 8-K

reporting an Item 5 event regarding the presentation of positive safety and efficacy data from our Phase 2B “at home” study of PT-141 for male sexual dysfunction.

~~None.~~

8876

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	•	On August 13, 2004, we filed a Form 8-K including the press release in which we announced an agreement between Palatin and King Pharmaceuticals, Inc. to jointly develop and, on obtaining necessary regulatory approvals, commercialize Palatin’s PT-141 for the treatment of male and female sexual dysfunction.
	•	On August 18, 2004, we filed a Form 8-K including the press release in which we announced that we conducted the initial closing and received proceeds of $20 million from King Pharmaceuticals, Inc. pursuant to the collaborative agreement between Palatin and King, which we announced on August 13, 2004.

SIGNATURES

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

PALATIN TECHNOLOGIES, INC.

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

Date: September ~~29, 2003~~13, 2004

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

Signature	Title	Date

/s/ Carl Spana	President, Chief Executive Officer and Director	September ~~29, 2003~~13, 2004
Carl Spana	(principal executive officer)

/s/ Stephen T. Wills	Executive Vice President and Chief Financial Officer	September ~~29, 2003~~13, 2004
Stephen T. Wills	(principal financial and accounting officer)

~~/s/ Perry B. Molinoff~~	~~Executive Vice President of Research & Development~~	~~September 29, 2003~~
~~Perry B. Molinoff~~	~~and Director~~

/s/ John K.A. Prendergast	Chairman and Director	September ~~29, 2003~~13, 2004
John K.A. Prendergast

/s/ ~~Robert K. deVeer, Jr.~~Perry B. Molinoff	Director	September ~~29, 2003~~13, 2004
~~Robert K. deVeer, Jr.~~Perry B. Molinoff

/s/ ~~Kevin S. Flannery~~Robert K. deVeer, Jr.	Director	September ~~29, 2003~~13, 2004
~~Kevin S. Flannery~~Robert K. deVeer, Jr.

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/s/ Zola P. Horovitz	Director	September ~~29, 2003~~13, 2004
Zola P. Horovitz

/s/ Robert I. Taber	Director	September ~~29, 2003~~13, 2004
Robert I. Taber

/s/ Errol DeSouza	Director	September ~~29, 2003~~13, 2004
Errol DeSouza

8978

Delaware	95-4078884
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4C Cedarbrook Drive
Cranbury, New Jersey	08512
(Address of principal executive offices)	(Zip Code)

		Page

Item 1.	Business	4

Item 2.	Properties	1415

Item 3.	Legal Proceedings	1516

Item 4.4	Submission of Matters to a Vote of Security Holders	1516

Item ~~14.~~15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	Page 8573

	Signatures	Page __77

Item 5.	Market for Registrant's Common Equity, ~~and~~ Related Stockholder Matters and Issuer Purchases of Equity Securities	1516

Item 6.	Selected ~~Consolidatd~~Consolidated Financial Data	19

Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2021

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 8.	Financial Statements and Supplementary Data	40

Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	6771

Item 9A.	Controls and Procedures	6872

Item 9B.	Other Information	72

Item 10.	Directors and Executive Officers of the Registrant	6972*

Item 11.	Executive Compensation	7272*

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	8072*

Item 13.	Certain Relationships and Related Transactions	8372*

Item 14.	Principal ~~Accounting~~Accountant Fees and Services	84
		72*


	•	IIEF-EF domain scores, the primary efficacy endpoint for the study, at the 10 mg and higher doses relative to placebo;
	•	Restoration of normal erectile function defined as a score of 26 or more points on the EF domain of the IIEF questionnaire at all four PT-141 doses relative to placebo; and
	•	Improvement in the quality of erections as assessed by the Global Assessment Questionnaire score was highly significant for all four doses of PT-141 relative to placebo.


	•	Approximately 70% of patients considered PT-141 to be as or more effective than sildenafil;
	•	The quality of erection achieved with PT-141 is perceived to be comparable or superior to sildenafil in 83% of patients;
	•	PT-141 has a longer duration of action and onset time was more rapid than sildenafil; and
	•	Many patients highlighted the “initiating” aspect (could feel the drug working) of PT-141 as a positive differentiator to sildenafil.


