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<SEC-DOCUMENT>/in/edgar/work/0001088020-00-000050/0001088020-00-000050.txt : 20001004
<SEC-HEADER>0001088020-00-000050.hdr.sgml : 20001004
ACCESSION NUMBER:		0001088020-00-000050
CONFORMED SUBMISSION TYPE:	10-K
CONFIRMING COPY:	
PUBLIC DOCUMENT COUNT:		9
CONFORMED PERIOD OF REPORT:	20000630
FILED AS OF DATE:		20001003

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			PALATIN TECHNOLOGIES INC
		CENTRAL INDEX KEY:			0000911216
		STANDARD INDUSTRIAL CLASSIFICATION:	 [2835
]		IRS NUMBER:				954078884
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			0630
</COMPANY-DATA>

		FILING VALUES:
			FORM TYPE:		10-K
			SEC ACT:		
			SEC FILE NUMBER:	000-22686
			FILM NUMBER:		00000000
</FILING-VALUES>

			BUSINESS ADDRESS:	
				STREET 1:		103 CARNEGIE CENTER, SUITE 200
				STREET 2:		SUITE 100
				CITY:			PRINCETON
				STATE:			NJ
				ZIP:			08540
				BUSINESS PHONE:		609-520-1911
</BUSINESS-ADDRESS>

				MAIL ADDRESS:	
					STREET 1:		103 CARNEGIE CENTER, SUITE 200
					STREET 2:		SUITE 100
					CITY:			PRINCETON
					STATE:			NJ
					ZIP:			08540
</MAIL-ADDRESS>

					FORMER COMPANY:	
						FORMER CONFORMED NAME:	INTERFILM INC
						DATE OF NAME CHANGE:	19930825
</FORMER-COMPANY>
</FILER>
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>ANNUAL REPORT FOR THE YEAR ENDED JUNE 30, 2000
<TEXT>


      THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON SEPTEMBER 29, 2000
              PURSUANT TO A RULE 201 TEMPORARY HARDHSIP EXEMPTION.

                     U.S. Securities and Exchange Commission

                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

     [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                     For the fiscal year ended June 30, 2000

                                       or

     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

         For the transition period from ____________ to _______________

                         Commission file number 0-22686


                           PALATIN TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)


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


         103 Carnegie Center, Suite 200
         Princeton, New Jersey                                   08540
         (Address of principal executive offices)             (Zip Code)

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

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

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

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

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

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, computed by reference to the price at which
the common equity was sold, as of September 25, 2000, was $47,782,831.

<PAGE>

As of September 25, 2000, 8,199,136 shares of the registrant's common stock, par
value $.01 per share, were outstanding.

Documents incorporated by reference: the registrant's definitive proxy statement
relating to the annual meeting of stockholders currently scheduled for November
2000, incorporated by reference in Part III of this Form 10-K.

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


<PAGE>

                                TABLE OF CONTENTS



                                     PART I

                                                                         Page

Item  1.    Business .........................................................1

Item  2.    Properties ......................................................12

Item  3.    Legal Proceedings ...............................................12

Item  4.    Submission of Matters to a Vote of Security Holders .............13



                                     PART II

Item 5.     Market for Registrant's Common Equity and Related Stockholder
                  Matters ...................................................13

Item  6.    Selected Financial Data .........................................14

Item  7.    Management's Discussion and Analysis of Financial Condition
                  and Results of Operations .................................16

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk ......25

Item  8.    Financial Statements and Supplementary Data .....................26

Item  9.    Changes In and Disagreements With Accountants on Accounting
                  and Financial Disclosure ..................................58


                                    PART III

Item 10.   Directors, Executive Officers, Promoters and Control Persons;
                  Compliance with Section 16(a) of the Exchange Act .........59*

Item 11.   Executive Compensation ...........................................59*

Item 12.   Security Ownership of Certain Beneficial Owners and Management ...59*

Item 13.   Certain Relationships and Related Transactions ...................59*

*Incorporated by reference from our definitive proxy statement relating to the
annual meeting of stockholders scheduled for November 15, 2000, which we will
file with the Securities and Exchange Commission within 120 days after our June
30, 2000 fiscal year end.



                                     PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K ..59

<PAGE>

Signatures ..................................................................63

Exhibit Index................................................................65



<PAGE>

                                     PART I

ITEM 1.  BUSINESS.

FORWARD-LOOKING STATEMENTS

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

OVERVIEW

     We are in the early stages of developing pharmaceutical products and
technologies. We are concentrating our efforts on the following:

     o    MIDAS(TM), a peptide technology which may be useful to develop drugs
          to treat diseases or for diagnostic imaging. A peptide is a short
          chain of amino acids. We are engaged in research and development of
          this technology to treat obesity and eating disorders and for neural
          regeneration, and believe that this technology may have applications
          in a variety of other areas as well, including immune disorders,
          cancers and cardiology.

     o    PT-141, a drug to treat sexual dysfunction, initially male erectile
          dysfunction. PT-141 is a stabilized peptide that works like a natural
          hormone. PT-141 is in preclinical testing, and we expect to start
          clinical trials in late 2000 or early 2001.

     o    LeuTech(R), a diagnostic imaging product used to image and locate the
          site of infection or inflammation within the body. We have completed
          clinical trials with LeuTech for the diagnosis of equivocal
          appendicitis and filed an application with the United States Food and
          Drug Administration for approval to market LeuTech for that
          indication. FDA review of our clinical efficacy and safety data is
          complete and the FDA has not requested any further data on efficacy or
          safety. However, the FDA has requested additional manufacturing and
          process validation data. We are currently working on responding to the
          FDA's request for additional data. We are conducting additional
          clinical trials with LeuTech to diagnose other infections such as bone
          infections, infections of prostheses, or artificial body parts, and
          abscesses. We believe that LeuTech can be used to diagnose a wide
          range of other infections, including infections of the intra-abdominal
          area, such as intestinal, spleen, liver or urinary tract infections.

                                       1

<PAGE>


PRODUCTS AND TECHNOLOGIES IN RESEARCH AND DEVELOPMENT

     MIDAS. MIDAS is a novel peptide chemistry that may have broad applications
in the pharmaceutical and radiopharmaceutical industries. The MIDAS technology
combines a metal ion with a specially designed peptide, resulting in a
biologically active molecule. Peptides, which are short chains of amino acids,
play important roles in regulating a variety of biological functions. Natural
peptides function by conforming or bending to fit specific molecules on cell
surfaces, called receptors, thereby signaling the cell to initiate a biological
activity. Some important biological functions that are affected in this manner
include overall growth and behavior, inflammatory responses, immune responses
and wound healing.

     In order to effectively regulate cell signaling, a peptide must bind to its
target receptor with high affinity. The affinity of a peptide for its target
receptor is highly dependent on its three-dimensional shape or conformation.
Many naturally occurring peptides are flexible and can take on multiple
conformations, allowing them to interact with more than one type of cell
receptor, and to control multiple functions within the body. However, when such
peptides are used as drugs, this multiple reactivity is a disadvantage as it may
potentially lead to side effects. The ability to construct high-affinity,
receptor-specific peptides offers a significant opportunity to develop potent
receptor-specific drugs.

     We believe that our patented MIDAS technology can be used for rational
design and production of receptor-specific drugs. Using MIDAS, highly stable
complexes of a peptide and a metal ion are formed, which mimic the
three-dimensional structure that fits a particular receptor ("conformation"). We
hope that by designing MIDAS peptides to mimic the conformation required for a
specific receptor, we can make a stable, receptor-specific drug, with enhanced
biological activity and fewer side effects. We may be able to develop
radiopharmaceutical products, which may be diagnostic or therapeutic, using
radioactive metal ions in MIDAS peptides. Non-radioactive metal ions may be used
in the development of biopharmaceutical MIDAS peptides.

     We are engaged in research and development on a number of product
opportunities for our MIDAS technology, including use of peptide molecules for
the treatment of obesity and eating disorders with a melanocortin receptor-based
therapeutic agent, and for neural regeneration. We believe that MIDAS technology
may have medical applications in a variety of areas, including immune disorders,
cancers and cardiology. We intend to seek to enter into strategic alliances or
collaborative arrangements to provide additional financial and technical
resources for MIDAS development.

     AGREEMENT WITH NIHON MEDI-PHYSICS. In 1996, we entered into a license
option agreement with Nihon Medi-Physics Co. Ltd., a large Japanese
pharmaceutical company. We received an initial payment of $1,000,000, before
Japanese withholding taxes of $100,000. On December 29, 1998, we terminated the
existing license option agreement with Nihon by mutual agreement, and signed a
letter of intent relating to development of diagnostic and therapeutic

                                       2

<PAGE>

radiopharmaceutical products based on our MIDAS peptide technology. We have
decided not to pursue any opportunities with Nihon Medi-Physics at the present
time.


     PT-14 AND PT141. PT-14 is a stabilized peptide based on the natural hormone
alpha-MSH. We are developing it for the treatment of male erectile dysfunction.
We believe that PT-14 will be different from currently available treatments for
male erectile dysfunction because its mechanism of action is through receptors
found in the brain, as compared to a direct effect on blood flow to the penis.
PT-14 may be useful in treating patients who do not respond well to current
therapies.

     In a preliminary double-blind clinical study using PT-14 conducted under a
physician-sponsored FDA investigational new drug application prior to our
licensing of PT-14, eight out of 10 men achieved clinically significant erectile
response.

     Studies during the last ten years indicate that as many as 20 million to 30
million men in the United States may be afflicted with some form of male
erectile dysfunction. Because of the large number of men believed to be
afflicted with male erectile dysfunction, we believe the total market for
treatment will be several billion dollars per year. There is tremendous
competition to develop and market drugs for treatment of male erectile
dysfunction.

     In March 1998, we entered into a license and development agreement with
Watson Laboratories, Inc., formerly TheraTech, Inc., which included a license to
some patents owned by TheraTech, to collaboratively develop an oral transmucosal
delivery system for PT-14. On March 15, 2000 we entered into an agreement with
Watson Laboratories to terminate this license and development agreement.

     PT-141. PT-141 is a safer, more potent derivative of PT-14. We have
initiated development efforts on a nasal delivery formulation of PT-141. We
intend to further evaluate PT-141 for male erectile dysfunction. We expect to
file an investigational new drug application with the FDA later this year, after
which we expect to begin our initial clinical trials with the enrollment of test
subjects.

     LEUTECH. The LeuTech kit system contains a modified mouse monoclonal
antibody and our proprietary chemistry for radiolabeling the antibody. Prior to
use in patients, the antibody contained in the LeuTech kit is radiolabeled with
technetium-99m, a radioactive isotope, by a radiopharmacy (a pharmacy
specializing in radioactive materials) or by a hospital's nuclear medicine
department. After radiolabeling, LeuTech is administered to the patient by
intravenous injection, and rapidly binds to white blood cells present at the
site of the infection or circulating in the blood stream. Using LeuTech,
physicians can take a definitive image within 45 minutes of administration,
permitting rapid imaging and detection of the site of infection.

     LeuTech has been used to image a variety of infections within the
intra-abdominal area, such as intestine, spleen, liver or urinary tract
abscesses, as well bone, prosthetic and other abscesses. As part of the body's
immune response to an infection, large numbers of white blood cells migrate to
and collect at the site of the infection. The concentration of white blood cells
at

                                       3

<PAGE>

the site of the infection can be used as the basis of detection. By using an
agent such as LeuTech, which "tags" or labels the white blood cells with
temporary radioactivity, the site of the infection can be readily detected using
a camera that records radioactivity.

     The most accurate procedure currently available for the nuclear medicine
imaging of infection sites involves white blood cells labeled with radioactivity
outside of the patient's body. This white blood cell labeling procedure begins
with the removal of blood cells from the patient, isolating white blood cells
from the patient's blood, radiolabeling the white blood cells and injecting the
radiolabeled white blood cells back into the patient. The radiolabeled white
blood cells then localize at the site of infection, and can be detected using
the appropriate camera. This procedure is expensive, involves risks to patients
and technicians associated with blood handling, and generally takes between
eight and twelve hours to generate a diagnostically useful image.

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

          Preclinical testing: animal trials to evaluate toxicity.

          Phase I: In Phase I clinical trials, researchers test a new drug or
          treatment in a small group of people for the first time to evaluate
          its safety, determine a safe dosage range, and identify side effects.

          Phase II: In Phase II clinical trials, the study drug or treatment is
          given to a larger group of people to see if it is effective and to
          further evaluate its safety.

          Phase III: In Phase III studies, the study drug or treatment is given
          to large groups of people to confirm its effectiveness, monitor side
          effects, compare it to commonly used treatments, and collect
          information that will allow the drug or treatment to be used safely.

          Phase IV: Phase IV studies are done after the drug or treatment has
          been marketed. These studies continue testing the study drug or
          treatment to collect information about their effect in various
          populations and any side effects associated with long-term use.
          Investigational new drug application: report on preclinical and
          clinical testing through Phase III, with manufacturing and labeling
          information.

          Biologics license application, or BLA: application for FDA approval
          for sale of a product classified as a biologic.

          New drug application: application for FDA approval for sale of a
          product classified as a drug.

          MIDAC: Medical Imaging Drug Advisory Committee.

     We submitted an investigational new drug application to the FDA on LeuTech
for diagnosis of appendicitis. We completed Phase I, II and III clinical trials
of LeuTech and submitted a biologics license application to the FDA for approval
to market LeuTech for the diagnosis of equivocal appendicitis.

     The Phase I clinical trial tested the safety of LeuTech, and investigated
the sites where it can be found after administration. In that study, LeuTech was
administered to 10 healthy

                                       4

<PAGE>

volunteers who were monitored for adverse events. The results showed that there
were no significant safety concerns associated with LeuTech administration.

     In the Phase II clinical trial, we evaluated LeuTech for its ability to
diagnose equivocal appendicitis. The Phase II clinical trial enrolled 56
patients with a preliminary diagnosis of equivocal appendicitis at two medical
centers. In the study, the commercial preparation of LeuTech demonstrated 88%
accuracy and 100% sensitivity in the diagnosis of equivocal appendicitis.

     In July 1998, we met with representatives of the FDA to discuss the LeuTech
Phase II clinical results and to discuss the LeuTech Phase III clinical trials
protocol. Following the meeting, we submitted a Phase III protocol and began
Phase III clinical trials for the diagnosis of equivocal appendicitis in
September 1998. Palatin completed Phase III trials in the spring of 1999.

     In May 1999, we met with representatives of the FDA to discuss the LeuTech
Phase III clinical results and to discuss filing a biologics license application
for approval to market LeuTech for diagnosis of equivocal appendicitis. We filed
the biologics license application on November 23, 1999.

     In July 2000, we met with the FDA MIDAC, which determined in two unanimous
(9-0) votes that LeuTech is safe and effective for use in the diagnosis of
appendicitis in patients with equivocal signs and symptoms, and that the it has
demonstrated clinical utility managing these patients.

     In September 2000, as part of the normal review process, we received a
complete review letter containing the FDA's comments. FDA review of the clinical
efficacy and safety data is complete, and the FDA did not request further data
on efficacy or safety. The letter advises us that the manufacturing process
validation data which we previously submitted were not adequate for final
approval. The FDA listed its issues and concerns regarding our application and
provided specific details on how we must supplement our application to remedy
the issues. Resolving the outstanding manufacturing issues will impact the
timing of FDA approval. Although we cannot know for certain whether we can
address these issues to the FDA's satisfaction, we are confident that we will be
able to resovle them.

     We have conducted small-scale LeuTech trials for indications involving
other infections. We have obtained images in indications such as osteomyelitis,
abdominal abscesses, and pulmonary infections. In many cases, researchers were
able to obtain LeuTech diagnostic images in under one hour. We are currently
conducting Phase II clinical trials to evaluate potential LeuTech indications as
well as safety studies on the risks of repeat doses causing a human anti-mouse
antigen response in the presence of human anti-mouse antigens.

     Strategic Collaboration Agreement with Mallinckrodt. On August 16, 1999, we
entered into a strategic collaboration agreement with Mallinckrodt, Inc., a
large international healthcare products company, to jointly develop and market
LeuTech. Under the terms of the agreement, Mallinckrodt:


                                       5

<PAGE>

     o    received an exclusive worldwide license (excluding Europe) for sales,
          marketing and distribution of LeuTech and paid a licensing fee of
          $500,000;

     o    agreed to make milestone payments of $5,000,000 on FDA approval of the
          first LeuTech indication and $5,000,000 on attainment of sales goals
          following product launch;

     o    agreed to reimburse us for 50% of all ongoing LeuTech development
          costs, subject to a cap, which can be amended;

     o    agreed to pay us a transfer price on each LeuTech product unit
          delivered to Mallinckrodt and a quarterly royalty on Mallinckrodt's
          future net sales of LeuTech;

     o    purchased 700,000 restricted shares of our non-voting Series C
          convertible preferred stock for $13,000,000;

     o    agreed that the Series C convertible preferred stock would be
          convertible after five years, or earlier upon the occurrence of a
          change in control (as defined in the agreement), into 700,000 shares
          of our common stock with certain registration and anti-dilution
          rights;

     o    agreed to the oversight of LeuTech development and marketing
          activities by a joint steering committee, comprised of equal numbers
          of representatives to be appointed;

     o    agreed to the potential termination of the agreement by either party
          in the event of material breach or nonpayment by the other party and
          the expiration of the agreement after the commercial sale of LeuTech
          ceases;

     o    agreed that if the agreement was validly terminated by us before its
          expiration due to material breach or nonpayment by Mallinckrodt, then,
          among other things, all licenses granted to Mallinckrodt will be
          terminated, Mallinckrodt will assign to us any interest they may have
          in any trademarks used to market LeuTech as well as any regulatory
          filings Mallinckrodt may have made in connection with LeuTech and
          Mallinckrodt will continue to pay us royalty on the sale of any
          inventory they may have the right to dispose of; and

     o    agreed that if the agreement was validly terminated by Mallinckrodt
          before its expiration due to a material breach or nonpayment by us,
          then, among other things, all licenses granted to Mallinckrodt under
          the terms of the agreement will be considered exclusive and
          irrevocable, we shall transfer to Mallinckrodt all contractual and
          intellectual property rights necessary for the production of LeuTech
          in quantities sufficient to meet Mallinckrodt's needs, and
          Mallinckrodt shall continue to pay us royalty on all sales of LeuTech.



     RESEARCH AND DEVELOPMENT. Our research and development efforts primarily
focus on two areas: diagnostic imaging and peptide-based therapeutics. Taken
collectively, we believe our technologies will facilitate the development of a
portfolio of potential products. A summary

                                       6

<PAGE>

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



<PAGE>


Program       Indication                       Status         Commercial Rights
- -------       ----------                       ------         -----------------

LeuTech       appendicitis                     BLA            Mallinckrodt

              osteomyelitis                    Phase II       Mallinckrodt

              post-surgical abscess            Phase II       Mallinckrodt

PT-141        erectile dysfunction             development

MIDAS         obesity and eating disorders     research

              neural regeneration              research


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

     o    year ended June 30, 2000: $9,110,000

     o    year ended June 30, 1999: $8,720,000

     o    year ended June 30, 1998: $7,110,000



PATENTS AND PROPRIETARY INFORMATION

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

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

     Although we have filed patent applications covering the LeuTech products,
and those applications are pending, we may not be able to obtain a patent, and
the claims of the patent may not provide meaningful protection for the LeuTech
product. In addition, even if the patent

                                       7

<PAGE>

issues, it may not be valid. We do not know for certain that the use or sale of
LeuTech will not infringe upon patents of third parties.

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

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

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

     PROPRIETARY INFORMATION. We rely on proprietary information, such as trade
secrets and know-how, which is not patented. We have taken steps to protect our
unpatented trade secrets and know-how, in part through the use of
confidentiality agreements with our employees, consultants and certain
contractors. If our employees, scientific consultants or collaborators or
licensees develop inventions or processes independently that may be applicable
to our product candidates, disputes may arise about ownership of proprietary
rights to those inventions and processes. Such inventions and processes will not
necessarily become our property, but may remain the property of those persons or
their employers. Protracted and costly litigation could be necessary to enforce
and determine the scope of our proprietary rights.

     If trade secrets are breached, our recourse will be solely against the
person who caused the secrecy breach. This might not be an adequate remedy to
us, because third parties other than

                                       8

<PAGE>


the person who causes the breach will be free to use the information without
accountability to us. This is an inherent limitation of the law of trade secret
protection.

GOVERNMENTAL REGULATION

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

     After approving a product for marketing, the FDA may require post-marketing
testing, including extensive Phase IV studies, and surveillance to monitor the
effects of the product in general use. The FDA may withdraw product approvals if
compliance with regulatory standards is not maintained or if problems occur
following initial marketing. In addition, the FDA may impose restrictions on the
use of a drug that may limit its marketing potential.

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

THIRD-PARTY REIMBURSEMENTS

         Successful sales of our proposed products in the United States and
other countries will depend on the availability of adequate reimbursement from
third-party payors such as governmental entities, managed care organizations and
private insurance plans. Reimbursement by a third-party payor may depend on a
number of factors, including the payor's determination that use of a product is
safe and efficacious, neither experimental nor investigational, medically
necessary, appropriate for the specific patient and cost effective. Since
reimbursement approval is required from each payor individually, seeking such
approvals is a time-consuming and costly process. Third-party payors routinely
limit reimbursement coverage and in many instances are exerting significant
pressure on medical suppliers to lower their prices. There is significant
uncertainty concerning third-party reimbursement for the use of any
pharmaceutical product

                                       9

<PAGE>

incorporating new technology, and we are not sure whether third-party
reimbursement will be available for our proposed products, or that the
reimbursement, if obtained, will be adequate. Less than full reimbursement by
governmental and other third-party payors for our products would adversely
affect the market acceptance of these products. Further, health care
reimbursement systems vary from country to country, and we are not sure whether
third-party reimbursement will be made available for our proposed products under
any other reimbursement system.

MANUFACTURING AND MARKETING

     To be successful, our products must be manufactured in commercial
quantities under current good manufacturing practices requirements prescribed by
the FDA and at acceptable costs. We do not have the facilities to manufacture
any products in commercial quantities under good manufacturing practices. We
intend to rely on collaborators, licensees or contract manufacturers for the
commercial manufacture of our products.

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

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

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

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

PRODUCT LIABILITY AND INSURANCE

     Our business may be affected by potential product liability risks which are
inherent in the testing, manufacturing and marketing of our proposed products.
We have liability insurance providing up to $5,000,000 coverage per occurrence
and in the aggregate as to certain clinical

                                       10

<PAGE>


trial risks, and we will seek to obtain additional product liability insurance
before the commercialization of our products.

EMPLOYEES

     As of September 25, 2000, we employed 27 persons full time, of whom 20 were
engaged in research and development activities and seven were engaged in
administration and management. Seven of our employees hold Ph.D. degrees. We
have been successful in attracting skilled and experienced scientific personnel,
however, competition for personnel in our industry is intense.

     None of our employees are covered by a collective bargaining agreement. Our
employees have executed confidentiality agreements. We consider relations with
our employees to be good.

     From time to time, we hire scientific consultants to work on specific
research and development programs. We also rely on independent organizations,
advisors and consultants to provide services, including most aspects of
manufacturing and some aspects of regulatory approval and clinical management.
Our independent advisors and consultants generally sign agreements that provide
for confidentiality of our proprietary information.


HISTORY AND MERGER

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

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

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

     o    change our name from Interfilm, Inc. to Palatin Technologies, Inc.,

     o    increase our authorized common stock from 10,000,000 to 25,000,000
          shares, and

     o    effect a 1-for-10 reverse split of the common stock.

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

     o    increase our authorized common stock from 25,000,000 to 75,000,000
          shares,

     o    increase our authorized preferred stock from 2,000,000 to 10,000,000
          shares, and

                                       11

<PAGE>


     o    effect a 1-for-4 reverse split of the common stock.



ITEM 2.  PROPERTIES.

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



ITEM 3.  LEGAL PROCEEDINGS.

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

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

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

     In our response filed in June of 2000, we have denied the material
allegations. Management believes that we have good and meritorious defenses to
the action and we intend vigorously to defend the action.

     We are involved in various claims and litigation arising in the normal
course of business, consisting of actions commenced against Palatin prior to the
RhoMed merger. We believe that the outcome of such claims and litigation will
not have a material adverse effect on our business.

                                       12

<PAGE>


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     We did not submit any matters to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 2000.



                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

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

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

                      YEAR ENDED JUNE 30, 2000          HIGH        LOW
Fourth Quarter...................................... $ 7-5/16     $ 3-5/8

Third Quarter....................................... $ 9-1/4      $ 2-3/4

Second Quarter...................................... $ 4          $ 2-3/8

First Quarter....................................... $ 5-3/16     $ 2-31/32

                      YEAR ENDED JUNE 30, 1999         HIGH         LOW
Fourth Quarter...................................... $ 7          $ 3-3/8

Third Quarter....................................... $ 6-3/8      $ 3-3/4

Second Quarter...................................... $ 5-13/16    $ 1-3/8

First Quarter....................................... $ 5-1/2      $ 1-29/32

     HOLDERS OF COMMON STOCK. On September 25, 2000, we had approximately 335
holders of record of common stock. About half of our outstanding common stock is
registered in the name of depositories and brokers, which represent a much
larger number of individual share accounts. On September 25, 2000 the closing
sales price of our common stock as reported on the AMEX was $6.25 per share.

     DIVIDENDS AND DIVIDEND POLICY. We have never declared or paid any
dividends. We currently intend to retain earnings, if any, for use in our
business. We do not anticipate paying dividends in the foreseeable future.

                                       13

<PAGE>


     DIVIDEND RESTRICTIONS. Our two outstanding series of preferred stock,
Series A and C, contain the following restrictions on our ability to pay
dividends or make distributions to stockholders.

     o    Series A: We may not pay a dividend or make any distribution to
          holders of any class of stock unless we first pay a special dividend
          or distribution of $100 per share to the holders of Series A preferred
          stock.

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

     RECENT SALES OF UNREGISTERED SECURITIES. In April 2000, we issued warrants
to eight accredited investors to purchase a total of 50,000 shares of our common
stock at an exercise price of $.01 per share. We issued the warrants in
connection our termination of a license and development agreement with Watson
Laboratories and the investors' privately negotiated purchase from Watson of a
total of 363,636 shares of our common stock, for a total price of $2 million.
Watson had purchased the shares from us in July 1998.

     The warrants are exercisable in whole or in part at any time before March
15, 2005. We will proportionately adjust the number of shares issuable on
exercise of the warrants if we effect a division, recombination or
reclassification of our common stock, or if we make a distribution of securities
on the basis of all outstanding common stock.

     We relied on the exemption under Section 4(2) of the Securities Act of 1933
in that the issuance did not involve any public offering of the warrants. The
warrants are not transferable absent registration or an exemption from
registration, and the warrant certificates bear a restrictive legend to that
effect. The warrant holders have piggy-back registration rights for five years,
or until the common stock underlying the warrants is registered or can be sold
without volume limitations under SEC Rule 144.

ITEM  6.  SELECTED FINANCIAL DATA.

     The following selected consolidated financial data has been derived from
the consolidated financial statements of Palatin Technologies, Inc. as of and
for each of the five years in the period ended June 30, 2000 which have been
audited by Arthur Andersen LLP, independent public accountants. This data should
be read in conjunction with our consolidated financial statements, including the
notes to the financial statements, and the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7 of this report.

                                       14

<PAGE>

                                       (In thousands, except per share data)
                                               Year Ended June 30,
                                               -------------------
                                  1996(1)    1997     1998     1999      2000
                             ---------------------------------------------------
Statement of Operations Data:
REVENUES:
 Grants and contracts       $    --   $    350  $     34    $     60    $ 4,617
 License fees and royalties      --        350        --         550        500
 Other                           24         22        --          --        --
                            -------   --------  ---------   ---------   --------
  Total revenues                 24        722        34         610      5,117
                            -------   --------  ---------   ---------   --------

                                       (In thousands, except per share data)
                                               Year Ended June 30,
                                               -------------------
                                  1996(1)    1997     1998     1999      2000
                             ---------------------------------------------------

OPERATING EXPENSES:
 Research and development       870     3,410      7,111       8,720      9,110
 General and administrative   1,701     2,533      2,991       3,957      4,567
 Net intangibles write down     259        --         --          --         --
                            -------   --------  ---------   ---------   --------
   Total operating expenses   2,830     5,943     10,102      12,677     13,677


OTHER INCOME (EXPENSES)
 Interest income                 11       296       409          172        405
 Interest expense              (628)     (375)     (227)        (107)       (29)
 Merger costs                  (475)       --        --           --         --
                            --------  --------  ---------   ---------   --------
   Total other income
     (expense)               (1,092)      (79)      182           65        376
                            --------  --------  ---------   ---------   --------

NET LOSS                    $(3,898)  $(5,300)   $(9,886)   $(12,002)   $(8,184)

PREFERRED STOCK
  DIVIDEND                       --    (2,889)      (233)         --         --
                            --------  --------  ---------   ---------   --------

NET LOSS ATTRIBUTABLE
  TO COMMON
  STOCKHOLDERS              $(3,898)  $(8,189)  $(10,119)   $(12,002)   $(8,184)
                            ========  ========  =========   =========   ========

Net loss per common
   share (2)                $ (1.82)  $ (2.80)  $  (3.15)   $  (2.02)   $ (1.10)


Weighted avg. common shares
Outstanding                   2,144     2,924      3,211       5,936      7,441
                            ========  ========  =========   =========   ========

                                       15

<PAGE>

                                                   June 30,
                            ----------------------------------------------------
                               1996      1997       1998        1999       2000
                            ----------------------------------------------------
Balance Sheet Data:
Cash, cash equivalents
   and Investments          $ 6,791   $12,622   $  4,326    $  2,789    $ 5,842
Property, plant &
   equipment, net                96       922      1,610       1,458      1,573
Working capital               4,503    10,142      2,069         554      4,995
Total assets                  7,041    14,063      6,475       4,723      8,885
Long term debt, net of
    current portion           1,844       940          -       2,000          -
Common stock                    115        30         41          71         79
Net stockholders' equity      2,838     9,835      3,390         341      6,905

- ------------------------------------
(1)  Ten Months Ended June 30, 1996.
(2)  Basic and diluted.



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes to the financial statements
filed as part of this report.

RESULTS OF OPERATIONS

YEAR ENDED JUNE 30, 2000 COMPARED TO THE YEAR ENDED JUNE 30, 1999

     CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - Cash, cash equivalents
and short-term investments increased to $5,375,210 at June 30, 2000 from
$2,788,628 at June 30, 1999. The increase was due to the receipt of funds,
approximately $11,450,000 net, from the collaboration agreement signed with
Mallinckrodt, Inc. on August 17, 1999. Pursuant to the agreement we:

     o    Received $500,000 from a one-time, non-refundable exclusive worldwide
          license (excluding Europe) for sales, marketing and distribution of
          LeuTech.

     o    Received $13,000,000 from the sale of 700,000 restricted shares of our
          non-voting Series C convertible preferred stock.

     o    Paid $2,000,000 in principal as repayment of a subordinated
          non-negotiable promissory note from Mallinckrodt, plus $46,489 in
          interest.

                                       16

<PAGE>


     ACCOUNTS RECEIVABLE - Accounts receivable increased to $953,163 at June 30,
2000 from zero at June 30, 1999. The increase was due to the recognition of
contract revenue pursuant to our strategic collaboration agreement with
Mallinckrodt, see below.

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

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

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

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

     INTEREST INCOME - Interest income increased to $405,590 for the year ended
June 30, 2000 compared to $172,241 for the year ended June 30, 1999. The
increase in interest income is the result of the receipt of funds pursuant to
our strategic collaboration agreement with Mallinckrodt, which enabled an
increase in funds available for investment purposes.

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

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

                                       17

<PAGE>


YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998

     GRANTS AND CONTRACTS - During the year ended June 30, 1999 we recognized
$59,977 as revenue under the Small Business Technology Transfer program of the
Department of Health and Human Services. Grant revenue under the Small Business
Innovative Research program of the Department of Health and Human Services was
$33,967 for the year ended June 30, 1998. During the year ended June 30, 1999,
we were awarded two new grants under the National Institutes of Health Small
Business Innovative Research program totaling $850,000.

     LICENSE FEES AND ROYALTIES - We recognized $550,000 in license fees as
revenue during the year ended June 30, 1999 related to its termination of a
license option agreement with Nihon. This $550,000 was previously reported as
deferred license revenue. We had no revenues from license fees or royalties
during the year ended June 30, 1998.

     RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses
increased to $8,719,562 for the year ended June 30, 1999 from $7,111,716 for the
year ended June 30, 1998. We substantially increased research and development
spending, primarily relating to development of LeuTech, including increased
expenses for manufacturing scale-up, consulting and clinical trials, and also
relating to research expenses on PT-14 and the MIDAS technology. The increase is
also attributable to the amortization of deferred compensation totaling
$313,202. We expect research and development expenses to continue to increase in
future quarters as we expand research and manufacturing efforts on LeuTech and
expand efforts to develop PT-14 and MIDAS technology.

     GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses
increased to $3,957,401 for the year ended June 30, 1999 from $2,990,756 for the
year ended June 30, 1998. The increase in general and administrative expenses
was mainly attributable to the amortization of deferred compensation and the
value of options granted at exercise prices below the then current market price
of our common stock totaling $995,473.

     INTEREST INCOME - Interest income decreased to $172,241 for the year ended
June 30, 1999 from $408,770 for the year ended June 30, 1998. The decrease in
interest income is primarily the result of the depletion of funds available for
investment purposes and used to fund operations.

     INTEREST EXPENSE - Interest expense decreased to $107,639 for the year
ended June 30, 1999 from $227,143 for the year ended June 30, 1998. The decrease
in interest expense is due to repayment of a portion of outstanding principal on
long-term debt.

     NET LOSS - Net loss increased to $12,002,384 for the year ended June 30,
1999 from $9,886,878 for the year ended June 30, 1998.

YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997

     GRANTS AND CONTRACTS - During the year ended June 30, 1998, we completed
four Phase I grants with the National Institutes of Health under the Small
Business Innovative Research program. Grant revenue from these research grants
was $33,967, compared to $350,173 during the year ended June 30, 1997.

     LICENSE FEES AND ROYALTIES - We had no revenues from license fees or
royalties during the

                                       18

<PAGE>


year ended June 30, 1998. In the year ended June 30, 1997, we entered into an
option agreement with Nihon, pursuant to which we received an initial payment of
$1,000,000 before Japanese withholding taxes of $100,000. We accounted for the
initial payment by recognizing license fee revenue of $350,000 and deferred
license fee revenue of $550,000.

     OTHER - We had no revenues from sales during the year ended June 30, 1998.
During the year ended June 30, 1997, we discontinued sales of our RhoChek
product due to insufficient sales. Total revenues from sales during the year
ended June 30, 1997, were $22,184.

     RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses
increased to $7,111,716 for the year ended June 30, 1998 from $3,409,983 for the
year ended June 30, 1997. We substantially increased research and development
spending, primarily relating to development of LeuTech, including increased
expenses for manufacturing scale-up, consulting and initiation of
Palatin-sponsored clinical trials, and also relating to research expenses on
MIDAS. The increase is also attributable to the amortization of deferred
compensation, and to the value of options granted at exercise prices below the
then current market price of our common stock, totaling $797,570 for the year
ended June 30, 1998.

     GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses
increased to $2,990,756 for the year ended June 30, 1998 from $2,533,883 for the
year ended June 30, 1997. The increase in general and administrative expenses
was mainly attributable to the amortization of deferred compensation, totaling
$925,740 for the year ended June 30, 1998, and the value of options granted at
exercise prices below the then current market price of our common stock.

     INTEREST INCOME - Interest income increased to $408,770 for the year ended
June 30, 1998 from $296,009 for the year ended June 30, 1997. The interest
income was primarily the result of interest on the net proceeds from our
offering of Series A preferred stock.

     INTEREST EXPENSE - Interest expense decreased to $227,143 for the year
ended June 30, 1998 from $374,664 for the year ended June 30, 1997. The decrease
is due to our repayment of outstanding principal on long-term debt provided by
Aberlyn Capital Management Limited Partnership.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, we have incurred net operating losses. As of June 30,
2000, we had a deficit accumulated during the development stage of $43,505,802.
We have financed our net operating losses through June 30, 2000 by a series of
debt and equity financings. At June 30, 2000, we had cash, cash equivalents and
investments of $5,842,044 and accounts receivable of $953,163.

     For the year ended June 30, 2000, the net increase in cash and cash
equivalents amounted to $885,792. Net cash used for operating activities was
$8,540,107, net cash used for investing activities was $2,054,809, and net cash
provided by financing activities was $11,480,708.

     In September 2000, we received $10.8 million from a private offering
consisting of common stock and warrants. Investors, consisting of financial
institutions based in Europe, purchased 1.8 million shares at a per share price
of $6.00, which represented the closing market price of Palatin shares on the
American Stock Exchange on September 7, 2000. For every five shares purchased,
the investors also received a five-year warrant to purchase one share of

                                       19

<PAGE>


common stock at a 25 percent premium to the closing price. The net proceeds will
be used primarily for general corporate purposes, especially for the development
and clinical trials of new products based on our proprietary technologies.

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

     On August 16, 1999, we entered into a strategic collaboration agreement
with Mallinckrodt, a large international healthcare products company, to jointly
develop and market LeuTech. Under the terms of the agreement, Mallinckrodt:

     o    received an exclusive worldwide license (excluding Europe) for sales,
          marketing and distributions of LeuTech and paid a licensing fee of
          $500,000;

     o    agreed to make milestone payments of $5,000,000 upon FDA
          approval of the first LeuTech indication and $5,000,000 on the
          attainment of sales goals following product launch;

     o    agreed to reimburse us for 50% of all ongoing LeuTech development
          costs, subject to a cap, which can be amended;

     o    agreed to pay to us a transfer price for each LeuTech product unit
          delivered to Mallinckrodt and a quarterly royalty on Mallinckrodt's
          future net sales of LeuTech;

     o    purchased 700,000 restricted shares of our non-voting Series C
          convertible preferred stock for $13,000,000; and

     o    agreed that the Series C convertible preferred stock would be
          convertible after five years, or earlier upon the occurrence of a
          change in control (as defined in the agreement), into 700,000 shares
          of our common stock with certain registration rights and anti-dilution
          rights.

     As of December 7, 1999, we entered into a five-year lease on administrative
offices in Princeton, New Jersey. Minimum future lease payments range from
approximately $187,374 in year one to approximately $202,070 in year five. We
have entered into a sublease agreement with Derma Sciences, Inc. on our previous
administrative offices. Under the sublease agreement Derma reimburses us 100% of
all rents and utility charges.

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

     As of April 2000, we entered into an amendment to our research facility
lease, which increased our rentable space from approximately 10,500 square feet
to approximately 15,800.

                                       20

<PAGE>


Our aggregate future annual minimum lease payments escalate from approximately
$203,000 until July 13, 2002 to $300,000 from July 14, 2002 through July 13,
2007.

     We have three license agreements that require minimum yearly payments.
Future annual minimum payments under the license agreements are: 2001 -
$150,000, 2002 - $200,000, 2003 - $200,000, 2004 - $200,000 and 2005 - $200,000.

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

     We have incurred negative cash flows from operations since our inception,
and have expended, and expect to continue to expend in the future, substantial
funds to complete our planned product development efforts. We expect our
existing capital resources, including the funds we received in September 2000,
will be adequate to fund our projected operations through June 30, 2001, based
on current expenditure levels.

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

FACTORS AFFECTING OUR BUSINESS CONDITION

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

DEVELOPMENT AND COMMERCIALIZATION OF OUR PROPOSED PRODUCTS AND TECHNOLOGIES
INVOLVES A LENGTHY, COMPLEX AND COSTLY PROCESS AND WE MAY NEVER DEVELOP OR
COMMERCIALIZE ANY PRODUCTS.

     Our proposed products are at various stages of research and development and
may never be successfully developed or commercialized. LeuTech will require
regulatory approval to market it for diagnosis of appendicitis, as well as
additional clinical trials for other indications. PT-141 and our MIDAS
technology will require significant further research, development and testing.
You should evaluate Palatin in light of the uncertainties, delays, difficulties
and expenses commonly experienced by early stage pharmaceutical companies, which
generally include unanticipated problems and additional costs relating to:

                                       21

<PAGE>


     o    the development and testing of products in animals and humans

     o    product approval or clearance

     o    regulatory compliance

     o    good manufacturing practices

     o    product introduction

     o    marketing and competition.

WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL LOSSES OVER THE NEXT SEVERAL YEARS
AND WE MAY NEVER BECOME PROFITABLE.

     We have never been profitable and we may never become profitable. As of
June 30, 2000, we had an accumulated deficit of $43,505,802 and a loss for the
year then ended of $8,183,438. We anticipate substantial losses over the next
few years as we begin to manufacture and market LeuTech, expand clinical trials
for LeuTech's other indications and for PT-141, and to continue research and
development of PT-141 and our MIDAS technology.

WE MAY SELL ADDITIONAL EQUITY SECURITIES, WHICH WOULD CAUSE DILUTION.

     We may sell more equity securities in the future to obtain operating funds.
We may sell these securities at a discount to the market price. Any future sales
of equity securities will dilute the holdings of existing stockholders, possibly
reducing the value of their investment.

WE COULD LOSE OUR RIGHTS TO LEUTECH AND PT-141, WHICH WOULD ADVERSELY AFFECT OUR
POTENTIAL REVENUES.

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

THE FDA MAY NOT APPROVE THE MARKETING OF LEUTECH, WHICH WOULD ADVERSELY AFFECT
OUR POTENTIAL REVENUES.

     We completed clinical trials of LeuTech for the diagnosis of equivocal
appendicitis in the spring of 1999. In November 1999, we filed an application
with the FDA for approval to market

                                       22

<PAGE>


LeuTech for that indication. FDA review of the application can be a long,
expensive and uncertain process. The application must demonstrate that LeuTech
has met rigorous standards of safety, efficacy and manufacturing before it can
be approved by the FDA for commercial use. The FDA has requested additional data
on LeuTech manufacturing and process validation. We cannot know for certain
whether we can remedy these matters to the FDA's satisfaction. 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.

WE DEPEND ON TWO CONTRACT MANUFACTURERS, DUTCH STATE MINES AND BEN VENUE
LABORATORIES, SO PRODUCTION AND SUPPLY OF LEUTECH DEPENDS ON PERFORMANCE OF
CONTRACTS BY THIRD PARTIES OVER WHOM WE HAVE NO CONTROL.

     We have no ability or capacity to manufacture LeuTech. We are dependent on
Dutch State Mines of the Netherlands for the manufacture of the antibody used in
LeuTech, and on Ben Venue Laboratories of Cleveland, Ohio for the manufacture of
LeuTech kits. The failure of either of these manufacturers to supply these key
components of LeuTech on a timely basis or at all, could force us to seek
alternative sources of supply and could interfere with our ability to deliver
product on a timely basis. Establishing relationships with new suppliers, any of
whom must be FDA-approved, is a time-consuming and costly process.

WE HAVE LIMITED EXPERIENCE IN MARKETING, DISTRIBUTING AND SELLING DIAGNOSTIC
IMAGING PRODUCTS AND MAY BE UNABLE TO ESTABLISH SUCCESSFUL MARKETING,
DISTRIBUTION AND SELLING CAPABILITIES FOR LEUTECH.

     If the FDA approves LeuTech for marketing, we expect to rely on
arrangements with other companies, such as Mallinckrodt, to market, sell and
distribute LeuTech. If such arrangements fail, we may have difficulty
establishing the necessary marketing relationships, and in any event, we will
have limited control over these activities. If we do not establish sufficient
marketing capability with other companies, our potential revenues from the sale
of LeuTech will be adversely affected.

IF LEUTECH DOES NOT ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS WILL SUFFER.

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

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

     o    potential advantage over alternative treatment methods; and

     o    reimbursement policies of government and third-party payors.

                                       23

<PAGE>


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

COMPETING PRODUCTS AND TECHNOLOGIES MAY MAKE LEUTECH AND OUR OTHER POTENTIAL
PRODUCTS NONCOMPETITIVE.

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

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

CONTAMINATION OR INJURY FROM HAZARDOUS MATERIALS USED IN THE DEVELOPMENT OF
LEUTECH, PT-141 AND MIDAS COULD RESULT IN LIABILITY EXCEEDING OUR FINANCIAL
RESOURCES.

     Our research and development of LeuTech, PT-141 and MIDAS involves the use
of hazardous materials and chemicals, including radioactive compounds. We cannot
completely eliminate the risk of contamination or injury from these materials.
In the event of contamination or injury, we may be responsible for any resulting
damages. Damages could be significant and could exceed our financial resources,
including the limits of its insurance.

OUR STOCK PRICE HAS RANGED FROM $9.25 TO $2.37 OVER THE LAST 12 MONTHS, AND WE
EXPECT IT TO REMAIN VOLATILE, WHICH COULD LIMIT INVESTORS' ABILITY TO SELL STOCK
AT A PROFIT.

     The volatile price of our stock makes it difficult for investors to predict
the value of their investment, to sell shares at a profit at any given time, or
to plan purchases and sales in advance. A variety of factors may affect the
market price of our common stock. These include, but are not limited to:

     o    continued operating losses

     o    announcements of technological innovations or new therapeutic products

                                       24

<PAGE>


     o    announcement or termination of collaborative relationships by us or
          our competitors

     o    announcements of mergers and acquisitions involving our suppliers and
          collaborators

     o    FDA approval or disapproval for marketing LeuTech

     o    governmental regulation

     o    clinical trial results

     o    developments in patent or other proprietary rights

     o    public concern as to the safety of our products

TRADING IN OUR STOCK OVER THE LAST 12 MONTHS HAS BEEN LIMITED, SO INVESTORS MAY
NOT BE ABLE TO SELL AS MUCH STOCK AS THEY WANT AT PREVAILING PRICES.

     The average daily trading volume in our common stock was approximately
59,000 shares and the average daily number of transactions was approximately 50
over the last twelve months. If limited trading in our stock continues, it may
be difficult for investors to sell their shares in the public market at any
given time at prevailing prices.

OUR MANAGEMENT AND PRINCIPAL STOCKHOLDERS TOGETHER CONTROL APPROXIMATELY 37% OF
OUR VOTING SECURITIES, WHICH CONCENTRATION OF OWNERSHIP COULD DELAY OR PREVENT A
CHANGE IN CONTROL.

     After giving effect to the sale of 1,800,000 shares of common stock in
September 2000, our executive officers and directors beneficially own
approximately 13% of our voting securities and our 5% or greater stockholders
beneficially own approximately 24% of our voting securities. These stockholders,
acting together, will be able to influence and possibly control most matters
submitted for approval by our stockholders, including the election of directors,
delaying or preventing a change of control, and the consideration of
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices.

ITEM  7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     INTEREST RATE RISK. Our exposure to market risk related to changes in
interest rates relates primarily to our investment portfolio. We invest in
instruments that meet high credit quality standards, and we limit the amount of
credit exposure as to any one issue, issuer and type of investments. As of June
30, 2000, our cash and cash equivalents and investments consisted of $5,842,044,
most of which were short term investments having a maturity of less than one
year. 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.

                                       25

<PAGE>


ITEM  8.
                           PALATIN TECHNOLOGIES, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                          Page

      Report of Independent Public Accountants.............................27

      Consolidated Balance Sheets..........................................28

      Consolidated Statements of Operations................................30

      Consolidated Statements of Stockholders' Equity (Deficit)............32

      Consolidated Statements of Cash Flows................................37

      Notes to Consolidated Financial Statements...........................40



                                       26

<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of
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, 2000 and 1999, 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, 2000 and the period from January
28, 1986 (inception) to June 30, 2000. These financial statements are the
responsibility of Palatin's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Palatin Technologies, Inc.
and subsidiaries as of June 30, 2000 and 1999 and the results of their
operations and their cash flows for each of the periods indicated above, in
conformity with accounting principles generally accepted in the United States.

                                                     ARTHUR ANDERSEN LLP
Philadelphia, PA
September 27, 2000



                                       27
<PAGE>

<TABLE>
<CAPTION>


                                                 PALATIN TECHNOLOGIES, INC.
                                              (A Development Stage Enterprise)
                                                 Consolidated Balance Sheets
                                                                                  June 30, 2000           June 30, 1999
                                                                              ----------------------  ----------------------
                             ASSETS
<S>                                                                           <C>                      <C>
Current assets:
  Cash and cash equivalents                                                         $     3,219,593         $     2,333,801
  Accounts receivable                                                                       953,163                       -
  Short-term investments                                                                  2,155,617                 454,827
  Prepaid expenses and other
                                                                                            179,792                 147,780
                                                                              ----------------------  ----------------------
      Total current assets                                                                6,508,165               2,936,408


Fixed assets, net of accumulated depreciation and amortization
  of $914,846 and $676,362 respectively                                                   1,573,140               1,457,605
Restricted cash                                                                             263,075                 185,000
Other                                                                                       541,017                 144,032
                                                                              ----------------------  ----------------------
                                                                                    $     8,885,397         $     4,723,045
                                                                              ======================  ======================

                   LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                                  $     1,012,070         $     1,116,894
  Accrued expenses                                                                          968,166               1,264,893
                                                                              ----------------------  ----------------------
      Total current liabilities                                                           1,980,236               2,381,787
                                                                              ----------------------  ----------------------
Long-term liabilities, net of current portion                                                     -               2,000,000
                                                                              ----------------------  ----------------------

Commitments and contingencies (Note 8)

Stockholders' equity:
  Preferred stock of $.01 par value - authorized 10,000,000 shares;
    Series A Convertible; 31,561 and 42,484 shares issued and outstanding
      as of June 30, 2000 and 1999, respectively;                                               316                     425
    Series B Convertible; 2,000 and 13,575 shares issued and outstanding as of
      June 30, 2000 and 1999, respectively;                                                      20                     136
    Series C Convertible;  700,000 shares issued and outstanding as of
         June 30, 2000;                                                                       7,000                       -
  Common stock of $.01 par value - authorized 75,000,000 shares;
    Issued and outstanding 7,902,372 and 7,137,595 shares as of June 30, 2000
      and 1999 respectively;                                                                 79,024                  71,376
  Additional paid-in capital                                                             50,324,603              35,610,243
  Unamortized deferred compensation                                                               -                 (18,558)
  Deficit accumulated during development stage                                          (43,505,802)            (35,322,364)
                                                                              ----------------------  ----------------------
Total stockholders' equity                                                                 6,905,161                 341,258
                                                                              ----------------------  ----------------------
                                                                                    $     8,885,397         $     4,723,045
                                                                              ======================  ======================

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

</TABLE>

                                       28

<PAGE>




                       THIS PAGE INTENTIONALLY LEFT BLANK




                                       29

<PAGE>

<TABLE>
<CAPTION>


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

                                            Inception
                                       (January 28, 1986)           Year                    Year                    Year
                                            through                Ended                    Ended                   Ended
                                         June 30, 2000         June 30, 2000            June 30, 1999           June 30, 1998
                                       ------------------  -----------------------  ---------------------- ------------------------
<S>                                        <C>                    <C>                        <C>                      <C>
REVENUES:
     Grants and contracts                  $   7,921,740          $     4,617,111            $     59,977             $     33,967
     License fees and royalties                1,734,296                  500,000                 550,000                        -
     Other                                       318,917                        -                       -                        -
                                       ------------------  -----------------------  ---------------------- ------------------------
        Total revenues                         9,974,953                5,117,111                 609,977                   33,967
                                       ------------------  -----------------------  ---------------------- ------------------------

OPERATING EXPENSES:
     Research and development                 32,747,288                9,109,619               8,719,562                7,111,716
     General and administrative               19,352,274                4,567,273               3,957,401                2,990,756
     Net intangibles write down                  259,334                        -                       -                        -
                                       ------------------  -----------------------  ---------------------- ------------------------
        Total operating expenses              52,358,896               13,676,892              12,676,963               10,102,472
                                       ------------------  -----------------------  ---------------------- ------------------------

OTHER INCOME (EXPENSES):
     Interest income                           1,353,990                  405,590                 172,241                  408,770
     Interest expense                         (1,950,849)                 (29,247)               (107,639)                (227,143)
     Merger costs                               (525,000)                       -                       -                        -
                                       ------------------  -----------------------  ---------------------- ------------------------
        Total other income/(expenses)         (1,121,859)                 376,343                  64,602                  181,627

                                       ------------------  -----------------------  ---------------------- ------------------------

NET LOSS                                     (43,505,802)              (8,183,438)            (12,002,384)              (9,886,878)

PREFERRED STOCK DIVIDEND                      (3,121,525)                       -                       -                 (232,590)
                                       ------------------  -----------------------  ---------------------- ------------------------


                                       30

<PAGE>


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

                                           Inception
                                       (January 28, 1986)           Year                    Year                    Year
                                            through                Ended                    Ended                   Ended
                                         June 30, 2000         June 30, 2000            June 30, 1999           June 30, 1998
                                       ------------------  -----------------------  ---------------------- ------------------------
NET LOSS ATTRIBUTABLE TO COMMON
       STOCKHOLDERS                       $  (46,627,327)         $    (8,183,438)         $  (12,002,384)          $  (10,119,468)
                                       ==================  =======================  ====================== ========================
Basic and diluted net loss per Common
     share                                  $     (27.35)           $       (1.10)           $      (2.02)            $      (3.15)
                                       ==================  =======================  ====================== ========================
Weighted average number of Common
     shares outstanding used in
     computing basic and diluted net
     loss per Common share                     1,704,685                7,441,082               5,936,498                3,210,684
                                       ==================  =======================  ====================== ========================


  The accompanying notes to consolidated financial statements are an integral part of these financial statements.
</TABLE>

                                       31

<PAGE>

<TABLE>
<CAPTION>


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

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

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

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

                                       32


<PAGE>



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

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

Balance, June 30, 1999                                       56,059                          561             -                    -
   Issuance of Preferred shares, net of expenses            700,000                        7,000             -                    -
   Conversion of Preferred shares into Common shares        (22,498)                        (225)            -                    -
   Net loss                                                       -                            -             -                    -
                                                 -------------------  -------------------  -------------------  -------------------
Balance, June 30, 2000                                      733,561         $      7,336           $        -           $        -
                                                 ===================  ===================  ===================  ===================



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

</TABLE>

                                       33

<PAGE>


<TABLE>
<CAPTION>


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

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

Adjusted balance, June 25, 1996   2,750,752        27,508   10,752,558     53,030         -             -    (8,132,938)  2,700,158
  Shares outstanding of Palatin
    Technologies, Inc.              108,188         1,082       (1,082)         -         -             -            -            -
  Issuance of Common shares          25,754           257      139,459          -         -             -            -      139,716
  Purchase of treasury stock
                                          -             -            -          -    (1,667)            -            -       (1,667)
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------
Balance, June 30, 1996            2,884,694        28,847   10,890,935     53,030    (1,667)             -   (8,132,938)  2,838,207
  Issuance of Preferred shares,
     net of expenses                      -             -   11,635,653          -         -              -           -   11,637,031
  Shares earned but not issued            -             -            -    250,141         -              -                  250,141
  Issuance of Common shares         135,987          1,360      316,761  (303,171)        -              -           -       14,950



                                       34

<PAGE>
                                                              PALATIN TECHNOLOGIES, INC.
                                                           (A Development Stage Enterprise)
                                              Consolidated Statements of Stockholders' Equity (Deficit)
                                                                    - Continued -



  Retirement treasury shares           (308)            (3)      (1,664)        -     1,667              -           -            -
  Issuance of stock options below
     fair market value                    -             -     1,472,716         -        -     (1,472,716)           -            -
  Amortization of deferred
        compensation                      -             -             -         -        -        394,383            -      394,383
  Net loss                                -             -             -         -         -             -    (5,300,164) (5,300,164)
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------
Balance, June 30, 1997            3,020,373        30,204   24,314,401          -         -    (1,078,333)  (13,433,102)  9,834,548

  Issuance of Preferred shares,
   net of expenses                        -             -    1,573,295          -         -             -             -   1,573,295
  Issuance of Preferred shares
   expense recapture                      -             -       49,733          -         -             -             -      49,733
  Issuance of Common shares          66,696           666       94,873          -         -             -             -      95,539
  Issuance of Common shares upon
   conversion of Preferred shares 1,012,554        10,126       (9,820)         -         -             -             -           -
  Issuance of stock options below
   fair market value                      -             -    1,161,156          -         -    (1,161,156)            -           -
  Amortization of deferred
   compensation                           -             -            -          -         -     1,723,310                 1,723,310
  Net loss                                -             -            -          -         -             -    (9,886,878) (9,886,878)
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------
Balance, June 30, 1998            4,099,623       40,995   27,183,638          -         -      (516,179)  (23,319,980)  3,389,547
  Issuance of Common shares       1,842,101        18,421    7,594,182          -         -             -             -   7,612,603
  Issuance of Common shares upon
   conversion of Preferred shares 1,115,740        11,158      (10,655)         -         -             -             -          (9)
  Issuance of Common shares upon
     exercise of warrants             9,874            99       18,676          -         -             -             -      18,775
  Issuance of Common shares upon
     exercise of options             70,257           703       13,348          -         -             -             -      14,051


                                       35

<PAGE>
                                                              PALATIN TECHNOLOGIES, INC.
                                                           (A Development Stage Enterprise)
                                              Consolidated Statements of Stockholders' Equity (Deficit)
                                                                    - Continued -


  Issuance of stock options below
     fair market value                    -             -      811,054          -         -      (811,054)            -           -
  Amortization of deferred
        compensation                      -             -            -          -         -     1,308,675                 1,308,675
  Net loss                                -             -            -          -         -             -   (12,002,384)(12,002,384)
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------
Balance, June 30, 1999            7,137,595        71,376   35,610,243                            (18,558)  (35,322,364)    341,258
                                                                     -
  Issuance of Preferred shares,
     net of expenses                      -             -   12,999,058          -         -             -                12,999,058
  Issuance of Preferred shares            -             -            -          -         -             -               -     7,000
  Issuance of Common shares upon
     conversion of Preferred                                                                                                     37
     shares                         572,374         5,724       (5,462)         -         -             -               -
  Issuance of Common shares upon
     exercise of warrants           111,551         1,115      451,097          -         -             -               -   452,212
  Issuance of Common shares upon
     exercise of options             80,852           809       99,667          -         -             -               -   100,476
  Acceleration of options
        previously granted                -             -    1,170,000          -         -             -                 1,170,000
  Amortization of stock based                                                                      18,558               -    18,558
        compensation                      -             -            -          -         -
  Net loss                                -             -            -          -         -             -    (8,183,438) (8,183,438)
                                  ----------  ------------  -----------  ---------  --------   -----------  ------------  ----------
Balance, June 30, 2000            7,902,372     $  79,024  $50,324,603     $    -   $     -    $        -  $(43,505,802) $6,905,161
                                  ==========  ============  ===========  =========  ========   ===========  ============  ==========

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

</TABLE>

                                       36


<PAGE>

<TABLE>
<CAPTION>

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


                                                        Inception
                                                       (January 28,          Year                Year             Year
                                                          1986)
                                                        through             Ended               Ended           Ended
                                                      June 30, 2000      June 30, 2000      June 30, 1999   June 30, 1998
                                                    ------------------  ---------------- ------------------ ---------------
<S>                                                 <C>                 <C>              <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss
                                                       (43,505,802)       (8,183,438)      (12,002,384)       (9,886,878)
  Adjustments to reconcile net loss to net
   cash used for operating activities:
      Depreciation and amortization                      1,085,770           248,491           232,625           230,160
      License fee                                          500,000                 -                 -           500,000
      Interest expense on note payable                      72,691                 -                 -                 -
      Accrued interest on long-term financing              796,038                 -                 -                 -
      Accrued interest on short-term financing               7,936                 -                 -                 -
      Intangibles and equipment write down                 278,318                 -                 -                 -
      Common stock and notes payable issued for            751,038                 -           127,350
         expenses                                                                                                 77,500
      Settlement with consultant                           (28,731)                -                 -                 -
      Deferred revenue                                           -                            (550,000)                -

      Acceleration of options
         previously granted                              1,170,000         1,170,000                 -                 -
      Amortization of stock based compensation           3,444,926            18,558         1,308,675         1,723,310

      Changes in certain operating assets and liabilities:
        Accounts receivable                               (953,163)
                                                                            (953,163)                -            84,562
        Prepaid expenses and other                      (1,296,485)         (439,004)           50,985          (301,780)
        Accounts payable                                 1,012,070          (104,824)          655,348           145,273
        Accrued expenses and other                         506,999          (296,727)          130,505          (189,229)
                                                   ----------------    --------------     --------------  ---------------

            Net cash used for operating
         activities                                    (36,158,395)       (8,540,107)       (10,046,896)      (7,617,082)
                                                   ----------------    --------------     --------------  ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of short-term investments                   (2,155,617)       (1,700,790)          (454,827)                -
  Purchases of property and equipment
                                                        (2,543,327)         (354,019)          (69,145)        (1,505,229)
                                                   ----------------    --------------     --------------  ---------------

         Net cash used for investing
         activities                                     (4,698,944)         (2,054,809)        (523,972)       (1,505,229)
                                                   ----------------    --------------     --------------  ---------------


                                       37


<PAGE>


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


                                                        Inception
                                                    (January 28,          Year                Year             Year
                                                        1986)
                                                      through             Ended               Ended           Ended
                                                    June 30, 2000      June 30, 2000      June 30, 1999   June 30, 1998
                                                  ------------------  ---------------- ------------------ ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from notes payable, related party               302,000                 -                  -                -
  Payments on notes payable, related party                (302,000)                -                  -          (80,000)
  Proceeds from senior bridge notes payable              1,850,000                 -                  -                -
  Payments on senior bridge notes payable               (1,850,000)                -                  -                -
  Proceeds from notes payable and
    long-term debt                                       3,951,327                 -          2,000,000                -
  Payments on notes payable and
    long-term debt                                      (1,951,327)                -           (939,588)        (869,551)
  Proceeds from common stock, stock option
    and warrant issuances, net                          17,868,273           480,708          7,518,070           18,037
  Proceeds from preferred stock, net                    24,210,326        11,000,000                  -        1,573,295
  Purchase of treasury stock                                (1,667)                -                  -                -
                                                   ----------------    --------------     --------------  ---------------
    Net cash provided by financing
         activities                                     44,076,932       11,480,708           8,578,482          641,781
                                                   ----------------    --------------     --------------  ---------------

NET INCREASE (DECREASE) IN CASH
    AND CASH EQUIVALENTS
                                                         3,219,593           885,792         (1,992,386)      (8,480,530)

CASH AND CASH EQUIVALENTS, beginning of period                   -          2,333,801           4,326,187      12,806,717
                                                   ----------------    --------------     --------------  ---------------

CASH AND CASH EQUIVALENTS, end of period              $  3,219,593      $  3,219,593       $   2,333,801   $   4,326,187
                                                   ================    ==============     ==============  ===============

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

</TABLE>

                                       38


<PAGE>

<TABLE>
<CAPTION>


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




                                                     Inception
                                                    (January 28,
                                                        1986)             Year                   Year        Year
                                                      through             Ended                 Ended        Ended
                                                    June 30, 2000     June 30, 2000    June 30, 1999     June 30, 1998
                                                  ------------------ ---------------- ----------------- ----------------
<S>                                               <C>                <C>                <C>               <C>

SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash paid for interest                          $      627,590     $       29,247     $       87,536    $      281,285
                                                  ================   ================   ================  ================

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

NON-CASH STOCK ACTIVITY:
   Conversion of loans from employees to
      Common stock                                 $       74,187     $      -           $      -          $            -
                                                  ================   ================   ================  ================
   Conversion of note payable to Common stock      $       16,000     $      -           $      -          $            -
                                                  ================   ================   ================  ================
   Common stock issued for equipment               $       2,327      $      -           $      -          $            -
                                                  ================   ================   ================  ================
   Common stock issued for expenses                $      884,565    $       -           $      127,350    $       77,500
                                                  ================   ================   ================  ================
   Common stock issued for accrued salaries
      and bonuses                                  $       16,548     $      -           $      -          $            -
                                                  ================   ================   ================  ================
   Accrued interest payable in Common stock        $       679,097    $      -           $      -          $            -
                                                  ================   ================   ================  ================

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

</TABLE>

                                       39


<PAGE>


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

(1)  ORGANIZATION ACTIVITIES:

     NATURE OF BUSINESS -- Palatin Technologies, Inc. ("Palatin" or the
"Company") is a development-stage, pharmaceutical company headquartered in
Princeton, NJ with its research facility in Edison, NJ. The Company is dedicated
to developing and commercializing products and technologies for diagnostic
imaging and ethical drug development utilizing peptide, monoclonal antibody, and
radiopharmaceutical technologies. The Company is concentrating on the following
products and technologies:

     (i)  Metal Ion-induced Distinctive Array of Structures ("MIDAS(TM)")
          metallopeptide technology ("MIDAS technology"),

     (ii) PT-141, a peptide hormone product for the treatment of sexual
          dysfunction ("PT-141"), and

     (iii) LeuTech(R), an infection and inflammation imaging product
           ("LeuTech").

     CORPORATE HISTORY -- Palatin, formerly Interfilm, Inc., was incorporated
under the laws of the State of Delaware on November 21, 1986. From November 4,
1993 until May 10, 1995, the date on which the Board of Directors substantially
curtailed the operations of the Company, the Company had been primarily engaged
in the business of exploiting rights related to its interactive motion picture
process, including the production and distribution of interactive motion
pictures for initial exhibition in theaters and subsequently in enhanced
versions for distribution to the home market. On June 25, 1996, a newly formed,
wholly-owned subsidiary of the Company, Interfilm Acquisition Corporation
("InSub"), a New Mexico corporation, merged with and into RhoMed Incorporated
("RhoMed"), a New Mexico corporation, with all outstanding shares of RhoMed
equity securities ultimately being exchanged for the Company's common stock (the
"Merger"). As a result of the Merger, RhoMed became a wholly-owned subsidiary of
the Company, with the holders of RhoMed preferred stock and RhoMed common stock
(including the holders of "RhoMed Securities" as hereafter defined) receiving an
aggregate of approximately 96% interest in the equity securities of the Company
on a fully-diluted basis. Additionally, all warrants and options to purchase
common stock of RhoMed outstanding immediately prior to the Merger (the "RhoMed
Securities"), including without limitation, any rights underlying RhoMed's
qualified or non-qualified stock option plans, were automatically converted into
rights upon exercise to receive the Company's common stock in the same manner in
which the shares of RhoMed common stock were converted. Since the former
stockholders of RhoMed retained more than a 50% controlling interest in the
surviving company (Palatin), the Merger was accounted for as a reverse merger,
with RhoMed deemed as the acquiror for accounting purposes. The business of
RhoMed, conducted by Palatin since June 25, 1996, represents the on-going
business of Palatin. Certain assets and liabilities of the Company and a
subsidiary existing prior to the Merger, consisting principally of certain
intellectual property and litigation claims against Sony Corporation of America
and related entities, were transferred to an unaffiliated limited liability
partnership for the benefit of the Company's stockholders of record as of June
21, 1996 (pre-Merger stockholders). The historical

                                       40

<PAGE>

financial statements prior to June 25, 1996, are those of RhoMed, except that
the stock transactions have been presented in the notes on an as if converted
basis. References to the Company's activities, results of operations and
financial condition prior to June 25, 1996 are to RhoMed unless otherwise
specified.


     CHARTER AMENDMENT - On September 5, 1997, an amendment to the
Restated Certificate of Incorporation of the Company (the "Amendment") was
filed, which:

     (i)  increased the total number of authorized shares of Common Stock from
          25,000,000 to 75,000,000.

     (ii) Increased the total number of authorized shares of Preferred Stock
          from 2,000,000 to 10,000,000.

     (iii) Effected a 1-for-4 reverse split of Common Stock.

     (iv) The consolidated financial statements have been retroactively restated
          to reflect the Amendment.


(2)  BUSINESS RISK AND LIQUIDITY:

     As shown in the accompanying financial statements, the Company incurred
substantial net losses of $8,183,438 for the year ended June 30, 2000 and has a
deficit accumulated in the development stage of $43,505,802 as of June 30, 2000.
The Company anticipates incurring additional losses in the future, as it begins
to manufacture and market LeuTech, expand clinical trials for LeuTech's other
indications and for PT-141, and to continue research and development of PT-141
and MIDAS technology. To achieve profitability, the Company, alone or with
others, must successfully develop and commercialize its technologies and
proposed products, conduct pre-clinical studies and clinical trials, obtain
required regulatory approvals and successfully manufacture and market such
technologies and proposed products. The time required to reach profitability is
highly uncertain, and there can be no assurance that the Company will be able to
achieve profitability on a sustained basis, if at all.

         In September 2000, the Company received $10.8 million from a private
offering consisting of common stock and warrants. Investors, consisting of
financial institutions based in Europe, purchased 1.8 million shares at a per
share price of $6.00, which represented the closing market price of Palatin
shares on the American Stock Exchange on September 7, 2000. For every five
shares purchased, the investors also received a five-year warrant to purchase
one share of common stock at a 25 percent premium to the closing price.

         Management plans to continue to refine its operations, control
expenses, evaluate alternative methods to conduct its business, and seek
available and attractive sources of financing and sharing of development costs
through strategic collaboration agreements or other resources. Management
believes that through one or a combination of such factors that it will be able
to obtain adequate financing to fund the Company's operations through fiscal
year 2001, based on current expenditure levels. There can be no assurance that
the Company's efforts will be successful.

                                       41

<PAGE>



(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Palatin and its wholly owned inactive subsidiaries,
RhoMed, Inc., Interfilm Technologies, Inc. and Evergreen Merger Corporation. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

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

     FISCAL YEAR -- Effective June 30, 1996, Palatin and RhoMed each changed its
fiscal year end to June 30. The fiscal year ends of Palatin and RhoMed prior to
the Merger were December 31 and August 31, respectively.

     SHORT-TERM INVESTMENTS -- The Company accounts for its investments in
accordance with Statement of Financial Accounting Standards No. 115 "Accounting
For Certain Investments in Debt and Equity Securities." The Company classifies
such investments as available for sale investments and as such all investments
are recorded at fair value. The investments consist of certificates of deposit.
Unrealized gains and losses are classified as a separate component of
stockholders' equity. As of June 30, 2000 the unrealized gain on investments was
immaterial. Realized gains and losses are recorded in the statement of
operations in the period that the transaction occurs.

     FIXED ASSETS -- Fixed assets consist of equipment, office furniture and
leasehold improvements. Fixed assets are stated at cost. Depreciation is
recognized using the straight-line method over the estimated useful lives of 5
years for equipment, 7 years for office furniture and over the term of the lease
for leasehold improvements. Maintenance and repairs are charged to expense as
incurred while expenditures that extend the useful life of an asset are
capitalized.

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

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

     In December 1999, the Securities and Exchange Commission issued the Staff
Accounting Bulletin No. 101-Revenue Recognition in Financial Statements (SAB
101). The bulletin draws on existing accounting rules and provides specific
guidance on how those accounting rules should be

                                       42

<PAGE>

applied and specifically addresses revenue recognition for non-refundable
technology access fees in the biotechnology industry. SAB 101 is effective for
fiscal years beginning after December 15, 1999.

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

     In connection with the issuance of SAB 101, the Company is required to
defer such amounts and recognize revenue over the term of the agreement or the
expected period of performance. Management estimates that the expected period of
performance is two years. The Company will report a change in accounting
principle and will record the impact of this change as a cumulative effect in
its statement of operations in its fourth quarter of fiscal 2001.

     RESEARCH AND DEVELOPMENT COSTS -- The costs of research and development
activities are charged to expense as incurred.

     STOCK OPTIONS AND WARRANTS -- Warrants and the majority of common stock
options issued to employees and non-employee directors have been issued at
exercise prices greater than, or equal to, their fair market value at the date
granted. Accordingly, no value has been assigned to these instruments. However,
certain stock options were issued under non-plan option agreements and a
non-qualified stock option plan at exercise prices below market value. The
difference between the exercise price and the market value of these securities
has been recorded as deferred compensation and is being charged to expense over
the vesting period of the option. In addition, during the fiscal year stock
options were granted to non-employees for past services. The deemed value
pursuant to SFAS No. 123, as calculated by the Black-Scholes option pricing
model was charged to the statement of operations.

     INCOME TAXES -- The Company and its subsidiaries file consolidated federal
and combined state income tax returns. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 ("SFAS
109"), "Accounting for Income Taxes." 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 timing
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 carryforwards.

     NET LOSS PER COMMON SHARE -- The Company applies SFAS No. 128, "Earnings
per Share" ("SFAS 128"). SFAS 128 requires dual presentation of basic and
diluted earnings per share ("EPS") for complex capital structures on the face of
the statement of operations. Basic EPS is computed by dividing the income (loss)
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution from the exercise or conversion

                                       43

<PAGE>

of securities into common stock, such as stock options. For the years ended June
30, 2000, 1999 and 1998 and for the period from inception (January 28, 1986)
through June 30, 2000, 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 5,508,067 shares of common stock at prices ranging from $0.20 to
$306.00 per share were outstanding at June 30, 2000.

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

     The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments: the carrying
amount reported on the balance sheet approximates the fair value for cash,
short-term borrowings and current maturities of long-term debt; and the fair
value for the Company's fixed rate long-term debt is estimated based on the
current rates offered to the Company for debt of the same remaining maturities.
Based on the above, the amount reported on the balance sheet approximates the
fair value.

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



(4)  RELATED PARTY TRANSACTIONS:

     During the fiscal year ended August 31, 1995, the Company encountered
serious liquidity and working capital deficiencies. As a result, effective April
1995, the Company entered into a letter of intent with The Castle Group Ltd.
("Castle"), a company controlled by Lindsay A. Rosenwald, M.D. ("Dr.
Rosenwald"), under which Castle agreed to arrange for a line of credit of up to
$300,000 to finance ongoing operations; agreed to arrange for future financings;
and the Company agreed to sell to Castle or its designees, for $4,000
consideration paid, 4,000,000 shares of preferred stock which converted into
466,952 shares of Common Stock. At the time the letter of intent was entered
into with Castle, the Company was insolvent and its equity had nominal value;
accordingly, the sale of preferred stock to Castle or its designees was recorded
at the nominal $4,000 consideration paid. The issuance of the preferred stock to
designees of Castle was consummated on October 25, 1995 and resulted in Dr.
Rosenwald and his designees obtaining majority ownership and control of the
Company on that date.

     On July 28, 1995, the Board of Directors approved an offering of senior
bridge notes and warrants (the "Class A Offering"), for which Paramount Capital,
Inc. ("Paramount"), of which Dr. Rosenwald is the Chairman, served as placement
agent. Two of the then three members of the Board of Directors of RhoMed were
employees of entities controlled by Dr. Rosenwald. The transaction and selection
of the placement agent was ratified by disinterested stockholders on August 15,
1995.

                                       44

<PAGE>

Paramount received (i) a cash commission equal to 6% of the gross proceeds
from the sale of the units or $60,000, (ii) a non-accountable expense allowance
equal to 3% of gross proceeds or $30,000 and (iii) placement agent's warrants,
on the same terms as the warrants, equal to 15% of the Common Stock underlying
the warrants issued in the Class A Offering. Additionally, investment funds
managed by a company of which Dr. Rosenwald is president purchased senior bridge
notes with a face value of $100,000 and warrants to purchase 13,824 shares of
Common Stock at $.22 per share.

     On November 27, 1995, the Company's Board of Directors approved an offering
of senior bridge notes and warrants (the "Class B Offering"), for which
Paramount served as placement agent, which was approved by the two disinterested
directors. Paramount received (i) a cash commission equal to 9% of the gross
proceeds from the sale of the units or $76,500, (ii) a non-accountable expense
allowance equal to 4% of gross proceeds or $34,000 and (iii) placement agent's
warrants at an exercise price of $6.52 per share but otherwise on the same terms
as the warrants, equal to 5% of the Common Stock underlying the warrants issued
in the Class B Offering. Additionally, investment funds managed by a company of
which Dr. Rosenwald is president purchased senior bridge notes with a face value
of $100,000 and warrants to purchase 4,608 shares of Common Stock at $2.72 per
share.

     On March 4, 1996, the Board of Directors approved an offering of common
stock (the "Common Stock Offering") and authorized an offering committee of the
Board of Directors, consisting of the two disinterested directors, to determine
the placement agent for the Common Stock Offering. The selection of Paramount as
placement agent was approved by the disinterested directors, who concluded that
alternative means of financings were not available to the Company on terms more
favorable than the Common Stock Offering. The price per share of common stock in
the Common Stock Offering of $5.44 was determined through negotiations between
the Company and Paramount. On May 14, 1996, the disinterested directors approved
an increase in the Common Stock Offering. Paramount received (i) a cash
commission equal to 9% of the gross proceeds from the sale of the units or
$868,000, (ii) a non-accountable expense allowance equal to 4% of gross proceeds
or $386,000 and (iii) placement agent's warrants, equal to 10% of the common
stock issued in the Common Stock Offering, at an exercise price of $6.52 per
common stock share, which are freely exercisable, terminate ten years from the
date of issuance and have certain registration rights. Additionally investment
funds managed by a company of which Dr. Rosenwald is president purchased 322,674
shares of Common Stock at $5.44 per share.

     On December 2, 1996, the Board of Directors approved an offering of Series
A Preferred Convertible Stock (the "Series A Preferred Offering"), which was
approved by the four disinterested directors. The selection of Paramount as
placement agent was approved by the disinterested directors, who concluded that
alternative means of financings were not available to the Company on terms more
favorable than the Series A Preferred Offering. The Series A Preferred
Convertible Stock was initially convertible into Common Stock at a 15% discount
to the average closing bid price of the Company's Common Stock for the twenty
(20) consecutive trading days immediately preceding the final closing. The 15%
discount on conversion of the Series A Preferred Convertible Stock to Common
Stock was determined through negotiations between the Company and the placement
agent. The 15% discount has been reflected in the Company's consolidated
statement of operations as a dividend to the Series A Preferred Convertible
Stock of $2,888,935. The Series A Preferred Convertible Stock is currently
convertible into Common Stock at a price per share of Common Stock of $4.67.
Paramount received (i) a cash commission equal to 9% of the gross proceeds

                                       45

<PAGE>

from the sale of the units or $1,240,020, (ii) a non-accountable expense
allowance equal to 4% of gross proceeds or $551,120 and (iii) placement agent's
warrants, equal to 10% of the Series A Preferred Convertible Stock issued in the
Series A Preferred Offering at an exercise price of $110.00 per share of Series
A Preferred Convertible Stock, which terminate ten years from the date of
issuance and have certain registration rights. The Company has valued those
warrants at $573,537. In the Series A Preferred Offering, investment funds
managed by a company of which Dr. Rosenwald is president purchased 10,000 shares
of Series A Preferred Convertible Stock at $100 per share.

     Pursuant to the placement agency agreement for the Series A Preferred
Offering, the Company entered into an introduction agreement with Paramount (the
"Introduction Agreement"), under which Paramount acted as the Company's
non-exclusive financial advisor for a minimum period of 18 months commencing
January 1, 1997, and received (i) out-of-pocket expenses incurred in connection
with services performed under the Introduction Agreement, (ii) a retainer of
$72,000, (iii) a warrant to purchase 6,250 shares of Common Stock at $8.75 per
share issued to a designee of Paramount and (iv) a percentage or lump sum
success fees in the event that Paramount assists the Company in connection with
certain financing and strategic transactions. The Introduction Agreement
replaced a similar agreement in effect from September 1, 1996 through December
31, 1996, pursuant to which Paramount Capital received a retainer of $5,000 per
month and a warrant to purchase 6,250 shares of Common Stock at $9.00 per share
issued to a designee of Paramount.

     On April 28, 1998, the Board of Directors approved an offering of Series B
Preferred Convertible Stock (the "Series B Preferred Offering"), which was
approved by the four disinterested directors. The selection of Paramount as
finder pursuant to a finder's fee agreement was approved by the disinterested
directors, who concluded that alternative means of financings were not available
to the Company on terms more favorable than the Series B Preferred Offering. The
Series B Preferred Convertible Stock was initially convertible into Common Stock
at a conversion price per share of Common Stock of $5.50. A 12.3% discount to
the average closing bid price of the Company's Common Stock as of the closing,
which conversion price was determined through negotiations between the Company
and the investors. The 12.3% discount has been reflected in the Company's
consolidated statement of operations as a dividend to the Series B Preferred
Convertible Stock of $232,590. The Series B Preferred Convertible Stock is
currently convertible into Common Stock at a price per share of Common Stock of
$3.52. Paramount received a finder's fee equal to 10% of the gross proceeds from
the sale of the units or $188,750.

     Upon the closing of the equity investments sold during the fiscal year
ended June 30, 1999, the Company issued to Paramount, or its designees, pursuant
to the Introduction Agreement referenced above; (i) warrants to purchase a total
of 186,923 shares of the Company's Common Stock at prices ranging from $4.70 to
$5.57, (ii) paid commissions of $295,020 in cash and (iii) paid non accountable
expenses of $30,000 in cash.

     Management of the Company believes that the terms of the transactions and
the agreements described above are on terms at least as favorable as those which
it could otherwise have obtained from unrelated parties.

                                       46

<PAGE>


(5)  PROPERTY AND EQUIPMENT:

     Property and equipment consists of the following:


                                         June 30,            June 30,
                                           2000                1999
                                           ----                ----

Office equipment                           $ 544,265           $ 374,147

Laboratory equipment                         449,857             428,162

Leasehold improvements                     1,493,864           1,331,658
                                    ------------------   ----------------

                                           2,487,986           2,133,967

Less: Accumulated depreciation and
         amortization                       (914,846)           (676,362)
                                    ------------------   ----------------

                                          $1,573,140          $1,457,605
                                    ==================   ================


(6)  LONG-TERM FINANCING:

     On May 13, 1999, the Company received $2,000,000 pursuant to a Subordinated
Non-negotiable Promissory Note from Mallinckrodt, Inc. Principal and interest
accrued at 9% per annum was due by December 31, 2000. The Note was secured by
the assets of the Company. This note and accrued interest of $46,489 was
satisfied pursuant to the execution of a Strategic Collaboration Agreement
signed with Mallinckrodt, Inc. on August 16, 1999. (See Note 11). The $2,000,000
in principal along with interest of $46,489 was netted against the $13,500,000
that the Company was due under this agreement. On August 17, 1999 the Company
received the net funds of $11,453,511 from Mallinckrodt.



(7)  SENIOR BRIDGE NOTES:

     CLASS A OFFERING -- On July 28, 1995, the Company initiated the Class A
Offering of 40 units, with each unit consisting of a $25,000 face amount senior
bridge note and a warrant to purchase 3,456 shares of Common Stock at an
exercise price of $.22 per share. All units were purchased, with net proceeds to
the Company of approximately $907,000 after payment of the placement agent's
commissions and expenses ($90,000) and offering expenses (approximately $3,000).
The nominal exercise price for the warrants reflected the seriously troubled
financial condition of the Company on the date of the transaction, and
accordingly, no value was assigned to the warrants upon issuance. The senior
bridge notes sold in the Class A Offering accrued interest at 1% per month, and
were payable, with interest, one year from the date of issuance. In August and
September of 1996, the Class A Offering notes with accrued interest were repaid
in full. The warrants are exercisable at any time, terminate ten years from the
date of issuance, and have certain registration rights.

     CLASS B OFFERING -- On November 27, 1995, the Company initiated the Class B
Offering of

                                       47

<PAGE>

up to 7.5 units at $100,000 per unit, subsequently increased to 8.5 units, with
each unit consisting of a $100,000 face amount senior bridge note and a warrant
to purchase an equivalent of 4,608 shares of common stock at an exercise price
of $2.72. Net proceeds to the Company were $739,500 after payment of the
placement agent's commissions and expenses ($110,500). Due to the seriously
troubled financial condition of the Company on the date of the transaction, no
value was assigned to the warrants upon issuance. The senior bridge notes sold
in the Class B Offering accrued interest at 1% per month, and were payable, with
interest 12 months from the date of issuance, unless accelerated under certain
circumstances. On June 28, 1996, the Class B Offering notes with accrued
interest were paid in full. The warrants are exercisable at any time, terminate
five years from the date of issuance, have certain registration rights, and
contain a call provision.



(8)  COMMITMENTS AND CONTINGENCIES:

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


                Fiscal Year

                2000                        $   421,613

                2001                            425,287

                2002                            494,751

                2003                            498,425

                2004 and thereafter           1,102,157
                                            -----------
                                             $2,942,233



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

     1.   $400,000 payable in 24 equal monthly installments of $16,666.66 less
          benefit deductions, tax withholding and other deductions required by
          law.

     2.   Payment by the Company of premiums necessary for the continuation of
          current group health insurance coverage under the Federal Law called
          "COBRA" for 18 months.

     3.   Continuation of life and disability insurance substantially similar to
          that which Mr. Quilty was receiving immediately prior to such
          resignation for 24 months.

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

                                       48

<PAGE>



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

     On October 12, 1998, the Board of Directors ratified employment agreements
with three officers of the Company, Carl Spana, Ph.D., Stephen T. Wills and
Charles Putnam effective September 11, 1998. Pursuant to the agreements, each is
serving as an executive vice president of the Company. The agreements expire in
September 2001. Pursuant to the agreements, each officer was granted options to
purchase 50,000 shares of the Company's Common Stock at an exercise price of
$2.50, the closing price of the Company's Common Stock on September 11, 1998.
These options vested over a two year period with the first 33% vested
immediately, the next 33% vested on the first anniversary of the date of grant
and the remaining 34% vested on the second anniversary of the date of grant. The
agreements include specified termination pay and vesting of stock options under
certain termination events.

     LICENSE AGREEMENTS -- The Company has three license agreements that require
minimum yearly payments. Future minimum payments under the license agreements
are: 2001 - $150,000, 2002 - $200,000, 2003 - $200,000, 2004 - $200,000 and 2005
- - $200,000.

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

     LEGAL PROCEEDINGS -- The Company is subject to various claims and
litigation in the ordinary course of its business. Management believes that the
outcome of such legal proceedings will not have a material adverse effect on the
Company. On March 14, 2000, the Company announced that it would not be extending
the merger consummation date of March 31, 2000 for its previously announced
proposed merger with San Diego-based Molecular Biosystems, Inc. and would not be
proceeding with the merger. The Company's decision not to proceed with the
merger was based on management's view that the merger was not in the best
interests of the Company's stockholders.

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

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

                                       49

<PAGE>

addition, Molecular Biosystems seeks consequential damages in an unstated amount
plus interest and Molecular Biosystems' costs and expenses of the action.

     In the Company's response filed in June of 2000, the Company has denied the
material allegations. Management believes that the Company has good and
meritorious defenses to the action and the Company intends vigorously to defend
the action.



(9)  STOCKHOLDERS' EQUITY (DEFICIT):

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

     SERIES B PREFERRED OFFERING -- As of April 28, 1998, the Company completed
a private placement of 18,875 shares of Series B Convertible Preferred Stock at
a price per share of $100. The net proceeds to the Company were approximately
$1,600,000, after deducting the finder's fee and other expenses of the Series B
Preferred Offering. As of June 30, 2000, Series B Convertible Preferred Stock
convertible into 56,818 shares of common stock remained outstanding, all of
which has since been converted.

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

     Each share of Series A Convertible Preferred Stock is convertible at any
time, at the option of the holder, into the number of shares of Common Stock
equal to $100 divided by the "Series A Conversion Price". The current Series A
Conversion Price is $4.67, so each share of Series A Convertible Preferred Stock
is currently convertible into approximately 21.4 shares of Common Stock. The
Series A Conversion Price is subject to adjustment, under certain circumstances,
upon the sale or issuance of Common Stock for consideration per share less than
either (i) the Conversion Price in effect on the date of such sale or issuance,
or (ii) the market price of the Common Stock as of the date of such sale or
issuance. The Conversion Price is also subject to adjustment upon the occurrence
of a merger, reorganization, consolidation, reclassification, stock dividend or
stock split which will result in an increase or decrease in the number of shares
of Common Stock outstanding.

     COMMON STOCK TRANSACTIONS -- At various times in March 1999, the Company
sold in a private placement, an aggregate of 514,215 shares of its $.01 par
value Common stock and 565,629 detachable five-year non-redeemable warrants.
Each Warrant is exercisable for one share of Common stock at an exercise price
equal to the per share Common stock purchase price. The Common stock purchase
price, which was based on the average closing bid price for the five business
days immediately prior to the

                                       50

<PAGE>

respective closing dates, ranged from $4.48 per share to $5.06 per share. The
Company received net proceeds of approximately $2,175,000, which is being used
for working capital and research and development programs.

     In connection with the private placement, the Company paid compensation to
third parties consisting of an aggregate of $222,370 in cash and agreed to issue
five-year warrants to purchase an aggregate of 114,073 shares of Common stock at
not less than the exercise prices of the warrants sold in the private placement.

     In February 1999, the Company sold in a private placement 651,750 shares of
its $.01 par value Common stock, at $4.00 per share and 651,750 detachable
five-year non-redeemable warrants. Each Warrant is exercisable for one share of
Common stock at an exercise price of $4.70. The Company received net proceeds of
approximately $2,350,000, which is being used for working capital and research
and development programs.

     In connection with the private placement, the Company paid compensation to
third parties consisting of an aggregate of $248,130 in cash and agreed to issue
five-year warrants to purchase an aggregate of 194,600 shares of Common stock at
$4.70.

     On December 31, 1998, the Company sold in a private placement 287,500
shares of its $.01 par value Common stock, at $4.00 per share and 287,500
detachable five-year non-redeemable warrants. Each Warrant is exercisable for
one share of Common stock at an exercise price of $4.375 per share. The Company
received net proceeds of approximately $1,000,000, which was used for working
capital and research and development programs.

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

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

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

     In the fiscal year ended June 30, 1998, the Company issued 10,000 shares of
Common Stock in exchange for services and recorded compensation expense for the
fair market value of $7.75 per share.

     On March 4, 1996, the Company initiated the Common Stock Offering of units
at $100,000 per unit, with each unit consisting of 18,433 shares of Common Stock
at a purchase price of $5.44 per share. The Common Stock Offering was terminated
on June 24, 1996, with 96.454 units having been sold, realizing net proceeds of
approximately $8,391,000, and resulting in the issuance of 1,777,961 shares of
Common Stock.

     On June 24, 1996, and pursuant to the Merger, certain stockholders of
Interfilm, Inc. prior to the Merger and third parties purchased 138,249 shares
of Common Stock at a purchase price of $5.44 per share, with net proceeds of
approximately $748,000. In addition, and pursuant to the

                                       51

<PAGE>

Merger, warrants to purchase 69,124 shares of Common Stock at an exercise price
of $8.68 were issued to certain stockholders of Interfilm prior to the Merger
and third parties. These warrants are exercisable at any time, terminate four
years from the date of issuance, have certain registration rights, contain a
call provision and are subject to adjustment in certain circumstances.

     In the ten months ended June 30, 1996, the Company issued 31,492 shares of
Common Stock in exchange for services and recorded compensation expense for the
fair market value of the shares.

     The Company commenced a private offering of preferred stock in fiscal 1994,
and a private offering of units consisting of common stock and common stock
warrants in fiscal 1995, both of which were terminated without having raised the
minimum required for closing. Stock issuance costs incurred in connection with
both offerings were expensed to operations in the fiscal year in which such
costs were incurred.

     In February 1993, the Company sold 26,912 shares of Common Stock for net
proceeds of approximately $577,000.

     In September 1992, the Company sold 12,288 shares of Common Stock for net
proceeds of approximately $191,000.

     In December 1991, the Company issued a private offering memorandum for the
sale of units consisting of 1,211 shares of Common Stock and a $20,000 note (see
Note 8). Four units were sold for $25,000 per unit.

     All pre-Merger common stock issuances were for RhoMed common stock,
subsequently converted into the Company's Common Stock as a result of the
Merger, and were at issuance prices representing market value of the RhoMed
common stock on the date of issuance.

     OUTSTANDING STOCK PURCHASE WARRANTS -- At June 30, 2000, the Company had
the following warrants outstanding:






                            [table on following page]


                                       52

<PAGE>


<TABLE>
<CAPTION>


                                                   Common          Exercise Price            Latest
             Warrant                            Stock Shares          per Share         Termination Date
<S>                                             <C>                <C>                  <C>

    Class A Offering                                      55,300          $     .22           9/13/05
    Class A Placement Agent                               20,737                .22           9/13/05
    Class B Offering                                      29,119               2.64           2/15/06
    Class B Placement Agent                                2,334               5.43           2/15/06
    Common Stock Offering Placement Agent                212,329               5.43           6/25/06
    Merger Warrants                                       69,124               8.68           6/24/02
    Series A Preferred Offering Placement Agent          278,958              5.137           11/9/02
    Palatin Offering #1                                  864,250       4.375 - 4.70          12/31/03
    Offering #1 Placement Agent                          254,600        3.75 - 4.70          12/31/03
    Palatin Offering #2                                  540,629        4.48 - 5.06            3/9/04
    Offering #2 Placement Agent                          114,073        4.48 - 5.57            3/9/04
    Watson termination agreement                          41,062                .01           3/15/05
    Other Warrants                                        17,052        6.45 - 6.56            5/9/02
                                                 ----------------    ----------------     -----------
      Total                                            2,499,567       $.22 - $8.68           6/25/06
                                                 ================    ================     ===========
</TABLE>


The Class B Offering and Merger Warrants contain provisions providing for
termination of the warrant if not exercised following notice of specified per
share trading prices.



     STOCK OPTION PLANS -- The Company has one stock option plan currently in
effect under which future grants may be issued, the 1996 Stock Option Plan, as
amended, approved by the Company's stockholders on June 17,1999, for which
2,500,000 shares of common stock are reserved. The Company has also granted
options under agreements with individuals, and not under any plan. On March 24,
1998 the Company's stockholders approved options to two executive officers to
purchase a total of 148,392 shares of common stock at an exercise price of $1.00
per share, which options replaced previously granted options to purchase the
same number of shares at an exercise price of $5.42 per share.

     Prior to the Merger, the Company had adopted a 1993 Equity Incentive Plan,
pursuant to which options for 750 shares of common stock, giving effect to the
Merger and Amendment, were granted and outstanding at June 30, 2000. No new
shares can be issued under this plan.

     Pursuant to the Merger, options which had been granted under RhoMed's four
stock option plans constituted RhoMed Securities which were automatically
converted into rights upon

                                       53

<PAGE>

exercise to receive Common Stock in the same manner in which the shares of
RhoMed common stock were converted.

     The Company applies disclosures required by Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." Effective July 1, 1996, the Company has elected to adopt the
disclosures of this pronouncement. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the grant date for
awards under SFAS 123, the Company's net loss and basic and diluted net loss
attributable to common stockholders per share for the year ended June 30, 2000
would have been $10,438,724 and $1.40 respectively. Net loss and basic and
diluted net loss attributable to common stockholders per share for the year
ended June 30, 1999 would have been $12,883,151 and $2.17, respectively, while
net loss and basic and diluted net loss attributable to common stockholders per
share for the year ended June 30, 1998 would have been $9,533,412 and $3.04,
respectively. Because the SFAS 123 method of accounting has not been applied to
options granted prior to September 1, 1995, the resulting pro forma compensation
cost, and thus pro forma net loss, may not be representative of that to be
expected in future years. The weighted average fair market value at the date of
grant for options granted during 2000, 1999 and 1998 is estimated as $2.41,
$1.29 and $2.55 per share, respectively, using the Black-Scholes option-pricing
model. The assumptions used in the Black-Scholes model are as follows: dividend
yield of 0%, expected volatility of 60%, weighted average risk-free interest
rate of 6.47% in 2000, 4.66% in 1999 and 5.83% in 1998, and an expected option
life of 7 years.

     The status of the plans and individual agreements, including predecessor
and replacement plans under which options remain outstanding, giving effect to
the Merger and the Amendment, during the three years ended June 30, 2000, was as
follows:




                            [table on following page]

                                       54

<PAGE>


<TABLE>
<CAPTION>

                                                  Number of shares          Range of prices    Weighted average
                                                 subject to options            per share       Prices per share
                                                 ------------------        --------------      ----------------
<S>                                              <C>                       <C>                 <C>
Outstanding at June 30, 1997                              838,122          $.20 - $360.00             $8.02
                                                          513,542            $.20 - $7.75
   Granted
   Expired or canceled                                  (201,584)          $ .20 - $10.85
   Exercised                                              (5,944)                    $.22
                                                        ----------        ----------------           ------
Outstanding at June 30, 1998                            1,144,136          $.20 - $360.00            $ 6.92
   Granted                                                940,088          $2.50 - $5.813
   Expired or canceled                                   (38,559)          $.22 - $360.00
   Exercised                                             (70,257)                    $.22
                                                        ----------        ----------------           ------
Outstanding at June 30, 1999                            1,975,408          $.20 - $306.00             $4.26
   Granted                                              1,238,210           $.20 - $6.625
   Expired or canceled                                  (124,264)          $2.50 - $10.85
   Exercised                                             (80,854)            $.22 - $6.25
                                                        ----------        ----------------           ------
Outstanding at June 30, 2000                            3,008,500          $.20 - $306.00             $3.92
                                                        =========          ==============             =====
Exercisable at June 30, 2000                            2,292,978          $.20 - $306.00              4.65
                                                        =========          ==============              ====
</TABLE>


(10) INCOME TAXES:

     Palatin has had no income tax expense or benefit since inception because of
operating losses. Deferred tax assets and liabilities are determined based on
the estimated future tax effect of differences between the financial statements
and tax reporting basis of assets and liabilities, given the provisions of the
tax laws. A valuation allowance for the net deferred tax assets has been
recorded at June 30, 1999, based on the weight of evidence that the deferred tax
assets exceed the likely reversal of deferred tax liabilities and likely taxable
income.

     The Tax Reform Act of 1986 imposes limitations on the use of net operating
loss carryforwards if certain stock ownership changes occur. As a result of the
change in majority ownership relating to the Castle preferred stock transaction,
the Common Stock Offering, the Merger, and the Series A Preferred Stock
Offering, Palatin most likely will not be able to fully realize the benefit of
its net operating loss carryforwards.

                                       55

<PAGE>



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

<TABLE>
<CAPTION>
                                                                               June 30
                                                          ---------------------------------------------------
                                                                    2000                      1999
                                                          ------------------------- -------------------------
<S>                                                             <C>                       <C>
Net operating loss carryforwards......................          $14,855,424               $13,015,397

Research and development tax credits..................              550,591                   245,958

Non-deductible expenses...............................              276,232                   204,721

Other.................................................                    -                  (32,577)
                                                          ------------------------- -------------------------
                                                                 15,682,247                13,433,499

Valuation Allowances..................................          (15,682,247)              (13,433,499)

                                                          ------------------------- -------------------------
Net deferred tax assets...............................              $     -                   $     -
                                                          ========================= =========================
</TABLE>

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


(11) 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 $3,446,000 of the
Company's revenues have been derived from federally or state funded grants and
contracts. Under federal grants and contracts, there are no royalties or other
forms of repayment; however, in certain limited circumstances the government can
acquire rights to technology which is not being commercially exploited.

     On August 16, 1999, the Company entered into a Strategic Collaboration
Agreement with Mallinckrodt, Inc., a large international healthcare products
company, to jointly develop and market LeuTech. Under the terms of the
agreement, Mallinckrodt paid a $500,000 license fee, which the Company
recognized as revenue in the year ended June 30, 2000 and purchased 700,000
restricted shares of Series C Convertible Preferred Stock for $13,000,000. The
stock is convertible into 700,000 shares of common stock with certain
registration rights and anti-dilution rights upon the occurrence of the earlier
of 5 years or a change of control in Palatin (as defined in the agreement). In
addition, Mallinckrodt agreed to make milestone payments totaling $10,000,000
upon FDA approval of the first LeuTech indication and attainment of sales goals
following product launch, reimburse the Company for 50% of all ongoing LeuTech
development costs and pay the Company a transfer price on each LeuTech product
unit and a royalty on Mallinckrodt's future net sales of LeuTech. After
offsetting the $2,000,000 subordinated note to Mallinckrodt including interest
of $46,849, the Company received net proceeds of $11,453,151 on August 17, 1999.
During the year ended June 30, 2000, the

                                       56

<PAGE>

Company recognized approximately $4,150,000 as contract revenue related to the
shared development costs of LeuTech.

(12) LICENSING FEES AND ROYALTIES:

     In December 1996, the Company entered into an Option Agreement with Nihon
Medi-Physics ("Nihon"), pursuant to which the Company received, in January 1997,
an initial payment of $1,000,000 before Japanese withholding taxes of $100,000
(the "Initial Payment"). The Company has accounted for the Initial Payment by
recognizing license fee revenue of $350,000, which represents the non-refundable
portion of the Initial Payment, and deferred license fee revenue of $550,000.
The Company recognized $550,000 in license fees as revenue during the quarter
ended December 31, 1998 related to its license option agreement with Nihon
Medi-Physics Ltd. ("Nihon"). This $550,000 was recognized pursuant to a
determination by both Nihon and the Company to change the development emphasis
and terminate the original agreement. The Company is not required to perform any
future services under this agreement.

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

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

     On March 31, 1998, the Company entered into a License Agreement with
Competitive Technologies, Inc. ("CTI") pursuant to which the Company paid, in
July 1998, $50,000 to CTI as a license fee. Such license fee was accounted for
as an expense in the statement of operations during the year ended June 30,
1998. The agreement includes future payments to CTI in subsequent years based on
certain factors. The Company paid $50,000 in license fees during the year ended
June 30, 1999, such fee was accounted for as an expense in the statement of
operations during the year ended June 30, 1999.

     On August 16, 1999, the Company received an exclusive worldwide license fee
of $500,000 (excluding Europe) for sales, marketing and distribution of LeuTech
from Mallinckrodt, Inc. (See Note 11)

                                       57

<PAGE>


(13) SUBSEQUENT EVENT:

     In September of 2000, the Company received $10.8 million from a private
offering consisting of common stock and warrants. Investors, consisting of
financial institutions based in Europe, purchased 1.8 million shares at a per
share price of $6.00, which represented the closing market price of Palatin
shares on the American Stock Exchange on September 7, 2000. For every five
shares purchased, the investors also received a five-year warrant to purchase
one share of common stock at a 25 percent premium to the closing price. The net
proceeds will be used primarily for general corporate purposes, especially for
the development and clinical trials of new products based on the Company's
proprietary technologies.


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

None.



                                       58

<PAGE>


                                    PART III

The information required by Part III of Form 10-K (Item 10 -- Directors and
Executive Officers of the Registrant, Item 11 -- Executive Compensation, Item 12
- -- Security Ownership of Certain Beneficial Owners and Management and Item 13 --
Certain Relationships and Transactions) is incorporated by reference from our
definitive proxy statement relating to the annual meeting of stockholders
scheduled for November 15, 2000, which we will file with the SEC within 120 days
after our June 30, 2000 fiscal year end.


                                     PART IV



ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) DOCUMENTS FILED AS PART OF THE REPORT:

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

          -    Report of Independent Public Accountants

          -    Consolidated Balance Sheets

          -    Consolidated Statements of Operations

          -    Consolidated Statements of Stockholders' Equity (Deficit)

          -    Consolidated Statements of Cash Flows

          -    Notes to Consolidated Financial Statements

     2.   Financial statement schedules: none.

     3.   Exhibits: The following exhibits are filed with this report, or
          incorporated by reference as noted. Exhibits filed with this report
          are marked with an asterisk (*). Exhibits which consist of or include
          a management contract or compensatory plan or arrangement are marked
          with an obelisk (+).

Number          Description

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

3.01 Certificate of incorporation. *

                                       59

<PAGE>



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

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

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

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

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

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

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

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

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

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

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

                                       60

<PAGE>



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

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

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

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

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

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

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

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

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

                                       61

<PAGE>



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

10.21 Strategic Collaboration Agreement dated as of August 17, 1999, between
     Palatin and Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.21
     of our amended annual report on Form 10-KSB/A for the period ended June 30,
     1999, filed with the SEC on December 28, 1999.