	•	The objective of this clinical study was to evaluate the efficacy and safety of co-administration of Viagra with PT-141 to 20 patients with ED.
	•	RigiScan® (a device for impotence testing) monitoring was employed over a six hour monitoring period to evaluate the duration and magnitude of each patient’s erectile response. Two 30-minute episodes of visual sexual stimulation (VSS) were included in the six hour RigiScan monitoring period.
	•	The study was designed as a double-blind, randomized, placebo-controlled, three-way crossover study evaluating the following three treatment arms:


	•	” Co-administration “: 25 mg Viagra and 7.5 mg PT-141 intranasal spray;
	•	” Viagra-alone “: 25 mg Viagra and placebo intranasal spray;
	•	” Placebo “: placebo tablet and placebo intranasal spray.


	•	Over the six hour RigiScan monitoring period, patients receiving the Co-administration treatment had, on average, increased erectile activity as compared to patients receiving either the Viagra-alone or Placebo treatment. The differences were statistically significant.
	•	Patients were also asked to evaluate the quality of their erection on a visual analog scale (1-10 scale). Patients receiving the Co-administration treatment rated their best erection an average score of 8.2 compared to 6.8 for the Viagra-alone treatment and 5.7 for the Placebo treatment. This difference between Co-administration and Viagra-alone quality-of-erection scores was also statistically significant.


	•	year ended June 30, 2004: $23.3 million
	•	year ended June 30, 2003: $17.4 million
	•	year ended June 30, 2002: $12.1 million


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


	•	continuing to undertake pre-clinical development and clinical trials;
	•	participating in regulatory approval processes;

PART I

Forward-looking statements

Overview

Products and Technologies in Research and Development

Competition

Patents and Proprietary Information

Governmental Regulation

Third-Party Reimbursements

Manufacturing and Marketing

Product Liability and Insurance

Employees

PART II

Critical Accounting Policies.

Certain Recent Significant Events in Fiscal Year 2003

Results of Operations

Liquidity and Capital Resources

Commitments

Recent Accounting Pronouncement

Factors Affecting our Business Condition

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

We currently have no revenues from product sales and will need to raise additional capital to operate our business.

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

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

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

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

Production and supply of LeuTech dependsNeutroSpec and PT-141 depend on contract manufacturers over whom we have no control.

33Table of ContentsWe have limited or no experience in marketing, distributing and selling diagnostic imaging products and will rely on our marketing partner to provide these capabilities.

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

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

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

37Table of ContentsContamination or injury from hazardous materials used in the development of LeuTech, PT- 141NeutroSpec, PT-141 and MIDAS could result in a liability exceeding our financial resources.

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

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.

Our management and principal stockholders together control approximately 57%30% of our voting securities, a concentration of ownership which could delay or prevent a change in control.

Corporate GovernanceWe will face increased costs as a result of changes to the regulations governing public companies, including the Sarbanes-Oxley Act of 2002.

(1) ORGANIZATION ACTIVITIES:

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

(3) PROPERTY AND EQUIPMENT:

(4) ACCRUED EXPENSES:

Other 524,088 437,503 ------------- -------------- $ 2,067,183 $ 1,619,382 ============= ============== (5) COMMITMENTS AND CONTINGENCIES:CONTINGENCIES

(6) STOCKHOLDERS’ EQUITY (DEFICIT):EQUITY:

(8) GRANTS AND CONTRACTS:

PART III

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Employment Agreements

Compensation Committee Interlocks and Insider Participation in Compensation Decisions.

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

Item 13. Certain Relationships and Related Transactions.

Item 14. Principal Accountant Fees and Services.

PART IV

33
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We have limited or no experience in marketing, distributing and selling diagnostic imaging products and will rely on our marketing partner to provide these capabilities.

37
Table of Contents
Contamination or injury from hazardous materials used in the development of LeuTech, PT- 141NeutroSpec, PT-141 and MIDAS could result in a liability exceeding our financial resources.

Other 524,088 437,503 ------------- -------------- $ 2,067,183 $ 1,619,382 ============= ==============
(5) COMMITMENTS AND CONTINGENCIES:CONTINGENCIES

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