10.22 Form of warrant and registration rights for the warrant issued in April
     2000 with an expiration date of March 15, 2005. *

10.23 Separation Agreement dated as of June 13, 2000 between Palatin
     Technologies, Inc. and Edward J. Quilty. * +

10.24 Letter agreement dated as of July 31, 2000 between Palatin Technologies,
     Inc. and Robert G. Moussa. * +

10.25 Letter agreement dated as of July 31, 2000 between Palatin Technologies,
     Inc. and James T. O'Brien. * +

21   Subsidiaries of the registrant. *

23.01 Consent of Arthur Andersen LLP, Independent Auditors, with respect to the
     financial statements of Palatin. *

27   Financial data schedule. *
- --------------------------------------
*    Exhibit filed with this report.

+    Management contract



b) REPORTS ON FORM 8-K

During the last quarter of the fiscal year ended June 30, 2000, we filed one
report on Form 8-K dated June 14, 2000, relating to the appointment of Carl
Spana, Ph.D. (formerly an executive vice president and chief technology officer)
as our new chief executive officer, and the appointment of director John K. A.
Prendergast as our new chairman, following the resignation of our former
president, chairman and chief executive officer, Edward J. Quilty. We reported
Item 5, Other Events, consisting of a brief description of the appointments, and
Item 7, Exhibits, consisting of our press release concerning the appointments.

                                       62

<PAGE>


                                   SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

PALATIN TECHNOLOGIES, INC.



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

Date:  September 28, 2000

In accordance with the Exchange Act, 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                          September 28, 2000
Carl Spana                 and Chief Executive Officer
                           (principal executive officer)

/s/ Stephen T. Wills
- ---------------------      Executive Vice President and       September 28, 2000
Stephen T. Wills           Chief Financial Officer (principal
                           financial and accounting officer)

/s/ Charles L. Putnam
- ---------------------      Executive Vice President and       September 28, 2000
Charles L. Putnam          Director


s/ John K.A. Prendergast
- ---------------------      Chairman and Director              September 28, 2000
John K.A. Prendergast



                                       63

<PAGE>




s/ Robert K. deVeer, Jr.
- ---------------------      Director                           September 28, 2000
Robert K. deVeer, Jr.


/s Kevin S. Flannery
- ---------------------      Director                           September 28, 2000
Kevin S. Flannery



                                       64

<PAGE>



                                  EXHIBIT INDEX

Number          Description

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

3.01 Certificate of incorporation. *

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

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

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

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

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

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

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

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

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

                                       65

<PAGE>



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

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

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

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

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

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

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

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

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

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

                                       66

<PAGE>



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

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

10.21 Strategic Collaboration Agreement dated as of August 17, 1999, between
     Palatin and Mallinckrodt, Inc. Incorporated by reference to Exhibit 10.21
     of our amended annual report on Form 10-KSB/A for the period ended June 30,
     1999, filed with the SEC on December 28, 1999.

10.22 Form of warrant and registration rights for the warrant issued in April
     2000 with an expiration date of March 15, 2005. *

10.23 Separation Agreement dated as of June 13, 2000 between Palatin
     Technologies, Inc. and Edward J. Quilty. * +

10.24 Letter agreement dated as of July 31, 2000 between Palatin Technologies,
     Inc. and Robert G. Moussa. * +

10.25 Letter agreement dated as of July 31, 2000 between Palatin Technologies,
     Inc. and James T. O'Brien. * +

21   Subsidiaries of the registrant. *

23.01 Consent of Arthur Andersen LLP, Independent Auditors, with respect to the
     financial statements of Palatin. *

27   Financial data schedule. *
- --------------------------------------
*    Exhibit filed with this report.

+    Management contract


                                       67

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.(I)
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>CERTIFICATE OF INCORPORATION
<TEXT>


                     RESTATED CERTIFICATE OF INCORPORATION
                                       OF
                                INTERFILM, INC.


        INTERFILM, INC., a corporation duly organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
The name under which the Corporation was originally incorporated was Cinedco,
Inc. The original Certificate of Incorporation of the Corporation was filed with
the Secretary of State of the State of Delaware on November 21, 1986.

        1. This Restated Certificate of Incorporation restates and integrates,
but does not amend, the Restated Certificate of Incorporation of the Corporation
to read as set forth herein.

        2. Pursuant to Section 245 of the General Corporation Law of the State
of Delaware, the text of the Certificate of Incorporation as heretofore amended
or supplemented is hereby restated to read in full as follows:

                                   ARTICLE I

                                      Name

                 The name of the Corporation is INTERFILM, INC.

                                   ARTICLE II

                    Registered Office and Registered  Agent

        The registered office of the Corporation in the State of Delaware is
located at c/o the Corporation Trust Company, 1209 Orange Street, City of
Wilmington, County of New Castle, State of Delaware, and the registered agent in
charge thereof is The Corporation Trust Company.

                                  ARTICLE III

                               Corporate Purpose

        The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "General Corporation Law").




<PAGE>



                                       2


                                   ARTICLE IV

                                 Capital Stock

        Section 1. AUTHORIZED CAPITAL STOCK. The Corporation shall be authorized
to issue two classes of shares of capital stock to be designated, respectively,
"Preferred Stock" and "Common Stock"; the total number of shares of capital
stock which the Corporation shall have the authority to issue is 12,000,000,
comprised of 10,000,000 shares of Common Stock, par value $.01 per share, and
2,000,000 shares of Preferred Stock, par value $.01 per share.

        Section 2. ISSUANCE OF PREFERRED STOCK. The Board of Directors is
authorized, subject to limitations prescribed by law and the provisions of this
Article IV, to provide for the issuance of the shares of Preferred Stock in
series, and by filing a certificate pursuant to the applicable law of the State
of Delaware, to establish from time to time the number of shares to be included
in each such series, and to fix the designation, powers, preferences, rights and
privileges of the shares of each such series and the qualifications, limitations
or restrictions thereof.

        The authority of the Board of Directors with respect to each such series
shall include, but not be limited to, determination of the following:

        (a) The number of shares constituting such series and the distinctive
designation of such series;

        (b) The dividend rate on the shares of such series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of such series;

        (c) Whether such series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;

        (d) Whether such series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for adjustment
of the conversion rate in such events as the Board of Directors shall determine;

        (e) Whether or not the shares of such series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share payable
in case of redemption, which amount may vary under different conditions and at
different redemption dates;




<PAGE>



                                       3


        (f) Whether such series shall have a sinking fund for the redemption or
purchase of shares of such series, and, if so, the terms and amount of such
sinking fund;

        (g) The rights of the shares of such series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the corporation, and the
relative rights of priority, if any, of payment of shares of such series;

        (h) Any other relative powers, preferences, rights, privileges,
qualifications, limitations and restrictions of such series.

        Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the Common Stock with respect to the same
dividend period.

        If upon any voluntary or involuntary liquidation, dissolution or winding
up of the corporation, the assets available for distribution to holders of
shares of Preferred Stock of all series shall be insufficient to pay such
holders the full preferential amount to which they are entitled, then such
assets shall be distributed ratably among the shares of all series of Preferred
Stock in accordance with the respective preferential amounts (including unpaid
cumulative dividends, if any) payable with respect thereto.

        Section 3. NO PREEMPTIVE RIGHTS. No holders of capital stock of the
Corporation shall be entitled to preemptive rights to purchase or subscribe for
any shares of any class of capital stock of the Corporation whether now or
hereafter authorized.

                                   ARTICLE V

                                   Directors

        Section 1. ELECTION OF DIRECTORS. Elections of directors of the
Corporation need not be by written ballot, except and to the extent provided in
the By-laws of the Corporation.

        Section 2. POWER WITH RESPECT TO BY-LAWS. The directors of the
Corporation shall have the power to adopt, amend or repeal By-laws.





<PAGE>



                                       4


        Section 3. PERSONAL LIABILITY OF DIRECTORS. To the fullest extent
permitted by the General Corporation Law as it now exists and as it may
hereafter be amended, no director of the Corporation shall be personally liable
to the Corporation or its stockholders for monetary damages for breach of a
fiduciary duty as a director.

                                   ARTICLE VI

               Indemnification of Directors, Officers and Others

        (1) The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he or she is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit or proceeding if he
or she acted in good faith and in a manner he or she reasonably believed to be
in, or not opposed to, the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person
seeking indemnification did not act in good faith and in a manner which he or
she reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.

        (2) The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that he or she is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection with the
defense or





<PAGE>



                                       5


settlement of such action or suit if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.

        (3) To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections (1) and (2) of this Article
VI, or in defense of any claim, issue or matter therein, he or she shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection therewith.

        (4) Any indemnification under Sections (1) and (2) of this Article VI
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he or she has
met the applicable standard of conduct set forth in such Sections (1) and (2).
Such determination shall be made (a) by the Board of Directors of the
Corporation by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (b) if such a quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion or (c) by the
stockholders of the Corporation.

        (5) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation authorized in this Article VI. Such expenses
(including attorneys' fees) incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the Board of Directors of the
Corporation deems appropriate.





<PAGE>



                                       6


        (6) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other sections of this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any law, by-law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office.

        (7) The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him or her
against such liability under the provisions of Section 145 of the General
Corporation Law.

        (8) For purposes of this Article VI, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees or
agents so that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Article VI with respect to the
resulting or surviving corporation as he or she would have with respect to such
constituent corporation if its separate existence had continued.

        (9) For purposes of this Article VI, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves service by, such director, officer, employee or
agent with respect to any employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he or she
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this Article
VI.





<PAGE>



                                       7


        (10) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VI shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.

                                  ARTICLE VII

                                   Amendment

        The Corporation reserves the right to amend, alter, change or repeal any
provision of this Restated Certificate of Incorporation, in the manner now or
hereafter prescribed by law, and all rights conferred on stockholders in this
Restated Certificate of Incorporation are subject to this reservation.

        3. This Restated Certificate of Incorporation was duly adopted by the
Board of Directors of the Corporation without the approval of the holders of
outstanding stock of the Corporation in accordance with the provisions of
Section 245 of the General Corporation Law.

        IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed by its President, Chief Executive Officer and Secretary this 1st day of
November, 1993.

                                        INTERFILM, INC.


                                        By:  /s/ Lawrence B. Kuppin
                                             --------------------------
                                             Lawrence B. Kuppin
                                             President, Chief Executive
                                               Officer and Secretary






<PAGE>




                           CERTIFICATE OF AMENDMENT

                                    TO THE

                     RESTATED CERTIFICATE OF INCORPORATION

                                      OF

                                INTERFILM, INC.

                          --------------------------

                           Under Section 242 of the
                            General Corporation Law

                          --------------------------


     The undersigned officer of Interfilm, Inc., a Delaware corporation (the
"Corporation"), in order to amend the Restated Certificate of Incorporation of
the Corporation, pursuant to the provisions of Section 242 of the General
Corporation Law of the State of Delaware, does hereby certify as follows:

     1.   The name of the Corporation is "Interfilm, Inc."

     2. The name under which the Corporation was originally incorporated was
"Cinedco, Inc." The original Certificate of Incorporation of the Corporation was
filed by the Secretary of State of the State of Delaware on November 21, 1986.

     3. The purpose of this amendment to the Restated Certificate of
Incorporation of the Corporation is: (i) to change the name of the Corporation
to "Palatin Technologies, Inc.", (ii) to increase the authorized shares of the
Company's common stock, par value $.01 per share (the "Common Stock"), from
10,000,000 to 25,000,000, and (iii) to effect a 1-for-10 reverse split of the
Common Stock.

     4. The Restated Certificate of Incorporation of the Corporation is hereby
amended by striking out Article I thereof in its entirety and by substituting in
lieu of said Article the following new Article I:

                                  "ARTICLE I

                                     Name

     The name of the Corporation is PALATIN TECHNOLOGIES, INC."

     5. The Restated Certificate of Incorporation of the Corporation is hereby
amended by striking out Section 1 of Article IV thereof in its entirety and by
substituting in lieu of said Section 1 the following new Section 1:





<PAGE>



     "Section 1. Authorized Capital Stock. The Corporation shall be authorized
to issue two classes of shares of capital stock to be designated, respectively,
"Preferred Stock" and "Common Stock." The total number of shares of capital
stock which the Corporation shall have the authority to issue is 27,000,000,
comprised of 25,000,000 shares of Common Stock, par value $.01 per share, and
2,000,000 shares of Preferred Stock, par value $.01 per share.

     On the effective date of this amendment to the Restated Certificate of
Incorporation (the "Effective Date"), the Common Stock of the Corporation will
be reverse split on a one-for-ten basis so that each share of Common Stock
issued and outstanding immediately prior to the Effective Date shall
automatically be converted into and reconstituted as one-tenth of a share of
Common Stock (the "Reverse Split"). No fractional shares will be issued by the
Corporation as a result of the Reverse Split. In lieu thereof, each stockholder
whose shares of Common Stock are not evenly divisible by ten will receive an
amount of cash equal to the average of the average last reported bid and asked
price of the Common Stock of the Corporation on the OTC Electronic Bulletin
Board for each of the first three days subsequent to the Effective Date on which
the Common Stock of the Corporation is traded multiplied by the fractional
interest."

     6. The foregoing amendment to the Corporation's Restated Certificate of
Incorporation was duly authorized and adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware by
unanimous written consent of the Board of Directors of the Corporation dated
June 13, 1996, and by written consent of a majority of the Common Stockholders
of the Corporation dated June 13, 1996.

     IN WITNESS WHEREOF, the undersigned has signed this Certificate and does
hereby affirm, under penalty of perjury, that the statements contained herein
are true and correct, this 19th day of July 1996.


                                                     /s/ John J. McDonough
                                                     -------------------------
                                                     Name:  John J. McDonough
                                                     Title: Vice President


                                       2








<PAGE>







                           CERTIFICATE OF DESIGNATIONS

                                       of

                      SERIES A CONVERTIBLE PREFERRED STOCK

                                       of

                           PALATIN TECHNOLOGIES, INC.

                         Pursuant to Section 151 of the
                General Corporation Law of the State of Delaware


                  PALATIN TECHNOLOGIES, INC., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), does
hereby certify that, pursuant to the authority conferred on the Board of
Directors of the Corporation by the Certificate of Incorporation, as amended to
date (the "Certificate of Incorporation"), of the Corporation and in accordance
with Section 151 of the General Corporation Law of the State of Delaware, the
Board of Directors of the Corporation adopted the following resolution
establishing a series of 264,000 shares of Preferred Stock of the Corporation
designated as "Series A Convertible Preferred Stock":

                  RESOLVED, that pursuant to the authority conferred on the
         Board of Directors of this Corporation by the Certificate of
         Incorporation, a series of Preferred Stock, par value $.01 per share,
         of the Corporation is hereby established and created, and that the
         designation and number of shares thereof and the voting and other
         powers, preferences and relative, participating, optional or other
         rights of the shares of such series and the qualifications, limitations
         and restrictions thereof are as follows:

                      SERIES A CONVERTIBLE PREFERRED STOCK

     1. DESIGNATION AND AMOUNT. There shall be a series of Preferred Stock
designated as "Series A Convertible Preferred Stock" and the number of shares
constituting such series shall be 264,000. Such series is referred to herein as
the "Series A Preferred Stock". Such number of shares of Series A Preferred
Stock may be increased prior to the Final Closing Date (as defined below) or
decreased by resolution of the Board of Directors of the Corporation; provided,
however, that no decrease shall reduce the number of shares of Series A
Preferred Stock to less than the number of shares then issued and outstanding.


     2. DIVIDENDS AND DISTRIBUTIONS. (a) Subject to the prior and superior
rights of the holders of any shares of any series or class of capital stock
ranking prior and superior to the shares of Series A Preferred Stock with
respect to dividends, the holders of shares of Series A


<PAGE>



Preferred Stock shall be entitled to receive, as, when and if declared by the
Board of Directors of the Corporation, out of assets legally available for that
purpose, dividends or distributions in cash, stock or otherwise.

     (b) The Corporation shall not declare any dividend or distribution on any
Junior Stock (as defined below) or any other capital stock of the Company unless
and until a special dividend or distribution of $100.00 per share (subject to
appropriate adjustment to reflect any stock split, combination, reclassification
or reorganization of the Series A Preferred Stock) has been declared and paid on
the Series A Preferred Stock. In the event such special dividend or distribution
is declared and paid on the Series A Preferred Stock, an aggregate per share
dividend or distribution equal to (i) $100.00 divided by (ii) the effective
Conversion Rate at the time of such special dividend or distribution on the
Series A Preferred Stock may be declared and paid on the Common Stock. Except as
aforesaid, the Corporation shall not declare any dividend or distribution on any
Junior Stock, unless the Corporation shall, concurrently with the declaration of
such dividend or distribution on the Junior Stock, declare a like dividend or
distribution, as the case may be, on the Series A Preferred Stock, which in the
case of dividends or distributions on Common Stock or Junior Stock convertible
into Common Stock, shall be in an amount per share equal to at least (x) the
amount of the dividend or distribution per share of Common Stock multiplied by
(y) the effective Conversion Rate at the time of such dividend or distribution.

     (c) Any dividend or distribution (other than that referenced in the first
sentence of Section 2(b)) payable to the holders of the Series A Preferred Stock
pursuant to this Section 2 shall be paid to such holders at the same time as the
dividend or distribution on the Junior Stock or any other capital stock of the
Company by which it is measured is paid.

     (d) All dividends or distributions declared upon the Series A Preferred
Stock shall be declared pro rata per share.

     (e) Any reference to "distribution" contained in this Section 2 shall not
be deemed to include any distribution made in connection with or in lieu of any
Liquidation Event (as defined below).

     (f) "Junior Stock" shall mean the Common Stock and any shares of preferred
stock of any series or class of the Corporation, whether presently outstanding
or hereafter issued, which are junior to the shares of Series A Preferred Stock
with respect to (i) the distribution of assets on any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, (ii) dividends and
(iii) voting.

     3. LIQUIDATION PREFERENCE. (a) In the event of a (i) liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
(ii) a sale or other disposition of all or substantially all of the assets of
the Corporation or (iii) any consolidation, merger, combination, reorganization
or other transaction in which the Corporation is not the surviving entity or the
shares of Common Stock constituting in excess of 50% of the voting power of the
Corporation are exchanged for or changed into stock or securities of another
entity, cash and/or any other property (a "Merger Transaction") (subparagraphs
(i), (ii) and (iii) being collectively referred to as a

                                        2


<PAGE>



"Liquidation Event"), after payment or provision for payment of debts and other
liabilities of the Corporation, the holders of the Series A Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Corporation
available for distribution to its stockholders, whether such assets are capital,
surplus, or earnings, before any payment or declaration and setting apart for
payment of any amount shall be made in respect of any Junior Stock or any other
capital stock of the Company, an amount equal to $100.00 per share plus an
amount equal to all declared and unpaid dividends thereon; provided, however, in
the case of a Merger Transaction, such $100.00 per share may be paid in cash,
property (valued as provided in Section 3(b)) and/or securities (valued as
provided in Section 3(b)) of the entity surviving such Merger Transaction. If
upon any Liquidation Event, whether voluntary or involuntary, the assets to be
distributed to the holders of the Series A Preferred Stock shall be insufficient
to permit the payment to such stockholders of the full preferential amounts
aforesaid, then all of the assets of the Corporation to be distributed shall be
so distributed ratably to the holders of the Series A Preferred Stock on the
basis of the number of shares of Series A Preferred Stock held. A consolidation
or merger of the Corporation with or into another corporation, other than in a
transaction described in this Section 3(a) above, shall not be considered a
liquidation, dissolution or winding up of the Corporation or a sale or other
disposition of all or substantially all of the assets of the Corporation and
accordingly the Corporation shall make appropriate provision to ensure that the
terms of this Certificate of Designations survive any such transaction. All
shares of Series A Preferred Stock shall rank as to payment upon the occurrence
of any Liquidation Event senior to the Common Stock as provided herein and,
unless the terms of such series shall provide otherwise, senior to all other
series of the Corporation's preferred stock.

     (b) Any securities or other property to be delivered to the holders of the
Series A Preferred Stock pursuant to Section 3(a) hereof shall be valued as
follows:

          (i) Securities not subject to an investment letter or other similar
     restriction on free marketability:

          (A) If traded on a securities exchange or on Nasdaq (as defined
          below), or if actively traded over-the-counter, the value shall be
          deemed to be the Market Price (as defined below) of the securities as
          of the third day prior to the date of valuation.

          (B) If there is no such active public market for the securities, the
          value shall be the Fair Market Value (as defined below) of the
          securities.

     "Market Price" of a security shall mean the average Closing Bid Price (as
     defined below) of such security, for twenty (20) consecutive trading days,
     ending with the day prior to the date as of which the Market Price is being
     determined.

     "Fair Market Value" of any asset (including any security) means the fair
     market value thereof as mutually determined by the Corporation and the
     holders of a majority (measured in terms of voting power) of the
     outstanding Series A Preferred Stock.

                                        3


<PAGE>



          The "Closing Bid Price" for any security for each trading day shall be
     the reported closing bid price of such security on the national securities
     exchange on which such security is listed or admitted to trading, or, if
     such security is not listed or admitted to trading on any national
     securities exchange, shall mean the reported closing bid price of such
     security on the Nasdaq SmallCap Market or the Nasdaq National Market System
     (collectively referred to as, "Nasdaq") or, if such security is not listed
     or admitted to trading on any national securities exchange or quoted on
     Nasdaq, shall mean the reported closing bid price of such security on the
     principal securities exchange on which such security is listed or admitted
     to trading (based on the aggregate dollar value of all securities listed or
     admitted to trading) or, if such security is not listed or admitted to
     trading on a national securities exchange, quoted on Nasdaq or listed or
     admitted to trading on any other securities exchange, shall mean the
     closing bid price in the over-the-counter market as furnished by any NASD
     member firm selected from time to time by the Corporation for that purpose.

          "Trading day" shall mean a day on which the securities exchange or
     NASDAQ used to determine the Closing Bid Price is open for the transaction
     of business or the reporting of trades or, if the Closing Bid Price is not
     so determined, a day on which such securities exchange is open for the
     transaction of business.

          (ii) For securities for which there is an active public market but
     which are subject to investment letter or other restrictions on free
     marketability, the value shall be the Fair Market Value thereof, determined
     by discounting appropriately the Market Price thereof.

          (iii) For all other securities, the value shall be the Fair Market
     Value thereof.

If the holders of a majority of the Series A Preferred Stock and the Corporation
are unable to reach agreement on any valuation matter, such valuation shall be
submitted to and determined by a nationally recognized independent investment
bank selected by the Board of Directors of the Corporation and the holders of a
majority of the Series A Preferred Stock (or, if such selection cannot be agreed
upon promptly, or in any event within ten days, then such valuation shall be
made by a nationally recognized independent investment banking firm selected by
the American Arbitration Association in New York City in accordance with its
rules).

     4. CONVERSION.

     (a) RIGHT OF CONVERSION. The shares of Series A Preferred Stock shall be
convertible, in whole or in part, at the option of the holder thereof and upon
notice to the Corporation as set forth in Section 4(b) below, into fully paid
and nonassessable shares of Common Stock and such other securities and property
as hereinafter provided. The initial conversion price per share of Common Stock
is $1.78 (the "Conversion Price") and shall be subject to adjustment as provided
herein. The rate at which each share of Series A Preferred Stock is convertible
at any time into Common Stock (the "Conversion Rate") shall be determined by
dividing the then existing Conversion Price into $100.00.

                                        4


<PAGE>



     Subject to adjustment pursuant to the provisions of Section 4(c) below, in
the event that the Conversion Price in effect at the time of each Interim
Closing Date (as defined below) and the Final Closing Date (as defined below) is
greater than 90% of the Market Price (as defined in Section 3(b)) of the Common
Stock as of (x) any interim closing date of the issuance and sale of the Series
A Preferred Stock (each an "Interim Closing Date") or (y) the final closing date
of the issuance and sale of the Series A Preferred Stock (the "Final Closing
Date") pursuant to the subscription agreements entered into in connection
therewith, then the Conversion Price shall be adjusted to equal 90% of the
lesser of any such Market Price. If there is any change in the Conversion Price
as a result of the preceding sentence, then the Conversion Rate shall be changed
accordingly as set forth above. For purposes of this Section 4, in the event the
prices referenced in the definition of Closing Bid Price in Section 3(b) cannot
be determined, the Market Price of the Common Stock shall be deemed to be the
Fair Market Value (as defined in Section 3(b)) of the Common Stock as of the
date of determination.

     The Board of Directors of the Corporation, or a committee designated by it
for such purpose, may specify an initial conversion price applicable to the
shares of Series A Preferred Stock issued at any closing lower than the initial
conversion price that would otherwise obtain pursuant to the preceding
paragraphs and, in the event an initial conversion price is so specified, it
shall be applicable to all shares of the Series A Preferred Stock.

     The Corporation shall prepare a certificate signed by the Chairman or
President, and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, of the Corporation setting forth the Conversion Rate as of
the Final Closing Date, showing in reasonable detail the facts upon which such
adjusted Conversion Rate is based, and such certificate shall forthwith be filed
with the transfer agent of the Series A Preferred Stock. A notice stating that
the Conversion Rate has been adjusted pursuant to the second preceding
paragraph, or that no adjustment is necessary, and setting forth the Conversion
Rate in effect as of the Final Closing Date shall be mailed as promptly as
practicable after the Final Closing Date by the Corporation to all record
holders of the Series A Preferred Stock at their last addresses as they shall
appear in the stock transfer books of the Corporation.

     (b) CONVERSION PROCEDURES. Any holder of shares of Series A Preferred Stock
desiring to convert such shares into Common Stock shall surrender the
certificate or certificates evidencing such shares of Series A Preferred Stock
at the office of the transfer agent for the Series A Preferred Stock, which
certificate or certificates, if the Corporation shall so require, shall be duly
endorsed to the Corporation or in blank, or accompanied by proper instruments of
transfer to the Corporation or in blank, accompanied by irrevocable written
notice to the Corporation that the holder elects so to convert such shares of
Series A Preferred Stock and specifying the name or names (with address) in
which a certificate or certificates evidencing shares of Common Stock are to be
issued. The Corporation need not deem a notice of conversion to be received
unless the holder complies with all the provisions hereof. The Corporation will
instruct the transfer agent (which may be the Corporation) to make a notation of
the date that a notice of conversion is received, which date shall be deemed to
be the date of receipt for purposes hereof.

                                        5


<PAGE>



     The Corporation shall, as soon as practicable after such deposit of
certificates evidencing shares of Series A Preferred Stock accompanied by the
written notice and compliance with any other conditions herein contained,
deliver at such office of such transfer agent to the person for whose account
such shares of Series A Preferred Stock were so surrendered, or to the nominee
or nominees of such person, certificates evidencing the number of full shares of
Common Stock to which such person shall be entitled as aforesaid, together with
a cash adjustment of any fraction of a share as hereinafter provided. Subject to
the following provisions of this paragraph, such conversion shall be deemed to
have been made as of the date of such surrender of the shares of Series A
Preferred Stock to be converted, and the person or persons entitled to receive
the Common Stock deliverable upon conversion of such Series A Preferred Stock
shall be treated for all purposes as the record holder or holders of such Common
Stock on such date; provided, however, that the Corporation shall not be
required to convert any shares of Series A Preferred Stock while the stock
transfer books of the Corporation are closed for any purpose, but the surrender
of Series A Preferred Stock for conversion during any period while such books
are so closed shall become effective for conversion immediately upon the
reopening of such books as if the surrender had been made on the date of such
reopening, and the conversion shall be at the conversion rate in effect on such
date. No adjustments in respect of any dividends on shares surrendered for
conversion or any dividend on the Common Stock issued upon conversion shall be
made upon the conversion of any shares of Series A Preferred Stock.

     All notices of conversion shall be irrevocable; provided, however, that if
the Corporation has sent notice of an event pursuant to Section 4(f) hereof, a
holder of Series A Preferred Stock may, at its election, provide in its notice
of conversion that the conversion of its shares of Series A Preferred Stock
shall be contingent upon the occurrence of the record date or effectiveness of
such event (as specified by such holder), provided that such notice of
conversion is received by the Corporation prior to such record date or effective
date, as the case may be.

     (c) ADJUSTMENT OF CONVERSION RATE AND CONVERSION PRICE.

          (i) Except as otherwise provided herein, in the event the Corporation
     shall, at any time or from time to time after the date hereof, (1) sell or
     issue any shares of Common Stock for a consideration per share less than
     either (i) the Conversion Price in effect on the date of such sale or
     issuance or (ii) the Market Price of the Common Stock as of the date of the
     sale or issuance, (2) issue any shares of Common Stock as a stock dividend
     to the holders of Common Stock, or (3) subdivide or combine the outstanding
     shares of Common Stock into a greater or lesser number of shares (any such
     sale, issuance, subdivision or combination being herein called a "Change of
     Shares"), then, and thereafter upon each further Change of Shares, the
     Conversion Price in effect immediately prior to such Change of Shares shall
     be changed to a price (rounded to the nearest cent) determined by
     multiplying the Conversion Price in effect immediately prior thereto by a
     fraction, the numerator of which shall be the sum of the number of shares
     of Common Stock outstanding immediately prior to the sale or issuance of
     such additional shares or such subdivision or combination and the number of
     shares of Common Stock which the aggregate consideration received
     (determined as provided in subsection 4(c)(v)(F) below) for the issuance of
     such additional shares would purchase at the greater of (i) the Conversion
     Price in effect on the date of such issuance or (ii) the Market Price as of
     such date, and the denominator of which shall be the number of shares of
     Common Stock outstanding

                                        6


<PAGE>



          immediately after the sale or issuance of such additional shares or
     such subdivision or combination. Such adjustment shall be made successively
     whenever such an issuance is made.

          (ii) In case of any reclassification, capital reorganization or other
     change of outstanding shares of Common Stock, or in case of any
     consolidation or merger of the Corporation with or into another corporation
     (other than a consolidation or merger in which the Corporation is the
     continuing corporation and which does not result in any reclassification,
     capital reorganization or other change of outstanding shares of Common
     Stock other than the number thereof), or in case of any sale or conveyance
     to another corporation of the property of the Corporation as, or
     substantially as, an entirety (other than a sale/leaseback, mortgage or
     other financing transaction), the Corporation shall cause effective
     provision to be made so that each holder of a share of Series A Preferred
     Stock shall be entitled to receive, upon conversion of such share of Series
     A Preferred Stock, the kind and number of shares of stock or other
     securities or property (including cash) receivable upon such
     reclassification, capital reorganization or other change, consolidation,
     merger, sale or conveyance by a holder of the number of shares of Common
     Stock into which such share of Series A Preferred Stock was convertible
     immediately prior to such reclassification, capital reorganization or other
     change, consolidation, merger, sale or conveyance. Any such provision shall
     include provision for adjustments that shall be as nearly equivalent as may
     be practicable to the adjustments provided for in this Section 4(c). The
     Corporation shall not effect any such consolidation, merger or sale unless
     prior to or simultaneously with the consummation thereof the successor (if
     other than the Corporation) resulting from such consolidation or merger or
     the corporation purchasing assets or other appropriate corporation or
     entity shall assume, by written instrument executed and delivered to the
     transfer agent for the Series A Preferred Stock (the "Transfer Agent"), the
     obligation to deliver to the holder of each share of Series A Preferred
     Stock such shares of stock, securities or assets as, in accordance with the
     foregoing provisions, such holders may be entitled to purchase and the
     other obligations under this Agreement. The foregoing provisions shall
     similarly apply to successive reclassifications, capital reorganizations
     and other changes of outstanding shares of Common Stock and to successive
     consolidations, mergers, sales or conveyances.

          (iii) If, at any time or from time to time, the Corporation shall
     issue or distribute to the holders of shares of Common Stock evidence of
     its indebtedness, any other securities of the Corporation or any cash,
     property or other assets (excluding an issuance or distribution governed by
     one of the preceding subsections of this Section 4(c) and also excluding
     cash dividends or cash distributions paid out of net profits legally
     available therefor in the full amount thereof (any such non-excluded event
     being herein called a "Special Dividend")), then in each case the holders
     of the Series A Preferred Stock shall be entitled to a proportionate share
     of any such Special Dividend as though they were the holders of the number
     of shares of Common Stock of the Corporation into which their shares of
     Series A Preferred Stock are convertible as of the record date fixed for
     the determination of the holders of Common Stock of the Corporation
     entitled to receive such Special Dividend.

          (iv) After each adjustment of the Conversion Price pursuant to this
     Section 4(c), the Corporation will promptly prepare a certificate signed by
     the Chairman or President, and by the Treasurer or an Assistant Treasurer
     or the Secretary or an Assistant Secretary, of the Corporation setting
     forth: (i) the Conversion Price as so adjusted, (ii) the Conversion Rate
     corresponding to such

                                        7


<PAGE>



     Conversion and (iii) a brief statement of the facts accounting for such
     adjustment. The Corporation will promptly file such certificate with the
     Transfer Agent and cause a brief summary thereof to be sent by ordinary
     first class mail to each registered holder of Series A Preferred Stock at
     his last address as it shall appear on the registry books of the Transfer
     Agent. No failure to mail such notice nor any defect therein or in the
     mailing thereof shall affect the validity of such adjustment. The affidavit
     of an officer of the Transfer Agent or the Secretary or an Assistant
     Secretary of the Corporation that such notice has been mailed shall, in the
     absence of fraud, be prima facie evidence of the facts stated therein. The
     Transfer Agent may rely on the information in the certificate as true and
     correct and has no duty or obligation to independently verify the amounts
     or calculations set forth therein.

          (v) For purposes of Section 4(c)(i) hereof, the following provisions
     (A) to (F) shall also be applicable:

               (A) The number of shares of Common Stock deemed outstanding at
          any given time shall include all shares of capital stock convertible
          into or exchangeable for Common Stock and all shares of Common Stock
          issuable upon the exercise of any convertible debt, warrants
          outstanding on the date thereof and options outstanding on the date
          thereof.

               (B) No adjustment of the Conversion Price shall be made unless
          such adjustment would require an increase or decrease of at least $.01
          in such price; provided that any adjustments which by reason of this
          clause (B) are not required to be made shall be carried forward and
          shall be made at the time of and together with the next subsequent
          adjustment which, together with any adjustment(s) so carried forward,
          shall require an increase or decrease of at least $.01 in the
          Conversion Price then in effect hereunder.

               (C) In case of (1) the sale by the Corporation (including as a
          component of a unit) of any rights or warrants to subscribe for or
          purchase, or any options for the purchase of, Common Stock or any
          securities convertible into or exchangeable for Common Stock (such
          securities convertible, exercisable or exchangeable into Common Stock
          being herein called "Convertible Securities"), or (2) the issuance by
          the Corporation, without the receipt by the Corporation of any
          consideration therefor, of any rights or warrants to subscribe for or
          purchase, or any options for the purchase of, Common Stock or
          Convertible Securities, whether or not such rights, warrants or
          options, or the right to convert or exchange such Convertible
          Securities, are immediately exercisable, and the consideration per
          share for which Common Stock is issuable upon the exercise of such
          rights, warrants or options or upon the conversion or exchange of such
          Convertible Securities (determined by dividing (x) the minimum
          aggregate consideration, as set forth in the instrument relating
          thereto without regard to any antidilution or similar provisions
          contained therein for a subsequent adjustment of such amount, payable
          to the Corporation upon the exercise of such rights, warrants or
          options, plus the consideration received by the Corporation for the
          issuance or sale of such rights, warrants or options, plus, in the
          case of such

                                        8


<PAGE>



          Convertible Securities, the minimum aggregate amount, as set forth in
          the instrument relating thereto without regard to any antidilution or
          similar provisions contained therein for a subsequent adjustment of
          such amount, of additional consideration, if any, other than such
          Convertible Securities, payable upon the conversion or exchange
          thereof, by (y) the total maximum number, as set forth in the
          instrument relating thereto without regard to any antidilution or
          similar provisions contained therein for a subsequent adjustment of
          such amount, of shares of Common Stock issuable upon the exercise of
          such rights, warrants or options or upon the conversion or exchange of
          such Convertible Securities issuable upon the exercise of such rights,
          warrants or options) is less than either the Conversion Price or the
          Market Price of the Common Stock as of the date of the issuance or
          sale of such rights, warrants or options, then such total maximum
          number of shares of Common Stock issuable upon the exercise of such
          rights, warrants or options or upon the conversion or exchange of such
          Convertible Securities (as of the date of the issuance or sale of such
          rights, warrants or options) shall be deemed to be "Common Stock" for
          purposes of Section 4(c)(i) hereof and shall be deemed to have been
          sold for an amount equal to such consideration per share and shall
          cause an adjustment to be made in accordance with Section 4(c)(i).

               (D) In case of the sale by the Corporation of any Convertible
          Securities, whether or not the right of conversion or exchange
          thereunder is immediately exercisable, and the price per share for
          which Common Stock is issuable upon the conversion or exchange of such
          Convertible Securities (determined by dividing (x) the total amount of
          consideration received by the Corporation for the sale of such
          Convertible Securities, plus the minimum aggregate amount, as set
          forth in the instrument relating thereto without regard to any
          antidilution or similar provisions contained therein for a subsequent
          adjustment of such amount, of additional consideration, if any, other
          than such Convertible Securities, payable upon the conversion or
          exchange thereof, by (y) the total maximum number, as set forth in the
          instrument relating thereto without regard to any antidilution or
          similar provisions contained therein for a subsequent adjustment of
          such amount, of shares of Common Stock issuable upon the conversion or
          exchange of such Convertible Securities) is less than either the
          Conversion Price or the Market Price of the Common Stock as of the
          date of the sale of such Convertible Securities, then such total
          maximum number of shares of Common Stock issuable upon the conversion
          or exchange of such Convertible Securities (as of the date of the sale
          of such Convertible Securities) shall be deemed to be "Common Stock"
          for purposes of Section 4(c)(i) hereof and shall be deemed to have
          been sold for an amount equal to such consideration per share and
          shall cause an adjustment to be made in accordance with Section
          4(c)(i).

               (E) In case the Corporation shall modify the rights of
          conversion, exchange or exercise of any of the securities referred to
          in (C) and (D) above or any other securities of the Corporation
          convertible, exchangeable or exercisable for shares of Common Stock,
          for any reason other than an event that would require adjustment to
          prevent dilution, so that the consideration per share received by the
          Corporation

                                        9


<PAGE>



          after such modification is less than either the Conversion Price or
          the Market Price as of the date prior to such modification, then such
          securities, to the extent not theretofore exercised, converted or
          exchanged, shall be deemed to have expired or terminated immediately
          prior to the date of such modification and the Corporation shall be
          deemed for purposes of calculating any adjustments pursuant to this
          Section 4(c) to have issued such new securities upon such new terms on
          the date of modification. Such adjustment shall become effective as of
          the date upon which such modification shall take effect. On the
          expiration or cancellation of any such right, warrant or option or the
          termination or cancellation of any such right to convert or exchange
          any such Convertible Securities, the Conversion Price then in effect
          hereunder shall forthwith be readjusted to such Conversion Price as
          would have obtained (a) had the adjustments made upon the issuance or
          sale of such rights, warrants, options or Convertible Securities been
          made upon the basis of the issuance of only the number of shares of
          Common Stock theretofore actually delivered (and the total
          consideration received therefor) upon the exercise of such rights,
          warrants or options or upon the conversion or exchange of such
          Convertible Securities and (b) had adjustments been made on the basis
          of the Purchase Price as adjusted under clause (a) for all
          transactions (which would have affected such adjusted Purchase Price)
          made after the issuance or sale of such rights, warrants, options or
          Convertible Securities.

               (F) In case of the sale of any shares of Common Stock, any
          Convertible Securities, any rights or warrants to subscribe for or
          purchase, or any options for the purchase of, Common Stock or
          Convertible Securities, the consideration received by the Corporation
          therefor shall be deemed to be the gross sales price therefor without
          deducting therefrom any expense paid or incurred by the Corporation or
          any underwriting discounts or commissions or concessions paid or
          allowed by the Corporation in connection therewith. In the event that
          any securities shall be issued in connection with any other securities
          of the Corporation, together comprising one integral transaction in
          which no specific consideration is allocated among the securities,
          then each of such securities shall be deemed to have been issued for
          such consideration as the Board of Directors of the Corporation
          determines in good faith; provided, however that if holders of in
          excess of 10% of the then outstanding Series A Preferred Stock
          disagree with such determination, the Corporation shall retain an
          independent investment banking firm for the purpose of obtaining an
          appraisal.

          (vi) Notwithstanding any other provision hereof, no adjustment to the
     Conversion Price will be made

               (A) upon the exercise of any of the options outstanding on the
          date hereof under the Corporation's existing stock option plans; or

               (B) upon the issuance or exercise of options which may hereafter
          be granted with the approval of the Board of Directors, or exercised,
          under the Corporation's 1996 Stock Option Plan or under any other
          employee benefit plan of

                                       10


<PAGE>



          the Company to officers, directors or employees, but only with respect
          to such options as are exercisable at prices no lower than the Closing
          Bid Price (or, if the prices referenced in the definition of Closing
          Bid Price cannot be determined, the Fair Market Value) of the Common
          Stock as of the date of grant thereof; or

               (C) upon the sale of any shares of Common Stock, warrants to
          purchase Common Stock or Convertible Securities in a firm commitment
          underwritten public offering, including, without limitation, shares
          sold upon the exercise of any overallotment option granted to the
          underwriters in connection with such offering; or

               (D) upon issuance or exercise of the Placement Warrants (in each
          case as defined in the placement agency agreement between the
          Corporation and the placement agent for sales of the Series A
          Preferred Stock), or upon the issuance or conversion of the Preferred
          Stock included in Liquidity Enhanced Exchangeable Preferred Stock
          Units of the Company issued (i) on or prior to the Final Closing Date
          or (ii) pursuant to the exercise of the Placement Warrants, or

               (E) upon the issuance or sale of Common Stock or Convertible
          Securities pursuant to the exercise of any rights, options or warrants
          to receive, subscribe for or purchase, or any options for the purchase
          of, Common Stock or Convertible Securities, whether or not such
          rights, warrants or options were outstanding on the date of the
          original sale of the Series A Preferred Stock or were thereafter
          issued or sold, provided that an adjustment was either made or not
          required to be made in accordance with Section 4(c)(i) in connection
          with the issuance or sale of such securities or any modification of
          the terms thereof; or

               (F) upon the issuance or sale of Common Stock upon conversion or
          exchange of any Convertible Securities, provided that any adjustments
          required to be made upon the issuance or sale of such Convertible
          Securities or any modification of the terms thereof were so made, and
          whether or not such Convertible Securities were outstanding on the
          date of the original sale of the Series A Preferred Stock or were
          thereafter issued or sold.

Section 4(c)(v)(E) shall nevertheless apply to any modification of the rights of
conversion, exchange or exercise of any of the securities referred to in (A)
through (C) or, to the extent effected with respect to less than all of the
outstanding Series A Preferred Stock, as the case may be, (D) above other than
automatic modifications made pursuant to applicable anti-dilution provisions
with respect to such securities.

          (vii) As used in this Section 4(c), the term "Common Stock" shall mean
     and include the Corporation's Common Stock authorized on the date of the
     original issue of the Units and shall also include any capital stock of any
     class of the Corporation thereafter authorized which shall not be limited
     to a fixed sum or percentage in respect of the rights of the holders
     thereof to participate in dividends and in the distribution of assets upon
     the voluntary liquidation, dissolution or winding up of the Corporation;
     provided, however, that the shares issuable upon conversion of the Series A

                                       11


<PAGE>



     Preferred Stock shall include only shares of such class designated in the
     Corporation's Certificate of Incorporation as Common Stock on the date of
     the original issue of the Units or (i), in the case of any
     reclassification, change, consolidation, merger, sale or conveyance of the
     character referred to in Section 4(c)(ii) hereof, the stock, securities or
     property provided for in such section or (ii), in the case of any
     reclassification or change in the outstanding shares of Common Stock
     issuable upon conversion of the Series A Preferred Stock as a result of a
     subdivision or combination or consisting of a change in par value, or from
     par value to no par value, or from no par value to par value, such shares
     of Common Stock as so reclassified or changed.

          (ix) Any determination as to whether an adjustment in the Conversion
     Price in effect hereunder is required pursuant to Section 4(c), or as to
     the amount of any such adjustment, if required, shall be binding upon the
     holders of the Series A Preferred Stock and the Company if made in good
     faith by the Board of Directors of the Company.

     (d) NO FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares of Common Stock shall be issued upon conversion of shares of
Series A Preferred Stock. If more than one certificate evidencing shares of
Series A Preferred Stock shall be surrendered for conversion at one time by the
same holder, the number of full shares issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series A Preferred
Stock so surrendered. Instead of any fractional share of Common Stock which
would otherwise be issuable upon conversion of any shares of Series A Preferred
Stock, the Corporation shall pay a cash adjustment in respect of such fractional
interest in an amount equal to the same fraction of the Market Price as of the
close of business on the day of conversion.

     (e) RESERVATION OF SHARES; TRANSFER TAXES; ETC. The Corporation shall at
all times reserve and keep available, out of its authorized and unissued shares
of Common Stock, solely for the purpose of effecting the conversion of the
Series A Preferred Stock, such number of shares of its Common Stock free of
preemptive rights as shall be sufficient to effect the conversion of all shares
of Series A Preferred Stock from time to time outstanding. The Corporation shall
authorize and reserve a sufficient number of shares of the Common Stock to
permit the conversion in full of the Series A Preferred Stock (including in the
event of a Reset Event, as defined in Section 5). The Corporation shall use its
best efforts to effect such authorization by the date which is 90 days following
the Final Closing Date but in any event no later than the date which is 270 days
following the Final Closing Date. If such authorization is not effected by the
date which is 270 days following the Final Closing Date, the holder shall be
entitled at its option, to require the Corporation to repurchase the shares of
Series A Preferred Stock then held by such holder at $100.00 per share. In the
event that on the date that a holder of Series A Preferred Stock elects to
convert such holder's shares of Series A Preferred Stock the Corporation has not
authorized and reserved a sufficient number of shares of Common Stock to permit
such conversion in full, the holder will be entitled upon conversion to receive
the fair market value per share of Common Stock on account of the shares which
would have been issuable to the holder upon conversion but which the Corporation
was unable to issue due to the lack of authorized and reserved shares. The fair
market value shall be paid in cash, or, if the Corporation does not have
sufficient cash, then with secured demand notes. Fair market value per share of
Common Stock for purposes of this Section 4(e) shall mean the Closing Bid Price
per share of the Common Stock for the trading day immediately preceding the
conversion. The

                                       12


<PAGE>



Corporation shall use its best efforts from time to time, in accordance with the
laws of the State of Delaware, to increase the authorized number of shares of
Common Stock if at any time the number of shares of authorized, unissued and
unreserved Common Stock shall not be sufficient to permit the conversion of all
the then-outstanding shares of Series A Preferred Stock (including in the event
of a Reset Event, (as defined in Section 5).

     The Corporation shall pay any and all issue or other taxes that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of the Series A Preferred Stock. The Corporation shall not, however,
be required to pay any tax which may be payable in respect of any transfer
involved in the issue or delivery of Common Stock (or other securities or
assets) in a name other than that in which the shares of Series A Preferred
Stock so converted were registered, and no such issue or delivery shall be made
unless and until the person requesting such issue has paid to the Corporation
the amount of such tax or has established, to the satisfaction of the
Corporation, that such tax has been paid.

     (f) PRIOR NOTICE OF CERTAIN EVENTS. In case:

          (i) the Corporation shall declare any dividend (or any other
     distribution); or

          (ii) the Corporation shall authorize the granting to the holders of
     Common Stock of rights or warrants to subscribe for or purchase any shares
     of stock of any class or of any other rights or warrants; or

          (iii) of any reclassification of Common Stock (other than a
     subdivision or combination of the outstanding Common Stock, or a change in
     par value, or from par value to no par value, or from no par value to par
     value); or

          (iv) of any consolidation or merger (including, without limitation, a
     Merger Transaction) to which the Corporation is a party and for which
     approval of any stockholders of the Corporation shall be required, or of
     the sale or transfer of all or substantially all of the assets of the
     Corporation or of any compulsory share exchange whereby the Common Stock is
     converted into other securities, cash or other property; or

          (v) of the voluntary or involuntary dissolution, liquidation or
     winding up of the Corporation (including, without limitation, a Liquidation
     Event);

then the Corporation shall cause to be filed with the transfer agent for the
Series A Preferred Stock, and shall cause to be mailed to the holders of record
of the Series A Preferred Stock, at their last addresses as they shall appear
upon the stock transfer books of the Corporation, at least 20 days prior to the
applicable record date hereinafter specified, a notice stating (x) the date on
which a record (if any) is to be taken for the purpose of such dividend,
distribution or granting of rights or warrants or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be entitled
to such dividend, distribution, rights or warrants are to be determined and a
description of the cash, securities or other property to be received by such
holders upon such dividend, distribution

                                       13


<PAGE>



or granting of rights or warrants or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding up or other Liquidation Event is expected to
become effective, the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such exchange, dissolution,
liquidation or winding up or other Liquidation Event and the consideration,
including securities or other property, to be received by such holders upon such
exchange; provided, however, that no failure to mail such notice or any defect
therein or in the mailing thereof shall affect the validity of the corporate
action required to be specified in such notice.

     (g) OTHER CHANGES IN CONVERSION RATE. The Corporation from time to time may
increase the Conversion Rate by any amount for any period of time if the period
is at least 20 days and if the increase is irrevocable during the period.
Whenever the Conversion Rate is so increased, the Corporation shall mail to
holders of record of the Series A Preferred Stock a notice of the increase at
least 15 days before the date the increased Conversion Rate takes effect, and
such notice shall state the increased Conversion Rate and the period it will be
in effect.

     The Corporation may make such increases in the Conversion Rate, in addition
to those required or allowed by this Section 4, as shall be determined by it, as
evidenced by a resolution of the Board of Directors, to be advisable in order to
avoid or diminish any income tax to holders of Common Stock resulting from any
dividend or distribution of stock or issuance of rights or warrants to purchase
or subscribe for stock or from any event treated as such for income tax
purposes.

     Notwithstanding anything to the contrary herein, in no case shall the
Conversion Price be adjusted to an amount less than $.01 per share, the current
par value of the Common Stock into which the Series A Preferred Stock is
convertible.

     (h) AMBIGUITIES/ERRORS. The Board of Directors of the Corporation shall
have the power to resolve any ambiguity or correct any error in the provisions
relating to the convertibility of the Series A Preferred Stock, and its actions
in so doing shall be final and conclusive.


     5. CONVERSION PRICE RESET EVENT. The Conversion Price (subject to the
adjustments pursuant to the provisions of Section 4(c) above), is subject to
adjustment on the date which is twelve (12) months after the Final Closing Date
(the "Reset Date") if the average Closing Bid Price of the Common Stock for the
thirty (30) consecutive trading days immediately preceding the Reset Date (the
"Reset Trading Price") is less than 130% of the then applicable Conversion Price
(a "Reset Event"). Upon a Reset Event, the then applicable Conversion Price
shall be reduced to equal the greater of (i) the Reset Trading Price divided by
1.3 and (ii) 50% of the then applicable Conversion Price. If there is any change
in the Conversion Price as a result of the preceding sentence, then the
Conversion Rate shall be changed accordingly as set forth above. The Corporation
shall prepare a certificate signed by the principal financial officer of the
Corporation setting forth the Conversion Rate as of the Reset Date, showing in
reasonable detail the facts upon which such Conversion Rate is based, and such
certificate shall forthwith be filed with the transfer agent of the Series A
Preferred Stock. A notice stating that the Conversion Rate has been adjusted
pursuant to this paragraph, or that no adjustment is necessary, and setting
forth the Conversion Rate in effect as

                                       14


<PAGE>



of the Reset Date shall be mailed as promptly as practicable after the Reset
Date by the Corporation to all record holders of the Series A Preferred Stock at
their last addresses as they shall appear in the stock transfer books of the
Corporation.

     6. MANDATORY CONVERSION. At any time on or after the date that is 12 months
after the Final Closing Date, the Corporation, at its option, may cause the
Series A Preferred Stock to be converted in whole, or in part, on a pro rata
basis, into fully paid and nonassessable shares of Common Stock at the then
effective Conversion Rate and such other securities and property as herein
provided if the Closing Bid Price of the Common Stock (or, if the prices
referenced in the definition of Closing Bid Price cannot be determined, the Fair
Market Value (as defined in Section 3(b)) of the Common Stock) shall have
exceeded 200% of the then applicable Conversion Price for at least 20 trading
days in any 30 consecutive trading day period ending three days prior to the
date of conversion. Any shares of Series A Preferred Stock so converted shall be
treated as having been surrendered by the holder thereof for conversion pursuant
to Section 4 on the date of such mandatory conversion (unless previously
converted at the option of the holder).

     Not more than 60 nor less than 20 days prior to the date of any such
mandatory conversion, notice by first class mail, postage prepaid, shall be
given to the holders of record of the Series A Preferred Stock to be converted,
addressed to such holders at their last addresses as shown on the stock transfer
books of the Corporation. Each such notice shall specify the date fixed for
conversion, the place or places for surrender of shares of Series A Preferred
Stock, and the then effective Conversion Rate pursuant to Section 4.

     Any notice which is mailed as herein provided shall be conclusively
presumed to have been duly given by the Corporation on the date deposited in the
mail, whether or not the holder of the Series A Preferred Stock receives such
notice; and failure properly to give such notice by mail, or any defect in such
notice, to the holders of the shares to be converted shall not affect the
validity of the proceedings for the conversion of any other shares of Series A
Preferred Stock. On or after the date fixed for conversion as stated in such
notice, each holder of shares called to be converted shall surrender the
certificate evidencing such shares to the Corporation at the place designated in
such notice for conversion. Notwithstanding that the certificates evidencing any
shares properly called for conversion shall not have been surrendered, the
shares shall no longer be deemed outstanding and all rights whatsoever with
respect to the shares so called for conversion (except the right of the holders
to convert such shares upon surrender of their certificates therefor) shall
terminate.

     7. VOTING RIGHTS.

     (a) GENERAL. Except as otherwise provided herein, in the Certificate of
Incorporation or the By-laws or as required by applicable law, the holders of
shares of Series A Preferred Stock, the holders of shares of Common Stock and
the holders of any other class or series of shares entitled to vote with the
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation. In any such vote, each share of Series A
Preferred Stock shall entitle the holder thereof to cast the number of votes
equal to the number of votes which could be cast in such vote by a holder of the
Common Stock into which such share of

                                       15


<PAGE>



Series A Preferred Stock is convertible (regardless of whether the Corporation
has sufficient authorized Shares of Common Stock to issue upon the conversion of
all outstanding Series A Preferred Stock) on the record date for such vote, or
if no record date has been established, on the date such vote is taken. Any
shares of Series A Preferred Stock held by the Corporation or any entity
controlled by the Corporation shall not have voting rights hereunder and shall
not be counted in determining the presence of a quorum.

     (b) Class Voting Rights. In addition to any vote specified in Section 7(a),
so long as 50% of the shares of Series A Preferred Stock (including those shares
of Series A Preferred Stock issued or issuable upon the exercise of the warrants
issued to Paramount Capital, Inc., the placement agent in connection with the
offer and sale of the Series A Preferred Stock or any other options for the
purchase of Series A Preferred Stock) shall be outstanding, the Corporation
shall not, without the affirmative vote or consent of the holders of at least
66.67% of all outstanding Series A Preferred Stock voting separately as a class,
(i) amend, alter or repeal any provision of the Certificate of Incorporation, or
the Bylaws of the Corporation so as adversely to affect the relative rights,
preferences, qualifications, limitations or restrictions of the Series A
Preferred Stock, (ii) declare or pay any dividend or distribution on any
securities of the Corporation other than the Series A Preferred Stock pursuant
to and accordance with the provisions of this Certificate of Designations, or
authorize the repurchase of any securities of the Corporation, or (iii)
authorize or issue, or increase the authorized amount of, any security ranking
prior to the Series A Preferred Stock (A) upon a Liquidation Event or (B) with
respect to the payment of any dividends or distributions or (C) with respect to
voting rights. The vote as contemplated herein shall specifically not be
required for (x) issuances of Common Stock or capital stock of the Corporation
on parity with the Series A Preferred Stock , (y) the authorization, issuance or
increase in the amount of the Series A Preferred Stock prior to the Final
Closing Date or (z) any consolidation or merger of the Corporation with or into
another corporation in which the Corporation is not the surviving entity, a sale
or transfer of all or part of the Corporation's assets for cash, securities or
other property, or a compulsory share exchange.

     8. OUTSTANDING SHARES. For purposes of this Certificate of Designations,
all shares of Series A Preferred Stock shall be deemed outstanding except (i)
from the date, or the deemed date, of surrender of certificates evidencing
shares of Series A Preferred Stock, all shares of Series A Preferred Stock
converted into Common Stock, (ii) from the date of registration of transfer, all
shares of Series A Preferred Stock held of record by the Corporation or any
subsidiary of the Corporation and (iii) any and all shares of Series A Preferred
Stock held in escrow prior to delivery of such stock by the Corporation to the
initial beneficial owners thereof.


                                       16


<PAGE>



     9. STATUS OF ACQUIRED SHARES. Shares of Series A Preferred Stock received
upon conversion pursuant to Section 4 or Section 5 or Section 6 or otherwise
acquired by the Corporation will be restored to the status of authorized but
unissued shares of Preferred Stock, without designation as to class, and may
thereafter be issued, but not as shares of Series A Preferred Stock.


     10. PREEMPTIVE RIGHTS. The Series A Preferred Stock is not entitled to any
preemptive or subscription rights in respect of any securities of the
Corporation.


     11. NO AMENDMENT OR IMPAIRMENT. The Corporation shall not amend its
Certificate of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, for the purpose of avoid ing or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the rights of the holders of the Series A Preferred Stock
against impairment.


     12. SEVERABILITY OF PROVISIONS. Whenever possible, each provision hereof
shall be interpreted in a manner as to be effective and valid under applicable
law, but if any provision hereof is held to be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating or otherwise adversely affecting
the remaining provisions hereof. If a court of competent jurisdiction should
determine that a provision hereof would be valid or enforceable if a period of
time were extended or shortened or a particular percentage were increased or
decreased, then such court may make such change as shall be necessary to render
the provision in question effective and valid under applicable law.




                                       17


<PAGE>



     IN WITNESS WHEREOF, Palatin Technologies, Inc. has caused this certificate
to be signed on its behalf by Edward J. Quilty, its Chairman and Chief Executive
Officer, this 21 day of February , 1997.


                                   PALATIN TECHNOLOGIES, INC.




                                   By:   /s/ Edward J. Quilty
                                       ------------------------------
                                   Name:   Edward J. Quilty
                                   Title:  Chairman and Chief Executive Officer


ATTEST:


  /s/ John J. McDonough
- -------------------------------
Secretary


























                                       18



<PAGE>



                            CERTIFICATE OF AMENDMENT

                                     TO THE

                      RESTATED CERTIFICATE OF INCORPORATION

                                       OF

                           PALATIN TECHNOLOGIES, INC.




                            Under Section 242 of the
                             General Corporation Law
                            of the State of Delaware



         The undersigned officer of Palatin Technologies, Inc., a Delaware
corporation (the "Corporation"), in order to amend the Restated Certificate of
Incorporation of the Corporation, pursuant to the provisions of Section 242 of
the General Corporation Law of the State of Delaware, does hereby certify as
follows:

     1. The Restated Certificate of Incorporation of the Corporation is hereby
amended by striking out Section 1 of Article IV thereof in its entirety and by
substituting in lieu of said Section 1 the following new Section 1:

                  Section 1. AUTHORIZED CAPITAL STOCK. The Corporation shall be
         authorized to issue two classes of shares of capital stock to be
         designated, respectively, "Preferred Stock" and "Common Stock." The
         total number of shares of capital stock which the Corporation shall
         have the authority to issue is 85,000,000, comprised of 75,000,000
         shares of Common Stock, par value $.01 per share, and 10,000,000 shares
         of Preferred Stock, par value $.01 per share.

     2. The Restated Certificate of Incorporation of the Corporation is hereby
amended by including a new Section 4 of Article IV thereof as follows:

                  SECTION 4. Upon the date the Certificate of Amendment,
         including this Section 4, is filed with the Secretary of State of the
         State of Delaware (the "Effective Date"), each four shares of issued
         and outstanding shares of Common Stock of this Corporation shall be


<PAGE>



          automatically combined into one share of Common Stock of this
          Corporation (the "Reverse Stock Split"). In lieu of the issuance of
          any fractional shares that would otherwise result from the Reverse
          Stock Split, the Corporation shall pay the cash value of fractions of
          a share determined by the average closing price of the Common Stock
          for the five (5) trading days immediately preceding the Effective Date
          multiplied by the fractional interest. Following the Effective Date,
          certificates representing the shares of Common Stock to be outstanding
          thereafter shall be exchanged for certificates now outstanding
          pursuant to procedures adopted by the Corporation's Board of Directors
          and communicated to those who are to receive new certificates.

     3. The foregoing amendments to the Corporation's Restated Certificate of
Incorporation were duly authorized and adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.

     4. This Certificate of Amendment shall become effective at 11:59 p.m., EDT,
on September 5, 1997.

         IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Amendment and does hereby affirm, under penalty of perjury, that the statements
contained herein are true and correct, this 5th day of September, 1997.

                                              Palatin Technologies, Inc.

                                               /s/ John J. McDonough
                                              -------------------------
                                              Name:  John J. McDonough
                                              Title: Vice President




<PAGE>






                           CERTIFICATE OF DESIGNATIONS

                                       of

                      SERIES B CONVERTIBLE PREFERRED STOCK

                                       of

                           PALATIN TECHNOLOGIES, INC.

                         Pursuant to Section 151 of the
                General Corporation Law of the State of Delaware


     PALATIN TECHNOLOGIES, INC., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), does hereby certify that,
pursuant to the authority conferred on the Board of Directors of the Corporation
by the Certificate of Incorporation, as amended to date (the "Certificate of
Incorporation"), of the Corporation and in accordance with Section 151 of the
General Corporation Law of the State of Delaware, the Board of Directors of the
Corporation adopted the following resolution establishing a series of 18,875
shares of Preferred Stock of the Corporation designated as "Series B Convertible
Preferred Stock":

                  RESOLVED, that pursuant to the authority conferred on the
         Board of Directors of this Corporation by the Certificate of
         Incorporation, a series of Preferred Stock, par value $.01 per share,
         of the Corporation is hereby established and created, and that the
         designation and number of shares thereof and the voting and other
         powers, preferences and relative, participating, optional or other
         rights of the shares of such series and the qualifications, limitations
         and restrictions thereof are as follows:

                      SERIES B CONVERTIBLE PREFERRED STOCK

     Section 1. Designation, Amount and Par Value. The series of preferred stock
shall be designated as Series B Convertible Preferred Stock (the "Preferred
Stock") and the number of shares so designated shall be 18,875 (which shall not
be subject to increase without the consent of the holders of the Preferred Stock
(each, a "Holder")). Each share of Preferred Stock shall have a par value of
$.01 per share and a stated value of $100 per share (the "Stated Value").






<PAGE>



     Section 2. Dividends and Certain Distributions.

     (a) Holders of Preferred Stock shall not be entitled to receive periodic
dividends on the Preferred Stock.

     (b) So long as any Preferred Stock shall remain outstanding, neither the
Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire
directly or indirectly any Junior Securities (as defined in Section 7), nor
shall the Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 5)
upon, nor shall any distribution be made in respect of, any Junior Securities,
nor shall any monies be set aside for or applied to the purchase or redemption
(through a sinking fund or otherwise) of any Junior Securities or shares pari
passu with the Preferred Stock, except for repurchases effected by the Company
on the open market, pursuant to a direct stock purchase plan.

     Section 3. Voting Rights. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the Company
shall not and shall cause its subsidiaries not to, without the affirmative vote
of the Holders of 66 2/3% of the shares of the Preferred Stock then outstanding,
(a) alter or change adversely the powers, preferences or rights given to the
Preferred Stock, (b) alter or amend this Certificate of Designation, (c)
authorize or create any class of stock ranking as to distribution of assets upon
a Liquidation (as defined in Section 4) or as to dividends, voting rights or
otherwise senior to the Preferred Stock, (d) amend its Certificate of
Incorporation, bylaws or other charter documents so as to affect adversely any
rights of any Holders, (e) increase the authorized number of shares of Preferred
Stock, or (f) enter into any agreement with respect to the foregoing.

     Section 4. Liquidation. Upon any liquidation, dissolution or winding-up of
the Company, whether voluntary or involuntary (a "Liquidation"), the Holders
shall be entitled to receive out of the assets of the Company, whether such
assets are capital or surplus, for each share of Preferred Stock an amount equal
to the Stated Value before any distribution or payment shall be made to the
holders of any Junior Securities, and if the assets of the Company shall be
insufficient to pay in full such amounts, then the entire assets to be
distributed to the Holders of Preferred Stock shall be distributed among the
Holders of Preferred Stock ratably in accordance with the respective amounts
that would be payable on such shares if all amounts payable thereon were paid in
full. A sale, conveyance or disposition of all or substantially all of the
assets of the Company or the effectuation by the Company of a transaction or
series of related transactions in which more than 50% of the voting power of the
Company is disposed of, or a consolidation or merger of the Company with or into
any other company or companies shall not be treated as a Liquidation, but
instead shall be subject to the provisions of Section 5. The Company shall mail
written notice of any such Liquidation, not less than 45 days prior to the
payment date stated therein, to each record Holder of Preferred Stock.



                                       -2-


<PAGE>



     Section 5. Conversion.

     (a)(i) Each share of Preferred Stock shall be convertible into shares of
Common Stock (subject to reduction pursuant to Section 5(a)(ii) hereof and
Section 4.8 of the Purchase Agreement) at the Conversion Ratio (as defined in
Section 7) at the option of the Holder in whole or in part at any time after the
Original Issue Date (as defined in Section 7). The Holders shall effect
conversions by surrendering the certificate or certificates representing the
shares of Preferred Stock to be converted to the Company, together with the form
of conversion notice attached hereto as Exhibit A (a "Conversion Notice"). Each
Conversion Notice shall specify the number of shares of Preferred Stock to be
converted and the date on which such conversion is to be effected, which date
may not be prior to the date the Holder delivers such Conversion Notice by
facsimile (the "Conversion Date"). If no Conversion Date is specified in a
Conversion Notice, the Conversion Date shall be the date that the Conversion
Notice is deemed delivered pursuant to Section 5(h). Subject to Sections 5(b)
and 5(a)(ii) hereof, each Conversion Notice, once given, shall be irrevocable.
If the Holder is converting less than all shares of Preferred Stock represented
by the certificate or certificates tendered by the Holder with the Conversion
Notice, or if a conversion hereunder cannot be effected in full for any reason,
the Company shall promptly deliver to such Holder (in the manner and within the
time set forth in Section 5(b)) a certificate for such number of shares as have
not been converted.

     (ii) If on any Conversion Date (A) the Common Stock is listed for trading
on the Nasdaq National Market or the Nasdaq SmallCap Market, (B) the Conversion
Price then in effect is such that the aggregate number of shares of Common Stock
that would then be issuable upon conversion in full of all then outstanding
shares of Preferred Stock, together with any shares of the Common Stock
previously issued upon conversion of the shares of Preferred Stock, would equal
or exceed 20% of the number of shares of the Common Stock outstanding on the
Original Issue Date (such number of shares as would not equal or exceed such 20%
limit, the "Issuable Maximum"), and (C) the Company shall not have previously
obtained the vote of stockholders (the "Shareholder Approval"), if any, as may
be required by the rules and regulations of The Nasdaq Stock Market (or any
successor association) applicable to approve the issuance of Common Stock in
excess of the Issuable Maximum in a private placement whereby shares of Common
Stock are deemed to have been issued at a price that is less than the greater of
book or fair market value of the Common Stock, then the Company shall issue to
the Holder so requesting a conversion a number of shares of Common Stock equal
to the Issuable Maximum and, with respect to the remainder of the aggregate
Stated Value of the shares of Preferred Stock then held by such Holder for which
a conversion in accordance with the Conversion Price would result in an issuance
of Common Stock in excess of the Issuable Maximum, the Company shall use its
best efforts to obtain the Shareholder Approval applicable to such issuance as
soon as is possible, but in any event not later than the 60th day after such
request.

     (b) (i) Not later than three (3) Trading Days after any Conversion Date,
the Company will deliver to the Holder (i) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 4.1(b) of the Purchase Agreement) representing the number of
shares of Common Stock being acquired upon the

                                       -3-


<PAGE>



conversion of shares of Preferred Stock (subject to reduction pursuant to
Section 5(a)(ii) hereof and Section 4.8 of the Purchase Agreement) and (ii) one
or more certificates representing the number of shares of Preferred Stock
tendered for conversion that were not requested to be converted (or that the
Company is prohibited from converting); provided, however, that the Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion of any shares of Preferred Stock until
certificates evidencing such shares of Preferred Stock are either delivered for
conversion to the Company or any transfer agent for the Preferred Stock or
Common Stock, or the Holder of such Preferred Stock notifies the Company that
such certificates have been lost, stolen or destroyed and provides a bond (or
other adequate security) reasonably satisfactory to the Company to indemnify the
Company from any loss incurred by it in connection therewith. The Company shall,
upon request of the Holder, if available, use its best efforts to deliver any
certificate or certificates required to be delivered by the Company under this
Section electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. If in the case of
any Conversion Notice such certificate or certificates are not delivered to or
as directed by the applicable Holder by the third Trading Day after the
Conversion Date, the Holder shall be entitled by written notice to the Company
at any time on or before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Company shall
immediately return the certificates representing the shares of Preferred Stock
tendered for conversion, (such recission shall be in addition to, and not in
lieu of, the rights set forth elsewhere herein).

     (c) (i) The conversion price for each share of Preferred Stock (the
"Conversion Price") in effect on any Conversion Date shall be $5.50; provided,
that, if the Reset Price (as defined in Section 7) is less than $6.05, then the
Conversion Price shall be reduced to the greater of (A) the Reset Price divided
by 1.1 and (B) $2.75 ($5.50 as so reset, the "Initial Conversion Price");
provided, however, that, (a) if the Underlying Securities Registration Statement
is not filed on or prior to the Filing Date (as defined in the Registration
Rights Agreement) (for purposes hereof, in the event the Company files such
Underlying Securities Registration Statement without complying with the
provisions of Section 3(a) of the Registration Rights Agreement, such filing
shall not be deemed to have occurred), or (b) if the Company fails to file with
the Commission a request for acceleration in accordance with Rule 12d1-2
promulgated under the Exchange Act within five (5) days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Securities Registration Statement will not be
"reviewed" or not subject to further review, or (c) if the Underlying Securities
Registration Statement is not declared effective by the Commission on or prior
to the 120th day after the Original Issue Date, or (d) if such Underlying
Securities Registration Statement is filed with and declared effective by the
Commission but thereafter ceases to be effective as to all Registrable
Securities (as such term is defined in the Registration Rights Agreement) at any
time prior to the expiration of the "Effectiveness Period" (as such term is
defined in the Registration Rights Agreement), without being succeeded within 10
Trading Days by a subsequent Underlying Securities Registration Statement filed
with and declared effective by the Commission, or (e) if the conversion rights
of the Holders are suspended for any reason, or if a Holder is not permitted to
resell Registrable Securities under an Underlying Securities Registration
Statement, or (f) if the Company is required to convene a stockholders meeting

                                       -4-


<PAGE>



pursuant to Section 5(a)(ii) and fails to convene such meeting within the time
period specified in such Section or does so convene such a meeting within such
time period but fails to obtain Shareholder Approval at such meeting, or (g) if
an amendment to the Underlying Securities Registration Statement is not filed by
the Company with the Commission within ten (10) days of the Commission's
notifying the Company that such amendment is required in order for the
Underlying Securities Registration Statement to be declared effective, or (h) if
the Company fails to comply with requests for conversion of any Preferred Stock
into shares of Common Stock in accordance with the terms hereof (any such
failure or breach being referred to as an "Event" and for purposes of clauses
(a), (c), (e), (f) and (h) the date on which such Event occurs, or for purposes
of clause (b) the date on which such five (5) day period is exceeded, or for
purposes of clauses (d) and (g) the date which such 10 Trading Day-period is
exceeded, being referred to as "Event Date"), then each Holder shall have the
right, exercisable by notice to the Company (an "Initial Reduced Conversion
Notice"), to decrease the Conversion Price by 1.5% as of the Event Date, and by
an additional 2.5% (on a cumulative basis) as of each monthly anniversary of
such Event Date until the Event at issue has been cured. The Holder can
discontinue and recontinue such election as to subsequent periods by notice to
the Company to such effect. Any decrease in the Conversion Price pursuant to
this Section shall continue notwithstanding the fact that the Event causing such
decrease has been subsequently cured. If the Common Stock shall fail to be
listed on, or be suspended from trading from, the Nasdaq National Market or
Nasdaq SmallCap Market for three (3) Trading Days (which need not be consecutive
Trading Days), then each Holder shall have the right, exercisable by notice to
the Company (the "Subsequent Reduced Conversion Price Notice"), to discount the
Conversion Price by 25% (which discount shall be cumulative with any other
discounts herein provided). For purposes hereof, shares of Preferred Stock for
which a conversion has been requested in accordance with the terms hereof shall
be deemed to be outstanding and held by the converting holder if such Event,
delisting or suspension (as the case may be) occurs on or prior to the date that
the Holder receives the Underlying Shares from the Company in respect thereof.

     (ii) If the Company, at any time while any shares of Preferred Stock are
outstanding, shall (a) pay a stock dividend or otherwise make a distribution or
distributions on shares of its Junior Securities or pari passu securities
payable in shares of Common Stock, (b) subdivide outstanding shares of Common
Stock into a larger number of shares, (c) combine outstanding shares of Common
Stock into a smaller number of shares, or (d) issue by reclassification of
shares of Common Stock any shares of capital stock of the Company, the Initial
Conversion Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding before such event and of
which the denominator shall be the number of shares of Common Stock outstanding
after such event. Any adjustment made pursuant to this Section 5(c)(ii) shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.

     (iii) If the Company, at any time while any shares of Preferred Stock are
outstanding, shall issue rights or warrants to all holders of Common Stock
entitling them to

                                       -5-


<PAGE>



subscribe for or purchase shares of Common Stock at a price per share less than
the Per Share Market Value of the Common Stock at the record date mentioned
below, the Initial Conversion Price shall be multiplied by a fraction, of which
the denominator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of Common Stock offered for
subscription or purchase, and of which the numerator shall be the number of
shares of Common Stock (excluding treasury shares, if any) outstanding on the
date of issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered would purchase
at such Per Share Market Value. Such adjustment shall be made whenever such
rights or warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights or warrants. However, upon the expiration of any right or warrant to
purchase Common Stock the issuance of which resulted in an adjustment in the
Initial Conversion Price pursuant to this Section 5(c)(iii), if any such right
or warrant shall expire and shall not have been exercised, the Initial
Conversion Price shall immediately upon such expiration be recomputed and
effective immediately upon such expiration be increased to the price which it
would have been (but reflecting any other adjustments in the Initial Conversion
Price made pursuant to the provisions of this Section 5 after the issuance of
such rights or warrants) had the adjustment of the Initial Conversion Price made
upon the issuance of such rights or warrants been made on the basis of offering
for subscription or purchase only that number of shares of Common Stock actually
purchased upon the exercise of such rights or warrants actually exercised.

     (iv) If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and not to Holders
of Preferred Stock) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security (excluding those referred to
in Sections 5(c)(ii) and (iii) above), then in each such case the Conversion
Price at which each share of Preferred Stock shall thereafter be convertible
shall be determined by multiplying the Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
Per Share Market Value of Common Stock determined as of the record date
mentioned above, and of which the numerator shall be such Per Share Market Value
of the Common Stock on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Board of Directors in good faith; provided, however, that in the event of a
distribution exceeding ten percent (10%) of the net assets of the Company, if
the Holders of a majority in interest of the Preferred Stock dispute such
valuation, such fair market value shall be determined by a nationally recognized
or major regional investment banking firm or firm of independent certified
public accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
good faith by the Holders of a majority in interest of the shares of Preferred
Stock then outstanding; and provided, further, that the Company, after receipt
of the determination by such Appraiser shall have the right to select an
additional Appraiser, in good faith, in which case the fair market value shall
be equal to the average of the determinations by each such Appraiser. In either
case the adjustments shall be described in a statement provided to

                                       -6-


<PAGE>



the Holders of Preferred Stock of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned
above.

     (v) All calculations under this Section 5 shall be made to the nearest cent
or the nearest 1/100th of a share, as the case may be.

     (vi) Whenever the Conversion Price is adjusted pursuant to Section
5(c)(i),(ii),(iii) or (iv), the Company shall promptly mail to each Holder of
Preferred Stock, a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.

     (vii) A. In case of any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is converted into
cash or property, the Holders of the Preferred Stock then outstanding shall have
the right thereafter to convert such shares only into the shares of stock and
other securities, cash and property receivable upon or deemed to be held by
holders of Common Stock following such reclassification or share exchange, and
the Holders of the Preferred Stock shall be entitled upon such event to receive
such amount of securities, cash or property as the shares of the Common Stock of
the Company into which such shares of Preferred Stock could have been converted
immediately prior to such reclassification or share exchange would have been
entitled.

     B. In the case of any consolidation or merger of the Company with or into
another Person pursuant to which the Company will not be the surviving entity,
any sale of all or substantially all of the assets of the Company, or any sale
or transfer or compulsory share exchange pursuant to which the Common Stock is
converted into securities of an entity other than the Company, each Holder of
Preferred Stock then outstanding shall have the option to either (1) convert
their shares of Preferred Stock into shares of Common Stock pursuant to the
terms hereof prior to the effective date of such transaction, or (2) subject to
the liquidation rights of the Company's Series A Convertible Preferred Stock, be
issued shares of convertible preferred stock or convertible debentures of the
Person with which such consolidation, merger, sale, transfer or share exchange
takes place, which newly issued shares or debentures (as the case may be) shall
have terms substantially similar in all material respects to the terms of the
Preferred Stock (including with respect to conversion) and shall be entitled to
all of the rights and privileges of a Holder set forth in this Certificate of
Designation, the Registration Rights Agreement and the Purchase Agreement
(including, without limitation, as such rights relate to the acquisition,
transferability, registration and listing of the freely tradeable securities
issuable upon a conversion or exchange thereof). Simultaneously with such
issuance of such convertible preferred stock or convertible debentures, the
Holders of Preferred Stock shall have the right to convert such shares of
preferred stock only into shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of Common Stock
following such consolidation, merger, sale, transfer or exchange. In the case of
clause (2) of the immediately preceding sentence, the conversion price for such
newly issued shares or debentures (as the case may be) shall be based

                                       -7-


<PAGE>



upon the amount of securities, cash or property that each share of Common Stock
would receive in such transaction and the Conversion Price stated herein. The
terms of any such reclassification, consolidation, merger, sale or exchange
under this Section shall include such terms so as to continue to give the
Holders the right to receive the securities, cash or property set forth in this
Section upon any conversion or redemption following such reclassification,
consolidation, merger, sale, transfer or exchange. This provision shall
similarly apply to successive reclassifications, consolidations, mergers, sales,
transfers or share exchanges.

     (viii) If:

          A.   the Company shall declare a dividend (or any other distribution)
               on its Common Stock; or

          B.   the Company shall declare a special nonrecurring cash dividend on
               or a redemption of its Common Stock; or

          C.   the Company shall authorize the granting to all holders of the
               Common Stock rights or warrants to subscribe for or purchase any
               shares of capital stock of any class or of any rights; or

          D.   the approval of any stockholders of the Company shall be required
               in connection with any reclassification of the Common Stock of
               the Company, any consolidation or merger to which the Company is
               a party, any sale or transfer of all or substantially all of the
               assets of the Company, of any compulsory share of exchange
               whereby the Common Stock is converted into other securities, cash
               or property; or

          E.   the Company shall authorize the voluntary or involuntary
               dissolution, liquidation or winding up of the affairs of the
               Company;

then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Preferred Stock, and shall cause to be mailed to
the Holders of Preferred Stock at their last addresses as they shall appear upon
the stock books of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of

                                       -8-


<PAGE>



Common Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share exchange;
provided, however, that the failure to mail such notice or any defect therein or
in the mailing thereof shall not affect the validity of the corporate action
required to be specified in such notice. Holders are entitled to convert shares
of Preferred Stock during the 20-day period commencing the date of such notice
to the effective date of the event triggering such notice.

     (ix) If the Company (i) makes a public announcement that it intends to
enter into a Change of Control Transaction or (ii) any person, group or entity
(including the Company, but excluding a Holder or any affiliate of a Holder)
publicly announces a bona fide tender offer, exchange offer or other transaction
to purchase 50% or more of the Common Stock (such announcement being referred to
herein as a "Major Announcement" and the date on which a Major Announcement is
made, the "Announcement Date"), then, in the event that a Holder seeks to
convert shares of Preferred Stock on or following the Announcement Date, the
Conversion Price shall, effective upon the Announcement Date and continuing
through the earlier to occur of the consummation of the proposed transaction or
tender offer, exchange offer or other transaction and the Abandonment Date (as
defined below), be equal to the lower of (x) the average Per Share Market Value
on the five Trading Days immediately preceding (but not including) the
Announcement Date and (y) the Conversion Price in effect on the Conversion Date
for such Preferred Stock. "Abandonment Date" means with respect to any proposed
transaction or tender offer, exchange offer or other transaction for which a
public announcement as contemplated by this paragraph has been made, the date
upon which the Company (in the case of clause (i) above) or the person, group or
entity (in the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer, exchange offer or
another transaction which caused this paragraph to become operative.

     (d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Preferred Stock free from preemptive rights or
any other actual contingent purchase rights of persons other than the Holders of
Preferred Stock, not less than such number of shares of Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(a) and Section 5(c)) upon the
conversion of all outstanding shares of Preferred Stock. The Company covenants
that all shares of Common Stock that shall be so issuable shall, upon issue, be
duly and validly authorized, issued and fully paid, nonassessable and freely
tradeable, subject to the legend requirements of Section 4.1(b) of the Purchase
Agreement.

     (e) Upon a conversion hereunder the Company shall not be required to issue
stock certificates representing fractions of shares of Common Stock, but must
make a cash payment in respect of any final fraction of a share based on the Per
Share Market Value at such time.


                                       -9-


<PAGE>



     (f) The issuance of certificates for shares of Common Stock on conversion
of Preferred Stock shall be made without charge to the Holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name other
than that of the Holder of such shares of Preferred Stock so converted and the
Company shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have paid to
the Company the amount of such tax or shall have established to the satisfaction
of the Company that such tax has been paid.

     (g) Shares of Preferred Stock converted into Common Stock shall be canceled
and shall have the status of authorized but unissued shares of undesignated
stock.

     (h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile or sent by a nationally recognized overnight courier service,
addressed to the attention of the Chief Executive Officer of the Company at the
facsimile telephone number or address of the principal place of business of the
Company as set forth in the Purchase Agreement. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to each Holder of Preferred
Stock at the facsimile telephone number or address of such Holder appearing on
the books of the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section prior to 8:00 p.m. (Eastern Standard Time), (ii) the date after the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile telephone number specified in this Section later than 8:00 p.m.
(Eastern Standard Time) on any date and earlier than 11:59 p.m. (Eastern
Standard Time) on such date, (iii) upon receipt, if sent by a nationally
recognized overnight courier service, or (iv) upon actual receipt by the party
to whom such notice is required to be given.

     Section 6. Redemption at Option of Company.

     (a) The Company shall have the right, exercisable at any time upon 20
Trading Days notice (an "Optional Redemption Notice") to the Holders of the
Preferred Stock given at any time after the Original Issue Date to redeem all or
any portion of the shares of Preferred Stock which have not previously been
converted or redeemed, at a price equal to the Optional Redemption Price (as
defined below). The entire Optional Redemption Price shall be paid in cash.
Holders of Preferred Stock may convert (and the Company shall honor such
conversions in accordance with the terms hereof) any shares of Preferred Stock,
including shares subject to an Optional Redemption Notice, during the period
from the date thereof through the 20th Trading Day after the receipt of an
Optional Redemption Notice.

                                      -10-


<PAGE>



     (b) If any portion of the Optional Redemption Price shall not be paid by
the Company within seven (7) calendar days after the 20th Trading Day after the
delivery of an Optional Redemption Notice, interest shall accrue thereon at the
rate of 15% per annum until the Optional Redemption Price plus all such interest
is paid in full (any such amount shall be paid as liquidated damages and not as
a penalty). In addition, if any portion of the Optional Redemption Price remains
unpaid for more than seven (7) calendar days after the date due, the Holder of
the Preferred Stock subject to such redemption may elect, by written notice to
the Company given at any time thereafter, to either (i) demand conversion in
accordance with the formula and the time frame therefor set forth herein of all
or any portion of the shares of Preferred Stock for which such Optional
Redemption Price, plus accrued liquidated damages thereof, has not been paid in
full (the "Unpaid Redemption Shares"), in which event the Per Share Market Value
for such shares shall be the lower of the Per Share Market Value calculated on
the date the Optional Redemption Price was originally due and the Per Share
Market Value as of the Holder's written demand for conversion, or (ii)
invalidate ab initio such redemption, notwithstanding anything herein contained
to the contrary. If the Holder elects option (i) above, the Company shall within
three (3) Trading Days of its receipt of such election deliver to the Holder the
shares of Common Stock issuable upon conversion of the Unpaid Redemption Shares
subject to such Holder conversion demand and otherwise perform its obligations
hereunder with respect thereto; or, if the Holder elects option (ii) above, the
Company shall promptly, and in any event not later than three (3) Trading Days
from receipt of Holder's notice of such election, return to the Holder all of
the Unpaid Redemption Shares.

     (c) The "Optional Redemption Price" shall equal the sum of (i) the product
of (A) the number of shares of Preferred Stock to be redeemed and (B) the
product of (1) the average Per Share Market Value for the five (5) Trading Days
immediately preceding (x) the date of the Optional Redemption Notice or (y) the
date of payment in full by the Company of the Optional Redemption Price,
whichever is greater, and (2) the Conversion Ratio calculated on the date of the
Optional Redemption Notice, and (ii) all other amounts, costs, expenses and
liquidated damages due in respect of such shares of Preferred Stock.

     Section 7. Definitions. For the purposes hereof, the following terms shall
have the following meanings:

          "Commission" means the Securities and Exchange Commission.

          "Common Stock" means the Company's common stock, $.01 par value, and
     stock of any other class into which such shares may hereafter have been
     reclassified or changed.

          "Conversion Ratio" means, at any time, a fraction, of which the
     numerator is Stated Value and of which the denominator is the Conversion
     Price at such time.

          "Exchange Act" means the Securities Exchange Act of 1934, as amended.


                                      -11-


<PAGE>



          "Junior Securities" means the Common Stock and all other equity
     securities of the Company, other than the Company's Series A Convertible
     Preferred Stock and Series C Convertible Preferred Stock (provided it is
     issued in a financing contemplated in Section 6(b) to the Registration
     Rights Agreement) or any other security that the Holders consent to be pari
     passu with the Preferred Stock.

          "Original Issue Date" shall mean the date of the first issuance of any
     shares of the Preferred Stock regardless of the number of transfers of any
     particular shares of Preferred Stock and regardless of the number of
     certificates which may be issued to evidence such Preferred Stock.

          "Per Share Market Value" means on any particular date (a) the closing
     bid price per share of the Common Stock on such date on the Nasdaq National
     Market or Nasdaq SmallCap Market or any other stock exchange or quotation
     system on which the Common Stock is then listed or if there is no such
     price on such date, then the closing bid price on such exchange or
     quotation system on the date nearest preceding such date, or (b) if the
     Common Stock is not listed then on the Nasdaq National Market or Nasdaq
     SmallCap Market or any stock exchange or quotation system, the closing bid
     price for a share of Common Stock in the over-the-counter market, as
     reported by the National Quotation Bureau Incorporated or similar
     organization or agency succeeding to its functions of reporting prices) at
     the close of business on such date, or (c) if the Common Stock is not then
     reported by the National Quotation Bureau Incorporated (or similar
     organization or agency succeeding to its functions of reporting prices),
     then the average of the "Pink Sheet" quotes for the relevant conversion
     period, as determined in good faith by the Holder, or (d) if the Common
     Stock is not then publicly traded the fair market value of a share of
     Common Stock as determined by an Appraiser selected in good faith by the
     Holders of a majority in interest of the shares of the Preferred Stock;
     provided, however, that the Company, after receipt of the determination by
     such Appraiser, shall have the right to select an additional Appraiser, in
     which case, the fair market value shall be equal to the average of the
     determinations by each such Appraiser; and provided, further that all
     determinations of the Per Share Market Value shall be appropriately
     adjusted for any stock dividends, stock splits or other similar
     transactions during such period.

          "Person" means a corporation, an association, a partnership,
     organization, a business, an individual, a government or political
     subdivision thereof or a governmental agency.

          "Purchase Agreement" means the Convertible Preferred Stock Purchase
     Agreement, dated as of the Original Issue Date, among the Company and the
     original Holder of the Preferred Stock.

          "Registration Rights Agreement" means the Registration Rights
     Agreement, dated as of the Original Issue Date, by and among the Company
     and the original Holder of the Preferred Stock.



                                      -12-


<PAGE>



          "Reset Price" means the average of Per Share Market Value for the 30
     consecutive Trading Days immediately preceding the 120th day after the
     Original Issue Date.

          "Securities Act" means the Securities Act of 1933, as amended.

          "Trading Day" means (a) a day on which the Common Stock is traded on
     the Nasdaq National Market or Nasdaq SmallCap Market or other stock
     exchange or market on which the Common Stock has been listed, or (b) if the
     Common Stock is not listed on the Nasdaq SmallCap Market or any stock
     exchange or market, a day on which the Common Stock is traded in the
     over-the-counter market, as reported by the OTC Bulletin Board, or (c) if
     the Common Stock is not quoted on the OTC Bulletin Board, a day on which
     the Common Stock is quoted in the over-the-counter market as reported by
     the National Quotation Bureau Incorporated (or any similar organization or
     agency succeeding its functions of reporting prices); provided, however,
     that in the event that the Common Stock is not listed or quoted as set
     forth in (a), (b) and (c) hereof, then Trading Day shall mean any day
     except Saturday, Sunday and any day which shall be a legal holiday or a day
     on which banking institutions in the State of New York are authorized or
     required by law or other government action to close.

          "Underlying Securities Registration Statement" means a registration
     statement under the Securities Act prepared by the Company and filed with
     the Commission in accordance with the Registration Rights Agreement,
     covering the resale of the Underlying Shares and naming the Holders as
     "selling stockholders" thereunder.

          "Underlying Shares" means shares of Common Stock into which the
     Preferred Stock are convertible in accordance with the terms hereof.

                  [Remainder of page left blank intentionally]


















                                      -13-


<PAGE>




                  IN WITNESS WHEREOF, the Company has caused this certificate to
be signed on its behalf by Edward J. Quilty, its Chairman and Chief Executive
Officer, this 27th day of April, 1998.

                               The Company:
                               PALATIN TECHNOLOGIES, INC.




                               By:      /s/Edward J. Quilty
                                        -------------------------
                               Name:    Edward J. Quilty
                               Title:   Chairman and Chief Executive Officer


ATTEST


  /s/ Stephen T. Wills
- ---------------------------
Stephen Wills
Assistant Secretary



<PAGE>



                                    EXHIBIT A

                              NOTICE OF CONVERSION

(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)

The undersigned hereby elects to convert the number of shares of Series B
Convertible Preferred Stock indicated below, into shares of Common Stock, $.01
par value (the "Common Stock"), of Palatin Technologies, Inc. (the "Company")
according to the conditions hereof, as of the date written below. If shares are
to be issued in the name of a person other than undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as reasonably requested by the Company
in accordance therewith. No fee will be charged to the Holder for any
conversion, except for such transfer taxes, if any.

Conversion calculations:
                             -------------------------------------------------
                             Date to Effect Conversion


                             -------------------------------------------------
                             Number of shares of Preferred Stock to be Converted


                             -------------------------------------------------
                             Number of shares of Common Stock to be Issued


                             -------------------------------------------------
                             Applicable Conversion Price


                             -------------------------------------------------
                             Signature


                             -------------------------------------------------
                             Name


                             -------------------------------------------------
                             Address



<PAGE>



                                [GRAPHIC OMITTED]

                           CERTIFICATE OF DESIGNATIONS
                                       of
                      SERIES C CONVERTIBLE PREFERRED STOCK
                                       of
                           PALATIN TECHNOLOGIES, INC.

                         Pursuant to Section 151 of the
                General Corporation Law of the State of Delaware

         PALATIN TECHNOLOGIES, INC., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), does hereby certify that,
pursuant to the authority conferred on the Board of Directors of the Corporation
by the certificate of incorporation, as amended to date (the "Certificate of
Incorporation"), of the Corporation and in accordance with Section 151 of the
General Corporation Law of the State of Delaware, the Board of Directors of the
Corporation adopted the following resolution establishing a series of 1,400,000
shares of Preferred Stock of the Corporation designated as "Series C Convertible
Preferred Stock":

                  RESOLVED, that pursuant to the authority conferred on the
         Board of Directors of this Corporation by the Certificate of
         Incorporation, a series of Preferred Stock, par value $.01 per share,
         of the Corporation is hereby established and created, and that the
         designation and number of shares thereof and the voting and other
         powers, preferences and relative, participating, optional or other
         rights of the shares of such series and the qualifications, limitations
         and restrictions thereof are as follows:

                                       Series C Convertible Preferred Stock

     Section 1. Designation, Amount and Par Value. The series of preferred stock
shall be designated as Series C Convertible Preferred Stock (the "Preferred
Stock") and the number of shares so designated shall be 1,400,000. Each share of
Preferred Stock shall have a par value of $.01 per share and shall have a stated
value of $18.57 per share (the "Stated Value").

     Section 2. Dividends and Certain Distributions.

     (a) The holders (the "Holders" and, individually, a "Holder") of Preferred
Stock shall not be entitled to receive periodic dividends on the Preferred
Stock.

     (b) So long as any Preferred Stock shall remain outstanding, neither the
Corporation nor any subsidiary thereof shall directly or indirectly pay or
declare any dividend or make any distribution (other than a dividend or
distribution described in Section 5) upon, nor shall any distribution be made in
respect of, any Junior Securities (as defined in Section 6).

     Section 3. Voting Rights. Except as otherwise required by law, the
Preferred Stock shall have no voting rights.




<PAGE>



     Section 4. Liquidation. Upon any liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary (a "Liquidation"), the Holder
shall be entitled to receive out of the assets of the Corporation, whether such
assets are capital or surplus, for each share of Preferred Stock, an amount
equal to the Stated Value before any distribution or payment shall be made to
the Holders of any Junior Securities, and if the assets of the Corporation shall
be insufficient to pay in full such amounts, then the entire assets to be
distributed to the Holder of the Preferred Stock shall be distributed to such
Holder of the Preferred Stock ratably in accordance with the respective amounts
that would be payable on such shares if all amounts payable thereon were paid in
full. Any Change in Control shall not be deemed to be a Liquidation, except to
the extent it is a Change of Control within the meaning of clause (e) of the
definition of Change of Control set forth in Section 6.

     Section 5. Conversion.

     (a) On or after August 15, 2004, or upon a Change in Control with respect
to the Corporation, and in either such case effective upon written notice,
described below, by the Holder to the Corporation, the Holder may convert some
or all of the shares of Preferred Stock, including any shares of Preferred Stock
obtained by the Holder pursuant to Section 5(c), into fully paid and
nonassessable shares of the Common Stock on a one-share-for-one-share basis,
without payment of funds or other consideration of any kind. The Holder shall
effect conversions by surrendering to the Corporation the certificate or
certificates representing the shares of Preferred Stock to be converted,
together with a completed and duly executed conversion notice in the form
attached hereto as Exhibit A (a "Conversion Notice"). Each Conversion Notice
shall specify the number of shares of Preferred Stock to be converted and the
date on which such conversion is to be effected, which date may not be prior to
the date the Holder delivers such Conversion Notice by facsimile to the
Corporation (the "Conversion Date"). If no Conversion Date is specified in a
Conversion Notice, the Conversion Date shall be the date that the Conversion
Notice is deemed delivered pursuant to Section 5(f). Subject to Section 5(b)
hereof, each Conversion Notice, once given, shall be irrevocable. If a Holder is
converting less than all the shares of the Preferred Stock represented by the
certificate or certificates tendered by such Holder, or if a conversion
hereunder cannot be effected in full for any reason, the Corporation shall
promptly deliver to such Holder (in the manner and within the time set forth in
Section 5(b)) a certificate for such number of shares as have not been
converted.

     (b) Not later than 10 Business Days after any Conversion Date, the
Corporation will use its best efforts to deliver to the Holder (i) a certificate
or certificates representing the number of shares of Common Stock being acquired
upon the conversion of shares of Preferred Stock and (ii) one or more
certificates representing the number of shares of Preferred Stock surrendered to
the Company for conversion that were not requested to be converted; provided,
however, that the Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of any shares of
Preferred Stock until certificates evidencing such shares of Preferred Stock are
either delivered for conversion to the Corporation or any transfer agent for the
Preferred Stock or Common Stock, or the Holder of such Preferred Stock notifies
the Corporation that such certificates have been lost, stolen or destroyed and
provides a bond (or other adequate security) satisfactory to the Corporation to
indemnify the Corporation from any loss that may be incurred by it in connection
therewith.



                                        2


<PAGE>



     (c) So long as the Purchase Agreement is in effect with respect to any
portion of the Territory (as defined in the Purchase Agreement), in the event at
any time a Dilutive Event (as defined in Section 6) results in a decrease in the
percentage of outstanding Common Stock then owned by the Holder (assuming full
conversion of the Preferred Stock) (the "Holder Ownership"), then the Holder
shall have the right, exercisable as provided below, (i) if, at the time of the
occurrence of the Dilutive Event, the Preferred Stock is not then convertible,
to receive that number of shares of Preferred Stock which, when converted along
with all other shares of Preferred Stock and combined with all other shares of
Common Stock then owned by the Holder, would be required to preserve the Holder
Ownership at the same percentage immediately before and after the Dilutive Event
or (ii) if, at the time of the occurrence of the Dilutive Event, the Preferred
Stock is then convertible, to receive that number of shares of Common Stock
which, when combined with all other shares of Common Stock owned by the Holder
(including Common Stock underlying any Preferred Stock then owned by the
Holder), would be required to preserve the Holder Ownership at the same
percentage immediately before and after the Dilutive Event. The foregoing right
shall be exercisable by payment to the Corporation of the purchase price and
delivery to the Corporation of the Purchase Notice (defined below). The purchase
price per share of Preferred Stock or Common Stock, as the case may be, to be
paid by the Holder upon exercise of the foregoing right shall be equal to the
consideration per share (if any) paid or to be paid by the person to whom
securities are being issued in connection with the Dilutive Event. If the
consideration paid by any such third party for such securities is other than
cash, such consideration shall be presumed to be cash equal to the fair market
value of such consideration as determined by an independent party acceptable to
both the Holder and the Corporation. The cost of making such determination, if
any, shall be borne by the Corporation. The Corporation shall provide written
notice to the Holder of a Dilutive Event within five (5) days after the issuance
of any securities giving rise to such Dilutive Event, and the Holder shall make
its election to purchase all or any portion of the securities which it is
entitled to purchase or receive in accordance herewith to preserve its
percentage interest in the Common Stock by written notice to the Corporation
(the "Purchase Notice") no more than thirty (30) days following its receipt of
the Corporation's written notice of such Dilutive Event. Upon the Holder's
failure timely to return the Purchase Notice to the Corporation, the Holder
shall be deemed to have waived its right to purchase or receive any additional
securities of the Corporation on such occasion. Upon the Holder's timely return
to the Corporation of the Purchase Notice, the Holder shall pay to the
Corporation the purchase price (if any) for the securities it so elects to
purchase or receive within thirty (30) days subsequent to its notice of election
to purchase or receive additional securities. Any failure by the Holder on any
occasion to purchase or receive all or some of the securities which it is
entitled to purchase or receive pursuant to this Section 5(c) as a consequence
of the occurrence of a single Dilutive Event shall not affect the right of the
Holder, on the subsequent occurrence of any different Dilutive Event, to
purchase or receive all or any portion of the securities which it is then
entitled to purchase or receive as a consequence of the operation of this
Section 5(c).

     (d) In determining the amount of consideration paid to the Corporation for
the issuance of Common Stock upon the exercise or conversion of exercisable or
convertible securities, all amounts paid to the Corporation in consideration for
the issuance of the convertible or exercisable securities shall be included as
part of the consideration to be paid by the Holder pursuant to this Section.



                                        3


<PAGE>



     (e) The provisions of the foregoing Section 5(c) shall not apply with
respect to the issuance of Common Stock in connection with, or upon the exercise
or conversion of securities issued in connection with, the following
transactions:

          (i) exercise of rights or options granted or which may be granted
     under a stock option or other plan for the benefit of employees, directors
     and/or consultants;

          (ii) exercise of rights, warrants or options outstanding on the date
     hereof;

          (iii) conversion of any shares of outstanding Preferred Stock, or any
     additional shares of Preferred Stock issued pursuant to Section 5(c)
     hereof;

          (iv) after such time as the Holder first becomes eligible to convert
     any of the Preferred Stock in accordance with Section 5(c) above, upon the
     issuance and sale of any shares of Common Stock, including the issuance of
     Common Stock upon exercise of convertible or exercisable securities, sold
     in a firm commitment underwritten public offering, including, without
     limitation, shares sold upon the exercise of any overallotment option
     granted to the underwriters in connection with such offering; and

          (v) issuance of Common Stock pursuant to antidilution or price
     protection provisions contained in existing employment agreements and the
     issuance of Common Stock pursuant to antidilution provisions described in
     the certificate of designations with respect the Corporation's Series A
     Convertible Preferred Stock.

     (f) Any notice or other communication or delivery required or permitted to
be provided hereunder shall be in writing and shall be deemed to have been
received on the earliest of (i) the date of transmission or hand delivery, if
such notice or communication is delivered to the address or to the facsimile
telephone number of the addressee prior to 6:00 p.m. (Eastern Standard or
Daylight time) on a Business Day, (ii) the Business Day after the date of
transmission or hand delivery, if such notice or communication is delivered to
the address or to the facsimile telephone number of the addressee later than
6:00 p.m. (Eastern Standard or Daylight time) on any date and earlier than 11:59
p.m. (Eastern Standard or Daylight time) on such date, (iii) the Business Day
following the date of sending, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.

     Section 6. Definitions. For the purposes hereof, the following terms shall
have the following meanings:

          "Business Day" means any day except Saturday, Sunday and any day which
     shall be in New York, New York a day on which banking institutions are
     closed.

          "Change in Control" means the occurrence, with respect to the
     Corporation, of any one of the following events:

          (a) any "person" as such term is defined in Section 3(a)(9) of the
          Exchange Act (and as used in Sections 13(d)(3) and 14(d)(2) of the
          Exchange Act) is or becomes a



                                        4


<PAGE>



          "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
          directly or indirectly, of securities of the Corporation representing
          greater than fifty percent (50%) of the combined voting power of the
          Corporation's then outstanding securities eligible to vote for the
          election of its board of directors; provided, however, that the event
          described in this clause (a) shall not be deemed to be a change in
          control by virtue of any of the following acquisitions: (i) by the
          Corporation or any wholly owned subsidiary of the Corporation, (ii) by
          any employee benefit plan sponsored or maintained by the Corporation
          or any subsidiary of the Corporation, (iii) by any underwriter
          temporarily holding securities pursuant to an offering of such
          securities, or (iv) except as provided in subsection (c) below, in
          which voting securities of the Corporation are acquired from the
          Corporation, if a resolution providing expressly that the acquisition
          pursuant to this clause (iv) does not constitute a change in control
          is approved by a vote of at least a majority of the directors who are
          directors of the Corporation on and as of the date hereof;

          (b) individuals who, on the date hereof, constitute the board of
          directors of the Corporation cease for any reason to constitute at
          least a majority thereof, provided that any person becoming a director
          subsequent to the date hereof, whose election, or nomination for
          election, by the Corporation's stockholders was approved by a vote of
          at least a majority of the directors comprising the current board of
          directors (either by a specific vote or by approval of the proxy
          statement of the Corporation in which such person is named as a
          nominee for director, without objection to such nomination) shall be,
          for purposes of this subsection (b), considered as though such person
          were a member of the current board of directors; provided, however,
          that no individual initially elected or nominated as a director of the
          Corporation as a result of an actual or threatened election contest
          with respect to directors or any other actual or threatened
          solicitation of proxies or consents by or on behalf of any person
          other than the board of directors shall be deemed to be a member of
          the current board of directors;

          (c) a merger, consolidation, share exchange or similar form of
          corporate reorganization of the Corporation requiring the approval of
          the Corporation's stockholders (whether for such transaction or the
          issuance of securities in the transaction or otherwise); provided,
          however, that a "Change in Control" shall not be deemed to occur upon
          a merger, consolidation, share exchange or similar form of corporate
          reorganization of the Corporation, whether or not stockholder approval
          is required, so long as (i) the board of directors of any entity
          surviving or resulting from such reorganization contains at least
          fifty percent (50%) of the directors who were members of the board of
          directors of the Corporation immediately prior to such reorganization
          and (ii) the Chief Executive Officer of any such surviving entity is
          the same person as the Chief Executive Officer of the Corporation
          immediately prior to such reorganization;

          (d) the direct or indirect sale or other disposition of all,
          substantially all or any substantial parts of the assets or lines of
          business of the Corporation, whether or not approval of any such
          transaction by stockholders is required; provided, however, that the
          Corporation shall be able to sell or otherwise dispose of non-LeuTech
          (as defined in the Purchase Agreement) assets or lines of business in
          a transaction not otherwise qualifying as a "Change in Control" under
          subsections (a), (b) and (c) set forth immediately above, whether or
          not approval of such transaction by stockholders is required, and such
          sale or other disposition shall not constitute a "Change in Control";
          or



                                        5


<PAGE>



          (e) the stockholders of the Corporation approve a plan of complete
          liquidation or dissolution of the Corporation.

          "Commission" means the Securities and Exchange Commission.

          "Common Stock" means the Corporation's voting common stock, $.01 par
     value.

          "Dilutive Event" shall mean (i) the issuance and sale by the
     Corporation of any shares of Common Stock (including the issuance of Common
     Stock upon exercise or conversion of securities exercisable for or
     convertible into Common Stock) or (ii) the issuance by the Corporation of
     any Common Stock or other securities in connection with any stock split,
     stock dividend or other recapitalization.

          "Exchange Act" means the Securities Exchange Act of 1934, as amended.

          "Junior Securities" means the Common Stock and all other equity
     securities of the Corporation, other than the Corporation's Series A
     Convertible Preferred Stock and Series B Convertible Preferred Stock (which
     are senior to the Preferred Stock) or any other security that the Holder
     consents in writing to be pari passu with the Preferred Stock.

          "Person" means a corporation, an association, a partnership,
     organization, a business, an individual, a government or political
     subdivision thereof or a governmental agency.

          "Purchase Agreement" means the Strategic Collaboration Agreement,
     dated as of the date hereof, among the Corporation and the original Holder
     of the Preferred Stock.

          "Securities Act" means the Securities Act of 1933, as amended.

                  [Remainder of page left blank intentionally]

































                                        6


<PAGE>



         IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed on its behalf by Edward J. Quilty, its Chairman and Chief Executive
Officer, this 17th day of August, 1999.

                             The Corporation:

                             PALATIN TECHNOLOGIES, INC.





                             By:           /s/ Edward J. Quilty
                                 ----------------------------------------------
                             Name:  Edward J. Quilty
                             Title:  Chairman and Chief Executive Officer










<PAGE>


                                    EXHIBIT A

                              NOTICE OF CONVERSION

(To be Executed by the Holder in order to
Convert shares of Preferred Stock)

The undersigned hereby elects to convert the number of shares of Series C
Convertible Preferred Stock indicated below, into shares of voting Common Stock,
$.01 par value (the "Common Stock"), of Palatin Technologies, Inc. (the
"Corporation") according to the conditions of the Certificate of Designations,
as of the date written below. If shares are to be issued in the name of a person
other than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Corporation in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.

Conversion calculations:

                            ---------------------------------------------------
                            Date to Effect Conversion


                            ---------------------------------------------------
                            Number of shares of Preferred Stock to be Converted


                            ---------------------------------------------------
                            Number of shares of Common Stock to be Issued


                            ---------------------------------------------------
                            Signature


                            ---------------------------------------------------
                            Name


                            ---------------------------------------------------
                            Address


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>EX. 10.22  FORM OF WARRANT EXPIRING MARCH 15, 2005
<TEXT>

                           FORM OF WARRANT CERTIFICATE

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.


                                _________Warrants


                           PALATIN TECHNOLOGIES, INC.

                    COMMON STOCK PURCHASE WARRANT CERTIFICATE

                   THE WARRANTS EVIDENCED BY THIS CERTIFICATE
                                       ARE NOT EXERCISABLE AFTER 5:00 P.M.,
                             NEW YORK CITY TIME, ON
                                ___________, 2005


THIS CERTIFIES THAT ________________________ or registered assigns is the
registered holder (the "Registered Holder") of the number of Warrants set forth
above, each of which represents the right to purchase one fully paid and
non-assessable share of Common Stock, par value $0.01 per share (the "Common
Stock"), of Palatin Technologies, Inc., a Delaware corporation (the "Company"),
at the initial exercise price of $0.01 per Warrant (the "Exercise Price") at any
time prior to the Expiration Date (as hereinafter defined), by surrendering this
Warrant Certificate, with the Form of Election to Purchase duly executed at the
principal office of the Company and by paying in full the Exercise Price, plus
transfer taxes, if any. Payment of the Exercise Price shall be made in United
States currency, by certified check or money order payable to the order of the
Company. The Warrants have been issued pursuant to a private placement of
Warrants. With respect to the Common Stock issuable on exercise of Warrants, the
Registered Holder has the registration rights set forth in the Appendix to this
Warrant certificate. By exercising a Warrant, the Registered Holder agrees to be
bound by the terms of the registration rights set forth in the Appendix.


                              EXERCISE OF WARRANTS

         Issuance of Common Stock. As soon as practicable after the date of
exercise of any Warrants, the Company shall issue, or cause the transfer agent
for the Common Stock, if any, to issue a certificate or certificates for the
number of full shares of Common Stock to which such Registered Holder is
entitled, registered in accordance with the instructions set forth in the Form
of Election to Purchase. All shares of Common Stock issued upon the exercise of
any Warrants shall be validly authorized and issued, fully paid and
non-assessable, and free from all taxes, liens and charges created by the
Company in respect of the issue thereof. Each person in whose name any such
certificate for shares of Common Stock is issued shall for all purposes be
deemed to have become the holder of record of the Common Stock represented
thereby on the date of exercise of the Warrants resulting in the issuance of
such shares, irrespective of the date of issuance or delivery of such
certificate for shares of Common Stock.

         Certificates for Unexercised Warrants. In the event that less than all
of the Warrants represented by a Warrant Certificate are exercised, the Company
shall execute and mail, by first-class mail, within 30 days of the date of
exercise, to the Registered Holder of such Warrant Certificate, or such other
person as shall be designated in the Form of Election to Purchase, a new Warrant
Certificate representing the number of full Warrants not exercised. In no event
shall a fraction of a Warrant be exercised, and the Company shall distribute no
Warrant Certificates representing fractions of Warrants. Final fractions of
shares shall be treated as provided for herein.

         Reservation of Shares. The Company shall at all times reserve and keep
available for issuance upon the exercise of Warrants a number of its authorized
but unissued shares of Common Stock that will be sufficient to permit the
exercise in full of all outstanding Warrants.


                        ADJUSTMENTS AND NOTICE PROVISIONS

         Adjustment of Exercise Price. Subject to the provisions hereof, the
Exercise Price in effect from time to time shall be subject to adjustment, as
follows:



<PAGE>


         (a) In case the Company shall at any time after the date hereof (i)
declare a dividend on the outstanding Common Stock payable in shares of its
capital stock, (ii) subdivide the outstanding Common Stock, (iii) combine the
outstanding Common Stock into a smaller number of shares, or (iv) issue any
shares of its capital stock by reclassification of the Common Stock (including
any such reclassification in connection with a consolidation or merger in which
the Company is the continuing corporation), then, in each case, the Exercise
Price, and the number of shares of Common Stock issuable upon exercise of the
Warrants in effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination, or reclassification, shall be
proportionately adjusted so that the Holders of the Warrants after such time
shall be entitled to receive the aggregate number and kind of shares which, if
such Warrants had been exercised immediately prior to such time, such Registered
Holders would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination or reclassification. Such
adjustment shall be made successively whenever any event listed above shall
occur.



<PAGE>


         (b) In case the Company shall issue or fix a record date for the
issuance to all holders of Common Stock of rights, options, or warrants to
subscribe for or purchase Common Stock (or securities convertible into or
exchangeable for Common Stock) at a price per share (or having a conversion or
exchange price per share, if a security convertible into or exchangeable for
Common Stock) less than the Current Market Price per share of Common Stock (as
determined below) on such record date, then, in each case, the Exercise Price
shall be adjusted by multiplying the Exercise Price in effect immediately prior
to such record date by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding on such record date plus the number of shares
of Common Stock which the aggregate offering price of the total number of shares
of Common Stock so to be offered (or the aggregate initial conversion or
exchange price of the convertible or exchangeable securities so to be offered)
would purchase at such Current Market Price and the denominator of which shall
be the number of shares of Common Stock outstanding on such record date plus the
number of additional shares of Common Stock to be offered for subscription or
purchase (or into which the convertible or exchangeable securities so to be
offered are initially convertible or exchangeable). Such adjustment shall become
effective at the close of business on such record date; provided, however, that,
to the extent the shares of Common Stock (or securities convertible into or
exchangeable for shares of Common Stock) are not delivered, the Exercise Price
shall be readjusted after the expiration of such rights, options, or warrants
(but only with respect to Warrants exercised after such expiration), to the
Exercise Price which would then be in effect had the adjustments made upon the
issuance of such rights, options, or warrants been made upon the basis of
delivery of only the number of shares of Common Stock (or securities convertible
into or exchangeable for shares of Common Stock) actually issued.
Notwithstanding anything to the contrary contained herein, no adjustment shall
be made to the Exercise Price until any condition to the vesting of such rights,
options or warrants shall be fulfilled or satisfied (and then only with respect
to the portion thereof which shall have vested). In case any subscription price
may be paid in a consideration part or all of which shall be in a form other
than cash, the value of such consideration shall be as determined in good faith
by the board of directors of the Company, whose determination shall be
conclusive absent manifest error. Shares of Common Stock owned by or held for
the account of the Company or any majority-owned subsidiary shall not be deemed
outstanding for the purpose of any such computation.

         (c) In case the Company shall distribute to all holders of Common Stock
(including any such distribution made to the stockholders of the Company in
connection with a consolidation or merger in which the Company is the continuing
corporation) evidences of its indebtedness, cash (other than any cash dividend
which, together with any cash dividends paid within the twelve (12) months prior
to the record date for such distribution, does not exceed 5% of the Current
Market Price at the record date for such distribution) or assets (other than
distributions and dividends payable in shares of Common Stock), or rights,
options, or warrants to subscribe for or purchase Common Stock, or securities
convertible into or exchangeable for shares of Common Stock (excluding those
with respect to the issuance of which an adjustment of the Exercise Price is
provided pursuant to the foregoing paragraph), then, in each case, the Exercise
Price shall be adjusted by multiplying the Exercise Price in effect immediately
prior to the record date for the determination of stockholders entitled to
receive such distribution by a fraction, the numerator of which shall be the
Current Market Price per share of Common Stock on such record date, less the
fair market value (as determined in good faith by the board of directors of the
Company, whose determination shall be conclusive absent manifest error) of the
portion of the evidences of indebtedness or assets so to be distributed, or of
such rights, options, or warrants or convertible or exchangeable securities, or
the amount of such cash, applicable to one share, and the denominator of which
shall be such Current Market Price per share of Common Stock. Such adjustment
shall become effective at the close of business on such record date.



<PAGE>


         Current Market Price. For the purpose of any computation under this
Warrant, the Current Market Price per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices for the fifteen (15)
consecutive trading days immediately preceding the date in question. The closing
price for each day shall be (a) the last reported sales price regular way or, in
case no such reported sale takes place on such day, the closing bid price
regular way, in either case on the principal national securities exchange or
market system (including, for purposes hereof, the American Stock Exchange
("AMEX")) on which the Common Stock, is listed or admitted to trading, (b) if
the Common Stock, is not listed or admitted to trading on any national
securities exchange or market system, the highest reported bid price for the
Common Stock, as furnished by the National Association of Securities Dealers,
Inc. through AMEX or a similar organization if AMEX is no longer reporting such
information, or (c) if on any such date the Common Stock is not listed or
admitted to trading on any national securities exchange and is not quoted by
AMEX or any similar organization, as determined by reference to the "pink
sheets" published by the National Quotation Bureau or, if not so published, by
such other method of determining the market value of a share of Common Stock, as
the board of directors of the Company shall in good faith from time to time deem
to be fair, whose determination shall be conclusive absent manifest error.

         No Adjustments to Exercise Price. No adjustment in the Exercise Price
shall be required if such adjustment is less than $.05; provided, however, that
any adjustments which by reason of this Warrant are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Warrant shall be made to the nearest cent or to the
nearest one thousandth of a share, as the case may be.

         Deferral of Adjustments to Exercise Price. In any case in which this
Warrant shall require that an adjustment in the Exercise Price be made effective
as of a record date for a specified event, the Company may elect to defer, until
the occurrence of such event, issuing to the Registered Holders of the Warrants,
if any Registered Holder has exercised a Warrant after such record date, the
shares of Common Stock, if any, issuable upon such exercise over and above the
shares of Common Stock, if any, issuable upon such exercise on the basis of the
Exercise Price in effect prior to such adjustment; provided, however, that the
Company shall deliver to such exercising Registered Holder a due bill or other
appropriate instrument evidencing such Registered Holder's right to receive such
additional shares upon the occurrence of the event requiring such adjustment.

         Adjustment to Number of Shares. Upon each adjustment of the Exercise
Price as a result of the calculations made above the Warrants shall thereafter
evidence the right to purchase, at the adjusted Exercise Price, that number of
shares (calculated to the nearest thousandth) obtained by dividing (A) the
product obtained by multiplying the number of shares purchasable upon exercise
of the Warrants prior to adjustment of the number of shares by the Exercise
Price in effect prior to adjustment of the Exercise Price by (B) the Exercise
Price in effect after such adjustment of the Exercise Price.



<PAGE>


         Reorganization. In case of any capital reorganization, other than in
the cases referred to above, or the consolidation or merger of the Company with
or into another corporation (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification of the outstanding shares of Common Stock or the conversion of
such outstanding shares of Common Stock into shares of other stock or other
securities or property), or the sale of the property of the Company as an
entirety or substantially as an entirety (collectively such actions being
hereinafter referred to as "Reorganizations"), there shall thereafter be
deliverable upon exercise of any Warrant (in lieu of the number of shares of
Common Stock theretofore deliverable) the number of shares of stock or other
securities or property to which a Registered Holder of the number of shares of
Common Stock which would otherwise have been deliverable upon the exercise of
such Warrant would have been entitled upon such Reorganization if such Warrant
had been exercised in full immediately prior to such Reorganization. In case of
any Reorganization, appropriate adjustment, as determined in good faith by the
Board of Directors of the Company, shall be made in the application of the
provisions herein set forth with respect to the rights and interests of
Registered Holders so that the provisions set forth herein shall thereafter be
applicable, as nearly as practicable, in relation to any shares or other
property thereafter deliverable upon exercise of Warrants. The Company shall not
effect any such Reorganization, unless upon or prior to the consummation thereof
the successor corporation, or if the Company shall be the surviving corporation
in any such Reorganization and is not the issuer of the shares of stock or other
securities or property to be delivered to holders of shares of the Common Stock
outstanding at the effective time thereof, then such issuer, shall assume by
written instrument the obligation to deliver to the Registered Holder of any
Warrant Certificate such shares of stock, securities, cash or other property as
such holder shall be entitled to purchase in accordance with the foregoing
provisions. Notwithstanding anything to the contrary contained herein, in the
event of sale or conveyance or other transfer of all or substantially all of the
assets of the Company as a part of a plan for liquidation of the Company, all
rights to exercise any Warrant shall terminate thirty (30) days after the
Company gives written notice to each Registered Holder of a Warrant Certificate
that such sale or conveyance of other transfer has been consummated.

         Reclassifications. (a) In case of any reclassification or change of the
shares of Common Stock issuable upon exercise of the Warrants (other than a
change in par value or from no par value to a specified par value, or as a
result of a subdivision or combination, but including any change in the shares
into two or more classes or series of shares), the Registered Holders of the
Warrants shall have the right thereafter to receive upon exercise of the
Warrants solely the kind and amount of shares of stock and other securities,
property, cash, or any combination thereof receivable upon such reclassification
or change by a Registered Holder of the number of shares of Common Stock for
which the Warrants might have been exercised immediately prior to such
reclassification or change. Thereafter, appropriate provision shall be as nearly
equivalent as practicable to the adjustments in this Warrant. The above
provisions of this paragraph shall similarly apply to successive
reclassifications and changes of shares of Common Stock.



<PAGE>


         (b) Notwithstanding anything to the contrary herein contained, in the
event of a transaction contemplated by the prior paragraph in which the
surviving, continuing, successor, or purchasing corporation demands that all
outstanding Warrants be extinguished prior to the closing date of the
contemplated transaction, the Company shall give prior notice (the "Merger
Notice") thereof to the Registered Holders advising them of such transaction.
The Registered Holders shall have ten (10) days after the date of the Merger
Notice to elect to (i) exercise the Warrants in the manner provided herein or
(ii) receive from the surviving, continuing, successor, or purchasing
corporation, with respect to outstanding Warrants, the same consideration
receivable by a Registered Holder of the number of shares of Common Stock for
which the Warrants might have been exercised immediately prior to such
consolidation, merger, sale, or purchase reduced by such amount of the
consideration as has a market value equal to the exercise price of the Warrants,
as determined by the Board of Directors of the Company, whose determination
shall be conclusive absent manifest error. If any Registered Holder fails to
timely notify the Company of its election, the Holder shall be deemed for all
purposes to have elected the option set forth in (ii) above. Any amounts
receivable by a Holder who has elected the option set forth in (ii) above shall
be payable at the same time as amounts payable to stockholders in connection
with any such transaction.

         Verification of Computations. Whenever the Exercise Price is adjusted
as provided in this Warrant, the Company will promptly obtain a certificate of
the chief financial officer of the Company setting forth the Exercise Price as
so adjusted and a brief statement of the facts accounting for such adjustment,
and will make available a brief summary thereof to the Registered Holders of the
Warrant Certificates, at their addresses listed on the register maintained for
the purpose by the Company.

         Exercise Price Not Less Than Par Value. In no event shall the Exercise
Price be adjusted below the par value per share of the Common Stock.

          Notice of Certain Actions. In case at any time the Company shall
          propose:

                  (a) to pay any dividend or make any distribution on shares of
         Common Stock in shares of Common Stock or make any other distribution
         (other than regularly scheduled cash dividends which are not in a
         greater amount per share than the most recent such cash dividend) to
         all holders of Common Stock; or

                  (b) to issue any rights, warrants, or other securities to all
         holders of Common Stock entitling them to purchase any additional
         shares of Common Stock or any other rights, warrants, or other
         securities; or

               (c) to effect any reclassification or change of outstanding
          shares of Common Stock, or any consolidation, merger, sale, lease, or
          conveyance of property, described above; or

               (d) to effect any liquidation, dissolution, or winding-up of the
          Company;

then, in each such case, the Company shall cause notice of such proposed action
to be mailed to each Registered Holder of a Warrant Certificate. Such notice
shall be mailed, at least ten (10) days prior to the record date for determining
holders of the Common Stock for purposes of receiving such payment or offer or
at least ten (10) days prior to the earlier of the date upon which such action
is to take place or any record date to determine holders of Common Stock
entitled to receive such securities or other property, as the case may be.



<PAGE>


         Notice of Adjustments. Whenever any adjustment is made pursuant to this
Warrant, the Company shall cause notice of such adjustment to be mailed to each
Registered Holder of a Warrant Certificate within fifteen (15) days thereafter,
such notice to include in reasonable detail (i) the events precipitating the
adjustment, (ii) the computation of any adjustments, and (iii) the Exercise
Price, the number of shares or the securities or other property purchasable upon
exercise of each Warrant after giving effect to such adjustment.

         Warrant Certificate Amendments. Irrespective of any adjustments
pursuant to this Warrant, Warrant Certificates theretofore or thereafter issued
need not be amended or replaced, but certificates thereafter issued shall bear
an appropriate legend or other notice of any adjustments.

         Fractional Shares. The Company shall not be required upon the exercise
of any Warrant to issue fractional shares of Common Stock which may result from
adjustments in accordance with this Warrant to the Exercise Price or number of
shares of Common Stock purchasable under each Warrant. If more than one Warrant
is exercised at one time by the same Registered Holder, the number of full
shares of Common Stock which shall be deliverable shall be computed based on the
number of shares deliverable in exchange for the aggregate number of Warrants
exercised. With respect to any final fraction of a share called for upon the
exercise of any Warrant or Warrants, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to the same fraction of the
Current Market Price of a share of Common Stock calculated in accordance with
this Warrant.

         Adjustments Not Provided For. If any change to the capitalization of
the Company should occur with respect to which a favorable adjustment to the
rights and interests of the Registered Holders of the Warrants should be made,
and such adjustment is not otherwise provided for in this Warrant, such
appropriate adjustment should be made as determined in good faith by the Board
of Directors of the Company.

         No Warrant may be exercised after 5:00 P.M., New York City time, on the
expiration date (the "Expiration Date") which will be March 15, 2005. All
Warrants evidenced hereby shall thereafter become void.


                          OTHER PROVISIONS RELATING TO
                          RIGHTS OF REGISTERED HOLDERS
                            OF WARRANT CERTIFICATES

         Rights of Warrant Holders. No Warrant Certificate shall entitle the
registered holder thereof to any of the rights of a stockholder of the Company,
including, without limitation, the right to vote, to receive dividends and other
distributions, to receive any notice of, or to attend, meetings of stockholders
or any other proceedings of the Company.



<PAGE>


         Lost, Stolen, Mutilated or Destroyed Warrant Certificates. If any
Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company
in its discretion may execute and deliver, in exchange and substitution for and
upon cancellation of a mutilated Warrant Certificate, or in lieu of or in
substitution for a lost, stolen or destroyed Warrant Certificate, a new Warrant
Certificate for the number of Warrants represented by the Warrant Certificate so
mutilated, lost, stolen or destroyed but only upon receipt of evidence of such
loss, theft or destruction of such Warrant Certificate, and of the ownership
thereof, and indemnity, if requested, all satisfactory to the Company.
Applicants for such substitute Warrant Certificates shall also comply with such
other reasonable regulations and pay such other reasonable charges incidental
thereto as the Company may prescribe. Any such new Warrant Certificate shall
constitute an original contractual obligation of the Company, whether or not the
allegedly lost, stolen, mutilated or destroyed Warrant Certificate shall be at
any time enforceable by anyone.


                                 SPLIT UP, COMBINATION, EXCHANGE, TRANSFER,
                    AND CANCELLATION OF WARRANT CERTIFICATES

         Split Up, Combination, Exchange and Transfer of Warrant Certificates.
Prior to the latest time at which the Warrants may be exercised, subject to any
applicable laws, rules or regulations restricting transferability, Warrant
Certificates, subject to the provisions hereof, may be split up, combined or
exchanged for other Warrant Certificates representing a like aggregate number of
Warrants or may be transferred in whole or in part. Any holder desiring to split
up, combine or exchange a Warrant Certificate or Warrant Certificates shall make
such request in writing delivered to the Company at its principal office and
shall surrender the Warrant Certificate or Warrant Certificates so to be split
up, combined or exchanged at said office with the Form of Assignment. Upon any
such surrender for split up, combination, exchange or transfer, the Company
shall execute and deliver to the person entitled thereto a Warrant Certificate
or Warrant Certificates, as the case may be, as so requested in the Form of
Assignment. The Company may require the holder to pay a sum sufficient to cover
any tax or governmental charge that may be imposed in connection with any split
up, combination, exchange or transfer of Warrant Certificates prior to the
issuance of any new Warrant Certificate.

         Cancellation of Warrant Certificates. Any Warrant Certificate
surrendered upon the exercise of Warrants or for split up, combination, exchange
or transfer, or purchased or otherwise acquired by the Company, shall be
canceled and shall not be reissued by the Company; and, except as otherwise
provided herein in case of the exercise of less than all of the Warrants
evidenced by a Warrant Certificate or in case of a split up, combination,
exchange or transfer, no Warrant Certificate shall be issued hereunder in lieu
of such canceled Warrant Certificate. Any Warrant Certificate so canceled shall
be destroyed by the Company.

         Agreement of Warrant Certificate Holders. Every holder of a Warrant
Certificate by accepting the same consents and agrees with the Company and with
every other holder of a Warrant Certificate that:



<PAGE>


                  (a) transfer of the Warrant Certificates shall be registered
         on the books of the Company only if surrendered at the principal office
         of the Company, duly endorsed or accompanied by a proper instrument of
         transfer; and

                  (b) prior to due presentment for registration of transfer, the
         Company may deem and treat the person in whose name the Warrant
         Certificate is registered as the absolute owner thereof and of the
         Warrants evidenced thereby (notwithstanding any notations of ownership
         or writing on the Warrant Certificates made by anyone other than the
         Company) for all purposes whatsoever, and the Company shall not be
         affected by any notice to the contrary.


                                  OTHER MATTERS

               Governing Law. The laws of the State of New York shall govern
          this Warrant Certificate.


         IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed.

                              PALATIN TECHNOLOGIES, INC.


                              By:
                                 -----------------------------------------------
                                       Stephen T. Wills, Vice President and
                                       Chief Financial Officer




<PAGE>


                                     FORM OF
                              ELECTION TO PURCHASE

     The undersigned hereby irrevocably elects to exercise of the Warrants
represented by this Warrant Certificate and to purchase the shares of Common
Stock issuable upon the exercise of said Warrants, and requests that
certificates for such shares be issued and delivered as follows:

ISSUE
TO:

                                     (NAME)


                                        (ADDRESS, INCLUDING ZIP CODE)



                              (SOCIAL SECURITY OR OTHER TAX IDENTIFYING NUMBER)


DELIVER
TO:

                                     (NAME)

at

                                        (ADDRESS, INCLUDING ZIP CODE)

     If the number of Warrants hereby exercised is less than all the Warrants
represented by this Warrant Certificate, the undersigned requests that a new
Warrant Certificate representing the number of full Warrants not exercised be
issued and delivered as set forth below.



     In full payment of the purchase price with respect to the Warrants
exercised and transfer taxes, if any, the undersigned hereby tenders payment of
$ by certified check or money order payable in United States currency to the
order of the Company.


<PAGE>



Dated:
      -----------------------







(Insert Social Security or                  (Signature of registered
other identifying number                    holder)
of holder)



                                                     (Signature of registered
                                                     holder, if co-owned)


NOTE: Signature must conform in all respects to name of holder as specified on
the face of the Warrant Certificate.


<PAGE>


                                     FORM OF
                                   ASSIGNMENT

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto the
Assignee named below all of the rights of the undersigned represented by the
within Warrant Certificate, with respect to the number of Warrants set forth
below:

Name of Assignee                    Address          No. of Warrants






and does hereby irrevocably constitute and appoint _________________________
Attorney to make such transfer on the books of Palatin Technologies, Inc.
maintained for that purpose, with full power of substitution in the premises.

Dated:                    , 20     .
       -------------------    -----




(Insert Social Security or                  Signature
 other identifying number
 of holder)

(Signature must conform in all respects to name of holder as specified on the
face of the Warrant Certificate.)




<PAGE>


                                    APPENDIX

                               REGISTRATION RIGHTS

1. Registered Holder. The registration rights set forth below are solely for the
benefit of the Registered Holder as defined in the Common Stock purchase
Warrants of Palatin Technologies, Inc., a Delaware corporation (the "Company")
which expire on March 15, 2005 (the "Warrants"). Assignment of these
registration rights is limited as set forth in Section 4(b).

2. Registration Rights.


     2.1  Certain Definitions. Unless otherwise defined in this Appendix, all
          capitalized terms in this Appendix shall have the meanings defined in
          the Warrants. As used in this Appendix, the following terms shall have
          the following meanings:

                  (a)      "Commission" shall mean the Securities and Exchange
                           Commission or any other federal agency at the time
                           administering the Securities Act.

                  (b)      "Form S-1, Form SB-1, Form S-2, Form SB-2 and Form
                           S-3" shall mean Form S-1, Form SB-1, Form S-2, Form
                           SB-2 or Form S-3, respectively, promulgated by the
                           Commission or any substantially similar form then in
                           effect.

                  (c)      The terms "Register", "Registered" and "Registration"
                           refer to a registration effected by preparing and
                           filing a Registration Statement or Statements or
                           similar documents in compliance with the Securities
                           Act, and the declaration or ordering by the
                           Commission of the effectiveness of such Registration
                           Statement.

                  (d)      "Registrable Securities" shall mean the Warrant
                           Shares so long as such shares are ineligible for sale
                           under subparagraph (k) of Rule 144.

                  (e)      "Registration Expenses" shall mean all expenses
                           incurred by the Company in complying with this
                           Section 2, including, without limitation, all federal
                           and state registration, qualification and filing
                           fees, printing expenses, fees and disbursements of
                           counsel for the Company, accountant fees, blue sky
                           fees and expenses and, the expense of any special
                           audits incident to or required by any such
                           Registration.

                  (f)      "Registration Statement" shall mean Form S-1, Form
                           SB-1, Form S-2, Form SB-2 or Form S-3, whichever is
                           applicable, unless otherwise specified herein.

                    (g)  "Rule 144" shall mean Rule 144 promulgated by the
                         Commission pursuant to the Securities Act.

                    (h)  "Securities Act" shall mean the Securities Act of 1933,
                         as amended.


                  (i)      "Selling Expenses" shall mean all underwriting
                           discounts and selling commissions applicable to the
                           sale of Registrable Securities pursuant to this
                           Appendix.

                  (j)      "Selling Stockholder" shall mean a holder of
                           Registrable Securities who requests Registration
                           under Section 2.2 hereof.

                    (k)  "Warrant Shares" shall mean the shares of Common Stock
                         underlying the Warrants.


         2.2      Piggyback Registration

                    (a)  Until the time set forth in Section 2.2(g) hereof, each
                         time that the Company proposes to Register a public
                         offering of its Common Stock, other than (i) pursuant
                         to a Registration Statement on Form S-4 or Form S-8 or
                         similar or successor forms or (ii) on a Registration
                         Statement filed in connection with an exchange offer or
                         other offer of Common Stock solely to the then-existing
                         stockholders of the Company, the Company shall promptly
                         give written notice of such proposed Registration to
                         all Registered Holders, which shall offer such holders
                         the right to request inclusion of any Registrable
                         Securities in the proposed Registration.

                    (b)  Each Registered Holder shall have ten (10) days or such
                         longer period as shall be set forth in the notice from
                         the receipt of such notice to deliver to the Company a
                         written request specifying the number of shares of
                         Registrable Securities such holder intends to sell and
                         the holder's intended plan of disposition.

                    (c)  The Company shall have the exclusive right to select
                         all underwriters for any underwritten public offering
                         of securities of the Company, including all Warrant
                         Shares. In the event that the proposed Registration by
                         the Company is, in whole or in part, an underwritten
                         public offering of securities of the Company, any
                         request under Section 2.2(b) shall contain the holder's
                         agreement that the Registrable Securities will be
                         included in the underwriting on the same terms and
                         conditions as the shares of Common Stock, if any,
                         otherwise being sold through underwriters under such
                         Registration.

                    (d)  Upon receipt of a written request pursuant to Section
                         2.2(b), the Company shall promptly use its best efforts
                         to cause all such Registrable Securities to be
                         Registered, to the extent required to permit sale or
                         disposition as set forth in the written request.

                    (e)  Notwithstanding the foregoing, if the managing
                         underwriter of an underwritten public offering
                         determines and advises in writing that the inclusion of
                         all Registrable Securities proposed to be included in
                         the underwritten public offering, together with any
                         shares proposed to be sold by the Company for its own
                         account and any other issued and outstanding shares of
                         Common Stock proposed to be included therein by holders
                         other than the holders of Registrable Securities (such
                         other holders' shares hereinafter collectively referred
                         to as the "Other Shares"), would interfere with the
                         successful marketing of the securities proposed to be
                         included in the underwritten public offering, including
                         the price at which such securities can be sold, then
                         the number of such shares of persons other than the
                         Company that otherwise would be included in such
                         underwritten public offering shall be excluded from
                         such underwritten public offering in a number deemed
                         necessary by such managing underwriter, first by
                         excluding, to the extent necessary, other shares held
                         by persons who have not exercised contractual rights to
                         include such Shares in the offering pursuant to the
                         Prior Registration Rights Agreements (as hereinafter
                         defined), and then, to the extent necessary, by
                         excluding Registrable Securities participating in such
                         underwritten public offering, pro rata, based on the
                         number of shares of Registrable Securities each holder
                         proposes to include; and, then, excluding to the extent
                         necessary, other Shares proposed to be included by the
                         holders of other Shares who have exercised registration
                         rights granted to them under registration rights
                         agreements of the Company in effect on the date hereof
                         or any other registration rights in effect on the date
                         hereof (collectively, the "Prior Registration Rights
                         Agreements").

                    (f)  All Warrant Shares that are not included in an
                         underwritten public offering pursuant to Section 2.2
                         shall be withheld from the market by the holders
                         thereof for a period, not to exceed 12 months following
                         a public offering, that the managing underwriter
                         reasonably determines is necessary in order to effect
                         the underwritten public offering. The holders of such
                         Warrant Shares shall execute such documentation as the
                         managing underwriter reasonably requests to evidence
                         this lock-up.

                    (g)  The registration rights provided by this Appendix shall
                         expire with respect to any Registrable Security upon
                         the earliest to occur of (i) the effectiveness of a
                         Registration Statement that includes in the
                         Registration effected thereby, at the request of a
                         Selling Stockholder, such Registrable Security; (ii)
                         the date on which such Registrable Security is eligible
                         for resale under Rule 144 without regard to the volume
                         limitations thereof; and (iii) five years from the date
                         hereof.

         2.3      Preparation and Filing. If and whenever the Company is under
                  an obligation pursuant to the provisions of this Section 2 to
                  use its best efforts to effect the Registration of any
                  Registrable Securities, the Company shall, as expeditiously as
                  practicable:

                  (a)      prepare and file with the Commission a Registration
                           Statement with respect to such Registrable
                           Securities, using such form of available Registration
                           Statement as is reasonably selected by the Company
                           (unless otherwise specified herein), and use its best
                           efforts to cause such Registration Statement to
                           become and remain effective, keeping each Selling
                           Stockholder advised as to the initiation, progress
                           and completion of the Registration;

                  (b)      prepare and file with the Commission such amendments
                           and supplements to such Registration Statements and
                           the prospectus used in connection therewith as may be
                           necessary to keep such Registration Statement
                           effective for six months, and to comply with the
                           provisions of the Securities Act with respect to the
                           sale or other disposition of all Registrable
                           Securities covered by such Registration Statement;

                  (c)      furnish to each Selling Stockholder such number of
                           copies of any summary prospectus or other prospectus,
                           including a preliminary prospectus and all amendments
                           and supplements thereto, in conformity with the
                           requirements of the Securities Act, and such other
                           documents as such Selling Stockholder may reasonably
                           request in order to facilitate the public sale or
                           other disposition of such Registrable Securities;
                           provided, however, that no such prospectus need be
                           furnished more than six months after the effective
                           date of the Registration Statement related thereto;

                    (d)  use its best efforts to register or qualify the
                         Registrable Securities covered by such Registration
                         Statement under the securities or blue sky laws of such
                         jurisdictions as each Selling Stockholder shall
                         reasonably request and do any and all other acts or
                         things which may be reasonably necessary or advisable
                         to enable such holder to consummate the public sale or
                         other disposition in such jurisdictions of such
                         Registrable Securities; provided, however, that the
                         Company shall not be required to consent to general
                         service of process, qualify to do business as a foreign
                         corporation where it would not be otherwise required to
                         qualify or submit to liability for state or local taxes
                         where it is not liable for such taxes or provide any
                         undertaking or make any change in its Certificate of
                         Incorporation; and

                    (e)  at any time when a prospectus covered by such
                         Registration Statement is required to be delivered
                         under the Securities Act within the appropriate period
                         mentioned in Section 2.3(b) hereof, notify each Selling
                         Stockholder of the happening of any event as a result
                         of which the prospectus included in such Registration
                         Statement, as then in effect, includes an untrue
                         statement of a material fact or omits to state a
                         material fact required to be stated therein or
                         necessary to make the statements therein not misleading
                         in the light of the circumstances then existing and, at
                         the request of such seller, prepare, file and furnish
                         to such seller a reasonable number of copies of a
                         supplement to or an amendment of such prospectus as may
                         be necessary so that, as thereafter delivered to the
                         purchasers of such shares, such prospectus shall not
                         include an untrue statement of a material fact or omit
                         to state a material fact required to be stated therein
                         or necessary to make the statement therein not
                         misleading in the light of the circumstances then
                         existing. The Company may delay amending or
                         supplementing the prospectus for a period of up to 90
                         days if the Company is then engaged in negotiations
                         regarding a material transaction that has not been
                         publicly disclosed, and the Selling Stockholders shall
                         suspend their sale of Shares until an appropriate
                         supplement or prospectus has been forwarded to them or
                         the proposed transaction is abandoned.

         Notwithstanding the foregoing, with respect to the proposed
         Registration of Registrable Securities pursuant to Section 2.2 hereof,
         the Company may withdraw or cease proceeding with any proposed
         Registration of Registrable Securities if it has withdrawn or ceased
         proceeding with the proposed Registration of Common Stock of the
         Company with which the Registration of such Registrable Securities was
         to be included.

          2.4  Expenses. The Company shall pay all Registration Expenses
               incurred by the Company in complying with this Section 2.

         2.5      Information Furnished by Registered Holder. It shall be a
                  condition precedent to the Company's obligations under this
                  Appendix as to any Selling Stockholder that each Selling
                  Stockholder furnish to the Company in writing such information
                  regarding such Selling Stockholder and the distribution
                  proposed by such Selling Stockholder as the Company may
                  reasonably request.

         2.6      Indemnification.


               2.6.1 Company's Indemnification of Registered Holders. The
                    Company shall indemnify each Selling Stockholder, each of
                    its officers, directors and constituent partners, and each
                    person controlling (within the meaning of the Securities
                    Act) such Selling Stockholder, against all claims, losses,
                    damages or liabilities (or actions in respect thereof)
                    suffered or incurred by any of them, to the extent such
                    claims, losses, damages or liabilities arise out of or are
                    based upon any untrue statement (or alleged untrue
                    statement) of a material fact contained in any prospectus or
                    any related Registration Statement incident to any such
                    Registration, or any omission (or alleged omission) to state
                    therein a material fact required to be stated therein or
                    necessary to make the statements therein not misleading, or
                    any violation by the Company of any rule or regulation
                    promulgated under the Securities Act applicable to the
                    Company and relating to actions or inaction required of the
                    Company in connection with any such Registration; and the
                    Company will reimburse each such Selling Stockholder, each
                    of its officers, directors and constituent partners and each
                    person who controls any such Selling Stockholder, for any
                    reasonable, documented legal and other expenses incurred in
                    connection with investigating or defending any such claim,
                    loss, damage, liability or action; provided, however, that
                    the indemnity contained in this Section 2.6.1 shall
                    not apply to amounts paid in settlement of any such
                    claim, loss, damage, liability or action if settlement is
                    effected without the consent of the Company (which consent
                    shall not unreasonably be withheld); and provided, further,
                    that the Company will not  be liable in any
                    such case to the extent that any such claim, loss, damage,
                    liability or expense arises out of or is based upon any
                    untrue (or alleged untrue) statement or omission based upon
                    written information furnished to the Company by such Selling
                    Stockholder, underwriter, controlling person or other
                    indemnified person and stated to be for use in connection
                    with the offering of securities of the Company.

               2.6.2 Selling Stockholder's Indemnification of Company. Each
                    Selling Stockholder shall indemnify the Company, each of its
                    directors and officers, each underwriter, if any, of the
                    Company's securities covered by a Registration Statement,
                    each person who controls the Company or such underwriter
                    within the meaning of the Securities Act, and each other
                    Selling Stockholder, each of its officers, directors and
                    constituent partners and each person controlling such other
                    Selling Stockholder, against all claims, losses, damages and
                    liabilities (or actions in respect thereof) suffered or
                    incurred by any of them and arising out of or based upon any
                    untrue statement (or alleged untrue statement) of a material
                    fact contained in such Registration Statement or related
                    prospectus, or any omission (or alleged omission) to state
                    therein a material fact required to be stated therein or
                    necessary to make the statements therein not misleading, or
                    any violation by such Selling Stockholder of any rule or
                    regulation promulgated under the Securities Act applicable
                    to such Selling Stockholder and relating to actions or
                    inaction required of such Selling Stockholder in connection
                    with the Registration of the Registrable Securities pursuant
                    to such Registration Statement; and will reimburse the
                    Company, such other Selling Stockholders, such directors,
                    officers, partners, persons, underwriters and controlling
                    persons for any reasonable, documented legal and other
                    expenses incurred in connection with investigating or
                    defending any such claim, loss, damage, liability or action;
                    provided, however, that such indemnification and
                    reimbursement shall be to the extent, ------- but only to
                    the extent, that such untrue statement (or alleged untrue
                    statement) or omission (or alleged omission) is made in such
                    Registration Statement or prospectus in reliance upon and in
                    conformity with written information furnished to the Company
                    by such Selling Stockholder and stated to be for use in
                    connection with the offering of Registrable Securities.

               2.6.3 Indemnification Procedure. Promptly after receipt by an
                    indemnified party under this Section 2.6 of notice of the
                    commencement of any action which may give rise to a claim
                    for indemnification hereunder, such indemnified party will,
                    if a claim in respect thereof is to be made against an
                    indemnifying party under this Section 2.6, notify the
                    indemnifying party in writing of the commencement thereof
                    and generally summarize such action. The indemnifying party
                    shall have the right to participate in and to assume the
                    defense of such claim, and shall be entitled to select
                    counsel for the defense of such claim with the approval of
                    any parties entitled to indemnification, which approval
                    shall not be unreasonably withheld. Notwithstanding the
                    foregoing, the parties entitled to indemnification shall
                    have the right to employ separate counsel (reasonably
                    satisfactory to the indemnifying party) to participate in
                    the defense thereof, but the fees and expenses of such
                    separate counsel shall be at the expense of such indemnified
                    parties unless the named parties to such action or
                    proceedings include both the indemnifying party and the
                    indemnified parties and the indemnifying party or such
                    indemnified parties shall have been advised by counsel that
                    there are one or more legal defenses available to the
                    indemnified parties which are different from or additional
                    to those available to the indemnifying party (in which case,
                    if the indemnified parties notify the indemnifying party in
                    writing that they elect to employ separate counsel at the
                    reasonable expense of the indemnifying party, the
                    indemnifying party shall not have the right to assume the
                    defense of such action or proceeding on behalf of the
                    indemnified parties, it being understood, however, that the
                    indemnifying party shall not, in connection with any such
                    action or proceeding or separate or substantially similar or
                    related action or proceeding in the same jurisdiction
                    arising out of the same general allegations or
                    circumstances, be liable for the reasonable, documented fees
                    and expenses of more than one separate counsel at any time
                    for all indemnified parties, which counsel shall be
                    designated in writing by the Registered Holders of a
                    majority of the Registrable Securities).

               2.6.4 Contribution. If the indemnification provided for in this
                    Section 2.6 from an indemnifying party is unavailable to an
                    indemnified party hereunder in respect to any losses,
                    claims, damages, liabilities or expenses referred to herein,
                    then the indemnifying party, in lieu of indemnifying such
                    indemnified party, shall contribute to the amount paid or
                    payable by such indemnified party as a result of such
                    losses, claims, damages, liabilities or expenses in such
                    proportion as is appropriate to reflect the relative fault
                    of the indemnifying party and indemnified party in
                    connection with the statements or omissions which result in
                    such losses, claims, damages, liabilities or expenses, as
                    well as any other relevant equitable considerations. The
                    relative fault of such indemnifying party and indemnified
                    party shall be determined by reference to, among other
                    things, whether the untrue or alleged untrue statement of a
                    material fact or the omission or alleged omission to state a
                    material fact relates to information supplied by such
                    indemnifying party or indemnified party and the parties'
                    relative intent, knowledge, access to information supplied
                    by such indemnifying party or indemnified party and
                    opportunity to correct or prevent such statement or
                    omission. The amount paid or payable by a party as a result
                    of the losses, claims, damages, liabilities and expenses
                    referred to above shall be deemed to include any documented
                    legal or other fees or expenses reasonably incurred by such
                    party in connection with investigating or defending any
                    action, suit, proceeding or claim, or in collecting such
                    indemnity or reimbursement from the indemnifying party.



3.       Covenants of the Company.
         ------------------------

         The Company agrees to:

         (a)      Notify the holders of Registrable Securities included in a
                  Registration Statement (i) of the issuance by the Commission
                  of any stop order suspending the effectiveness of such
                  Registration Statement and (ii) upon learning of the
                  initiation of any proceedings for the purpose of suspending
                  such effectiveness, the existence of such proceedings. The
                  Company will make every reasonable effort to prevent the
                  issuance of any stop order and, if any stop order is issued,
                  to obtain the lifting thereof at the earliest possible time.

         (b)      If the Common Stock is then listed on a national securities
                  exchange, use its best efforts to cause the Registrable
                  Securities to be listed on such exchange. If the Common Stock
                  is not then listed on a national securities exchange, use its
                  best efforts to facilitate the reporting of the Registrable
                  Securities on Nasdaq.

         (c)      Take all other reasonable actions necessary to expedite and
                  facilitate disposition of the Registrable Securities by the
                  holders thereof pursuant to the Registration Statement.

         (d)      With a view to making available to the holders of Registrable
                  Securities the benefits of Rule 144 promulgated under the
                  Securities Act and any other rule or regulation of the
                  Commission that may at any time permit the Registered Holders
                  to sell securities of the Company to the public without
                  registration, the Company agrees to:

                  (i)      make and keep adequate current public information
                           with respect to the Company available, as those terms
                           are understood and defined in Rule 144, at all times
                           after 90 days after the effective date of the first
                           Registration Statement filed by the Company for the
                           offering of its securities to the general public;

                  (ii)     file with the Commission in a timely manner all
                           reports and other documents required of the Company
                           under the Securities Act and the Securities Exchange
                           Act of 1934 (the "1934 Act"); and

                    (iii) furnish to each holder of Warrant Shares, so long as
                         such holder of Warrant Shares owns any Warrant Shares,
                         forthwith upon written request (a) a written statement
                         by the Company as to whether it has complied with the
                         reporting requirements of Rule 144, the Securities Act
                         and the 1934 Act, (b) a copy of the most recent annual
                         or quarterly report of the Company and such other
                         reports and documents so filed by the Company and (c)
                         such other information as may be reasonably requested
                         and as is publicly available in availing the holders of
                         Shares of any rule or regulation of the Commission
                         which permits the selling of any such securities
                         without registration.

         (e)      Prior to the filing of a Registration Statement or any
                  amendment thereto (whether pre-effective or post-effective),
                  and prior to the filing of any prospectus or prospectus
                  supplement related thereto, the Company will provide each
                  Selling Stockholder with copies of all pages thereto, if any,
                  which reference such Selling Stockholder.

         (f)      If the Registration Statement relates to an underwritten
                  offering, enter into and perform its obligations under an
                  underwriting agreement, in usual and customary form,
                  including, without limitation, customary indemnification and
                  contribution obligations, with the underwriter's
                  representative.

         (g)      Make generally available to its security holders as soon as
                  practicable, but not later than forty five (45) days after the
                  close of the period covered thereby, the Company's financial
                  statements as filed with the Commission.

                    (h)  At the request of the Registered Holders who hold a
                         majority in interest of the Registrable Securities
                         being sold, furnish to the underwriters, if any, on the
                         date that Registrable Securities are delivered to the
                         underwriters for sale in connection with a registration
                         pursuant to this Appendix (i) an opinion, dated such
                         date, of the counsel representing the Company for the
                         purposes of such registration, in form and substance as
                         is customarily given to underwriters in an underwritten
                         public offering, addressed to the underwriters, and
                         (ii) a letter, dated such date, from the independent
                         certified public accountants of the Company, in form
                         and substance as is customarily given by independent
                         certified public accountants to underwriters in an
                         underwritten public offering, addressed to the
                         underwriters.

         (i)      Make available for inspection by any underwriters
                  participating in the offering and the counsel, accountants or
                  other agents retained by such underwriter, all pertinent
                  financial and other records, corporate documents and
                  properties of the Company, and cause the Company's officers,
                  directors and employees to supply all information reasonably
                  requested by such underwriters in connection with the
                  Registration Statement.

         (j)      Provide a transfer agent and registrar, which may be a single
                  entity, for the Registrable Securities not later than the
                  effective date of the Registration Statement.

         (k)      Take all actions reasonably necessary to facilitate the timely
                  preparation and delivery of certificates (not bearing any
                  restrictive legend) representing the Registrable Securities
                  sold pursuant to the Registration Statement and to enable such
                  certificates to be in such denominations and registered in
                  such names as the Registered Holders or any underwriters may
                  reasonably request.

 4.   Miscellaneous.
      -------------

          (a)  This Appendix shall be governed by and construed under the laws
               of the State of New York.

         (b)      This Appendix may not be assigned by a Registered Holder other
                  than to the purchaser or transferee of more than 5,000 of the
                  Registered Holder's Warrants Warrant Shares, which purchaser
                  or transferee shall be a permitted assign under the Warrants.
                  Except as otherwise expressly provided herein, the provisions
                  hereof shall inure to the benefit of, and be binding upon, the
                  Registered Holders, their successors, permitted assigns,
                  heirs, executors and administrators.

          (c)  The Warrants, together with this Appendix, constitute the full
               and entire understanding and agreement among the Company and the
               Registered Holders with regard to the subjects hereof and no
               party shall be liable or bound to any other party in any manner
               by any representations, warranties, covenants or agreements
               except as specifically set forth herein or therein. Nothing in
               this Appendix, express or implied, is intended to confer upon any
               party, other than the Company and the Registered Holders and
               their respective successors and permitted assigns, any rights,
               remedies, obligations, or liabilities under or by reason of this
               Appendix, except as expressly provided herein.

         (d)      In the event that any provision of this Appendix shall be
                  invalid, illegal or unenforceable, it shall, to the extent
                  practicable, be modified so as to make it valid, legal and
                  enforceable and to retain as nearly as practicable the intent
                  of the parties, and the validity legality, and enforceability
                  of the remaining provisions shall not in any way be affected
                  or impaired thereby. To the extent permitted by law, the
                  parties waive the benefit of any provision of law that renders
                  any provision of the Appendix invalid or unenforceable in any
                  respect.

         (e)      Except as otherwise provided herein, any term of this Appendix
                  may be amended, and the observance of any term of this
                  Appendix may be waived (either generally or in a particular
                  instance, either retroactively or prospectively, and either
                  for a specified period of time or indefinitely), with the
                  written consent of the Company and the Registered Holder.

         (f)      All notices and other communications required or permitted
                  hereunder shall be in writing and shall be deemed effectively
                  given upon personal delivery, on the first business day
                  following mailing by overnight courier, or on the fifth day
                  following mailing by registered or certified mail, return
                  receipt requested, postage prepaid, addressed to the Company
                  at its address as set forth in the Warrants and to the
                  Registered Holder at its address as shown on the books of the
                  Company.

         (g)      The titles of the paragraphs and subparagraphs of this
                  Appendix are for convenience of reference only and are not to
                  be considered in construing this Appendix.

         (h)      No waiver by the Company or the Registered Holder of any one
                  or more defaults by any other party or parties in the
                  performance of any of the provisions hereof shall operate or
                  be construed as a waiver of any future default or defaults,
                  whether of a like or different nature. Except as expressly
                  provided herein, no failure or delay on the part of any party
                  in exercising any right, power or remedy hereunder shall
                  operate as a waiver thereof, nor shall any single or partial
                  exercise of any such right, power or remedy preclude any other
                  or further exercise thereof or the exercise of any other
                  right, power or remedy.

                                                 [END OF APPENDIX]

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.23
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>EX. 10.23  SEPARATION AGREEMENT
<TEXT>



SEPARATION AGREEMENT AND GENERAL RELEASE

          BY THIS AGREEMENT YOU GIVE UP CERTAIN LEGAL RIGHTS. PLEASE CONSULT
          WITH AN ATTORNEY BEFORE YOU SIGN IT.

AGREEMENT made as of June 13, 2000 by and between Edward J. Quilty ("Employee,"
"You" or "Your") and Palatin Technologies, Inc. (the "Company," "We" or "Our").
Reference is hereby made to that certain Employment Agreement (the "Employment
Agreement"), dated July 9, 1999 by and between you and Palatin Technologies,
Inc. The term "Company" as used herein shall include the Company and any of the
Company's subsidiaries and affiliates.

In consideration of the promises and conditions set forth below, and intending
to be legally bound, you and the Company agree as follows: 1. Resignation: You
acknowledge that you voluntarily resigned your employment with the Company
effective on June 13, 2000. You hereby resign, as of the date hereof, your
position(s) as officer and/or director of the Company, and you agree to execute
and deliver any further instruments or documents which the Company may
reasonably request in order to effectuate your resignation.

2. Severance Benefits: If you sign this Agreement and comply with its terms, we
will provide you with the following special severance benefit:
(a) $400,000 payable in 24 equal monthly installments of $16,666.66 commencing
on the date of execution this Agreement, less benefit deductions, tax
withholding and other deductions required by law. In the event the date of this
Agreement shall be other than the first day of a calendar month the monthly
payment for such partial calendar month shall be prorated in proportion to the
number of days in such calendar month.
(b) Payment by the Company of premiums necessary for the continuation of your
current group health insurance coverage under the federal law called "COBRA" for
24 months after your last day of work and, thereafter, continuation coverage at
your own expense, if you elect such coverage in accordance with the COBRA
statute except that continuation coverage will stop on the day you are first
covered by another group health plan; and




<PAGE>





(c) For a period of 24 months the Company will arrange to provide you
with life and disability insurance substantially similar to that which you were
receiving immediately prior to your resignation; and

(d) All options previously granted as attached in Exhibit 1 to you will vest and
will be exercisable for four (4) years after the Effective Date (as defined in
Paragraph 6, below). You hereby agree that with respect to shares of Common
Stock currently owned by you and options and shares of Common Stock issuable
upon exercise of options owned by you, you will comply in all respects with The
Limitations of Amount of Securities sold pursuant to Rule 144(e)(i) and (e)(iii)
under the Securities Act of 1933, as amended. whether or not such compliance is
required as a matter of law, for a period of six months commencing on the date
of execution of this Agreement. (e) We will use our commercially reasonable
efforts to file a registration statement within the nine month period following
the Effective Date (as defined below) to register any unregistered shares of
your common stock or common stock issuable upon exercise of your options.
 You acknowledge that the specific severance benefit stated above includes
compensation and/or benefits in addition to what you would otherwise be entitled
to receive. The Employee shall not be required to mitigate the amount of any
payment provided for herein by seeking other employment or otherwise. The
special severance benefits will not become due until on or after Effective Date.
You hereby agree to make yourself available to assist the Company and/or related
persons (as defined below), for no additional cost, in the transition process,
including the litigation with the Mo1ecular BioSystems, Inc.
3. Waiver and Release by Employee: (a) In exchange for the special severance
benefits promised to you in this Agreement, and as a material inducement for
that promise, you hereby WAIVE, RELEASE and FOREVER DlSCHARGE The Company and/or
related persons from any and all claims, rights and liabilities of every kind,
whether or not you now know them to exist which you ever had or may have arising
out of your employment with the Company or termination of that employment, as of
the date of this Agreement. This WAIVER and RELEASE includes, but is not limited
to, any claim for unlawful discrimination under the Age Discrimination in
Employment Act of 1967, as amended ("ADEA"),Title VlI of the Civil Rights Act of
1964, as amended, the Americans with Disabilities Act of 1990, 42 U.S.C. ss.
1981, the Worker Adjustment and Retraining Notification Act ("WARN"), and the
Family and Medical Leave Act of 1993, and any violation of any other federal,
state or local constitution, statute, rule, regulation or ordinance, or for
breach of contract, wrongful discharge, tort or other civil wrong. To the
fullest extent permitted by law, you PROMISE NOT TO SUE or bring any charges,
complaints or lawsuits related to the claims you are waiving by this Agreement
against the Company and/or related persons in the future, individually or as a
member of a class.

(b) If you violate this agreement by bringing or maintaining any charges,
claims, grievances, or lawsuits contrary to this Paragraph, you will pay all
costs and expenses of the Company and/or related persons in defending against
such charges, claims or actions brought by you or on your behalf, including
reasonable attorney's fees, and will be required to give back, at the Company's
sole discretion, the value of anything paid by the Company in exchange for this
Agreement.







<PAGE>




(c) As referred to in this Agreement, "the Company and/or related persons"
includes the Company, its parents, subsidiaries, affiliates and divisions, their
respective successors and assigns, and all of their past and present directors,
officers, representatives, shareholders, agents, employees, whether as
individuals or in their official capacity, and the respective heirs and personal
representatives of any of them.

( d) This WAIVER, RELEASE and PROMISE NOT TO SUE is binding
on you, your heirs, legal representatives and assigns.

4. Waiver and Release by Company:  (a) We hereby WAIVE, RELEASE and
FOREVER DISCHARGE you from any and all claims, rights and liabilities of every
kind, whether or not we now know them to exist, which you ever had or may have
arising out of your employment with the Company or termination of that
employment, as of the date of this Agreement. This WAIVER and RELEASE includes,
but is not limited to any violation of any federal, state or local constitution,
statute, rule, regulation or ordinance, or for breach of contract, wrongful
discharge, tort or other civil wrong. To the fullest extent permitted by Law, we
PROMISE NOT TO SUE or bring any charges, complaints or lawsuits related to the
claims we are waiving by this Agreement against you in the future, individually
or as a member of a class.
 (b) If we violate this Agreement by bringing or maintaining any charges,
claims, grievances, or lawsuits contrary to this Paragraph, we will pay all of
your costs and expenses in defending against such charges, claims or actions
brought by us, including reasonable attorney's fees.
 (c) This WAIVER, RELEASE and PROMISE NOT TO SUE is binding on the Company, its
successors and assigns. 5. Employee Review: You are advised to consult with an
attorney before you sign this Agreement. 6. Effective Date: This Agreement is
effective after the Company has received your signed copy of this Agreement.
That will be the "Effective Date" of this Agreement. 7. Confidentiality;
Non-disparagement: You shall keep the terms of this Agreement confidential. You
agree not at any time to talk about, write about or otherwise publicize the
terms or existence of this Agreement to anyone other than your legal, tax or
other financial advisors or immediate family members, except in response to a
subpoena, court directive or otherwise as required by law. You will not
disparage, denigrate or defame the Company and/or related persons, or any of
their business products or services. The Company and/or related persons will not
disparage, denigrate or defame Employee. The parties agree that the press
release substantially in the form attached hereto will be issued promptly
following the Effective Date. 8. No Other Assurances: You acknowledge that in
deciding to sign this Agreement you have not relied on any promises or
commitments, whether spoken or in writing, made to you by any Company
representative, except for what is expressly stated in this Agreement. This
Agreement constitutes the entire understanding and agreement between you and the
Company, and



<PAGE>





replaces and cancels all previous agreements and commitments, whether spoken or
written, in connection with the matters described. 9. Effect of Non-Enforcement:
If one or more terms of this Agreement shall be ruled by a court to be void or
unenforceable, the Company may choose to cancel any or all of the remaining
terms of this Agreement and get back from you (or your successors or assigns)
the value of anything paid by the Company in exchange for this Agreement. Terms
of this Agreement that are not canceled (if any) shall continue in full force
and effect.

1 0. Governing Law; Jurisdiction; Jury Trial Waiver: This Agreement shall be
construed, governed by and enforced in accordance with the laws of the State of
New Jersey, without regard to its conflicts of law principles. Any action
arising out of or relating to this Agreement may, at the election of the
Company, be brought and prosecuted only in that State, and in the event of such
election, you consent to the jurisdiction and venue of any courts of or in such
jurisdiction and waive trial by jury. 11. Modification in Writing: This
Agreement cannot be changed or modified except by written agreement signed by
both you and an authorized Company representative.




<PAGE>





12. No Admission of Liability: This Agreement does not constitute an admission
of any unlawful discriminatory acts or liability of any kind by the Company
and/or related persons, or anyone acting under their supervision or on their
behalf. This Agreement may not be used or introduced as evidence in any legal
proceeding, except to enforce its terms.

PLEASE READ the following declaration and sign this Agreement only if it is
true: I acknowledge that I have carefully read and considered this Agreement;
that I have been given the opportunity to review this Agreement with legal or
other advisors of my choice; that I understand that by signing this Agreement I
RELEASE 1egal claims and WAIVE certain rights; and that I freely and voluntarily
consent to all terms of this Agreement with full understanding of what they
mean.


Palatin Technologies, Inc.



     s/ Carl Spana
By: ___________________________________
     Carl Spana
     Interim Chief Executive Officer and President

6/13/00
- --------------------------------------
Date Signed by Palatin Technologies, Inc.




s/ Edward J. Quilty
- ---------------------------------
Signature of Employee



6/13/00
- ---------------------------------
Date Signed by Edward J. Quilty

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.24
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>EX. 10.24  LETTER AGREEMENT WITH ROBERT G. MOUSSA
<TEXT>



                                                              July 31, 2000

VIA FACSIMILE & FEDERAL EXPRESS

Mr. Robert G. Moussa
2115 Imperial G.C. Blvd.
Naples, FL  34110



         Re:      Resignation as a Director/Extension of Options


Dear Bob:

     In connection with the above referenced matter each of Robert G. Moussa
("you" and "your") and Palatin Technologies, Inc. (Palatin Technologies, Inc.
together with its subsidiaries and affiliates, the "Company", "we" or "our")
agree as follows:

     1. You hereby voluntarily resign, as of the date hereof, your position as
director of the Company.

     2. As of the date hereof, the Company is not aware of any claims or
liabilities now existing arising out of your services as a director to the
Company. The Company will maintain not less than its current directors and
officers insurance coverage.

     3. In consideration for your services rendered to the Company and your
agreement herein, all options (currently in the aggregate amount of 112,284)
previously granted to you will vest and will be exercisable for three (3) years
from the date hereof. You hereby agree not to offer, sell or otherwise dispose
of any shares of Common Stock of the Company or securities exercisable for or
convertible into shares of Common Stock of the Company for a period of ninety
(90) days from the date hereof, without our prior written consent.

     4. You shall keep the terms of this letter agreement ("Agreement")
confidential. You will not disparage, denigrate or defame the Company or any of
its business, products or services. The Company will not disparage, denigrate or
defame you.

     5. You acknowledge that in deciding to sign this Agreement you have not
relied on any promises or commitments, whether spoken or in writing, made to you
by any Company representative, except for what is expressly stated in this
Agreement. This Agreement constitutes the entire understanding and agreement
between you and the Company, and replaces and cancels all previous agreements
and commitments, whether spoken or written, in connection with the matters
described, other than the option agreements which terms shall be deemed to be
modified by Paragraph 3 of this Agreement.

     6. This Agreement shall be construed, governed by and enforced in
accordance with the laws of the State of New Jersey. Any action arising out of
or relating to this Agreement may, at the election of the Company, be brought
and prosecuted in that State, and in the event of such election, you consent to
the jurisdiction venue of any courts of or in such jurisdiction and waive trial
by jury.

     7. This Agreement cannot be modified except by written agreement signed by
both you and an authorized Company representative.

     8. You agree to execute and deliver any further instruments or documents
which the Company may reasonably request in order to effectuate the terms and
purpose of this Agreement.

     If you are in agreement with the foregoing, kindly execute this Agreement
in the space provided below and return the same to the undersigned by facsimile
(609-520-0621) and Federal Express.


                                           Sincerely,

                                           Palatin Technologies, Inc.


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





AGREED AND ACCEPTED
AS OF THIS 31st DAY OF JULY 2000:

- --------------------------------
Robert G. Moussa


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.25
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>EX. 10.25 LETTER AGREEMENT WITH JAMES T. O'BRIEN
<TEXT>



                                                              July 31, 2000

VIA FACSIMILE & FEDERAL EXPRESS

PERSONAL & CONFIDENTIAL

Mr. James T. O'Brien
11801 Pawnee Lane
Leawood, KS  66211


         Re:      Resignation as a Director/Extension of Options


Dear Jim:

     In connection with the above referenced matter each of James T. O'Brien
("you" and "your") and Palatin Technologies, Inc. (Palatin Technologies, Inc.
together with its subsidiaries and affiliates, the "Company", "we" or "our")
agree as follows:

     1. You hereby voluntarily resign, as of the date hereof, your position as
director of the Company.

     2. As of the date hereof, the Company is not aware of any claims or
liabilities now existing arising out of your services as a director to the
Company. The Company will maintain not less than its current directors and
officers insurance coverage.

     3. In consideration for your services rendered to the Company and your
agreement herein, all options (currently in the aggregate amount of 129,634)
previously granted to you will vest and will be exercisable for three (3) years
from the date hereof. You hereby agree not to offer, sell or otherwise dispose
of any shares of Common Stock of the Company or securities exercisable for or
convertible into shares of Common Stock of the Company for a period of ninety
(90) days from the date hereof, without our prior written consent.

     4. You shall keep the terms of this letter agreement ("Agreement")
confidential. You will not disparage, denigrate or defame the Company or any of
its business, products or services. The Company will not disparage, denigrate or
defame you.


<PAGE>


     5. You acknowledge that in deciding to sign this Agreement you have not
relied on any promises or commitments, whether spoken or in writing, made to you
by any Company representative, except for what is expressly stated in this
Agreement. This Agreement constitutes the entire understanding and agreement
between you and the Company, and replaces and cancels all previous agreements
and commitments, whether spoken or written, in connection with the matters
described, other than the option agreements which terms shall be deemed to be
modified by Paragraph 3 of this Agreement.

     6. This Agreement shall be construed, governed by and enforced in
accordance with the laws of the State of New Jersey. Any action arising out of
or relating to this Agreement may, at the election of the Company, be brought
and prosecuted in that State, and in the event of such election, you consent to
the jurisdiction venue of any courts of or in such jurisdiction and waive trial
by jury.

     7. This Agreement cannot be modified except by written agreement signed by
both you and an authorized Company representative.

     8. You agree to execute and deliver any further instruments or documents
which the Company may reasonably request in order to effectuate the terms and
purpose of this Agreement.

     If you are in agreement with the foregoing, kindly execute this Agreement
in the space provided below and return the same to the undersigned by facsimile
(609-520-0621) and Federal Express.


                                           Sincerely,

                                           Palatin Technologies, Inc.


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





AGREED AND ACCEPTED
AS OF THIS 31st DAY OF JULY 2000:

- --------------------------------
James T. O'Brien


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>7
<FILENAME>0007.txt
<DESCRIPTION>SUBSIDIARIES
<TEXT>


                 Subsidiaries of the Registrant


                                State of             Name under which
Name of subsidiary            incorporation      subsidiary does business
- -------------------            --------------      --------------------------

RhoMed Incorporated             New Mexico       RhoMed Incorporated

Interfilm Technologies, Inc.    New York         Interfilm Technologies, Inc.

Evergreen Merger Corporation    Delaware           Evergreen Merger Corporation


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>8
<FILENAME>0008.txt
<DESCRIPTION>EX. 23 CONSENT OF ARTHUR ANDERSEN LLP
<TEXT>


Consent of Arthur Andersen LLP


                       [LETTERHEAD OF ARTHUR ANDERSEN LLP]


                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
registration statement file nos. 333-57059, 333-56605, 333-33569, 333-72873 and
333-84421.


                             /s/ Arthur Andersen LLP

Philadelphia, Pa.
  September 27, 2000

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>9
<FILENAME>0009.txt
<DESCRIPTION>FDS -- FY 2000
<TEXT>

<TABLE> <S> <C>


<ARTICLE>                     5

<LEGEND>
This schedule contains summary financial information extracted from the
registrant's audited consolidated financial statements for the fiscal year ended
June 30, 2000 and is qualified  in its  entirety by reference to such  financial
statements.
</LEGEND>

<CURRENCY>                      U.S. Dollars


<S>                             <C>
<PERIOD-TYPE>                   Year
<FISCAL-YEAR-END>                              JUN-30-2000
<PERIOD-START>                                  JUL-1-1999
<PERIOD-END>                                   JUN-30-2000
<EXCHANGE-RATE>                                          1
<CASH>                                           3,129,593
<SECURITIES>                                     2,155,617
<RECEIVABLES>                                      953,163
<ALLOWANCES>                                             0
<INVENTORY>                                              0
<CURRENT-ASSETS>                                 6,508,165
<PP&E>                                           1,573,140
<DEPRECIATION>                                           0
<TOTAL-ASSETS>                                   8,885,397
<CURRENT-LIABILITIES>                            1,012,070
<BONDS>                                                  0
<PREFERRED-MANDATORY>                                    0
<PREFERRED>                                          7,336
<COMMON>                                            79,024
<OTHER-SE>                                       6,818,801
<TOTAL-LIABILITY-AND-EQUITY>                     8,885,397
<SALES>                                                  0
<TOTAL-REVENUES>                                 5,117,111
<CGS>                                                    0
<TOTAL-COSTS>                                   13,676,892
<OTHER-EXPENSES>                                         0
<LOSS-PROVISION>                                         0
<INTEREST-EXPENSE>                                  29,247
<INCOME-PRETAX>                                 (8,183,438)
<INCOME-TAX>                                             0
<INCOME-CONTINUING>                             (8,183,438)
<DISCONTINUED>                                           0
<EXTRAORDINARY>                                          0
<CHANGES>                                                0
<NET-INCOME>                                    (8,183,438)
<EPS-BASIC>                                          (1.10)
<EPS-DILUTED>                                        (1.10)



</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
