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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2008

or



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

For the transition period from  to

Commission file number 0-16005

Unigene Laboratories, Inc.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 22-2328609                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|81 Fulton Street, Boonton, New Jersey                          |  | 07005                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (973) 265-1100





(Former name, former address and former fiscal year, if changed since last report.)

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

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



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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x.

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date:

Common Stock, $.01 Par Value 90,150,520 shares as of November 3, 2008









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INDEX

UNIGENE LABORATORIES, INC.



|                                                                                                  |  |     
|------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                  |  | PAGE
|PART I. FINANCIAL INFORMATION                                                                     |  |     
|                                                                                                  | 
|Item 1. Financial Statements (Unaudited)                                                          |  |     
|                                                                                                  | 
|Condensed Balance Sheets-September 30, 2008 and December 31, 2007                                 |  | 3   
|                                                                                                  | 
|Condensed Statements of Operations-Three months and nine months ended September 30, 2008 and
2007 |  | 4   
|                                                                                                  | 
|Condensed Statement of Stockholders Deficit-Nine months ended September 30, 2008                 |  | 5   
|                                                                                                  | 
|Condensed Statements of Cash Flows-Nine months ended September 30, 2008 and 2007                  |  | 6   
|                                                                                                  | 
|Notes to Condensed Financial Statements                                                           |  | 7   
|                                                                                                  | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations     |  | 21  
|                                                                                                  | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                |  | 30  
|                                                                                                  | 
|Item 4. Controls and Procedures                                                                   |  | 31  
|                                                                                                  | 
|PART II. OTHER INFORMATION                                                                        |  |     
|                                                                                                  | 
|Item 1 A. Risk Factors                                                                            |  | 32  
|                                                                                                  | 
|Item 6. Exhibits                                                                                  |  | 34  
|                                                                                                  | 
|SIGNATURES                                                                                        |  | 35  
|                                                                                                  | 
|INDEX OF EXHIBITS                                                                                 |  | 36  



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

UNIGENE LABORATORIES, INC.

CONDENSED BALANCE SHEETS



|                                                                                                                                                        |  |                    |              |   |                   |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                                                                        |  | September 30, 2008 |              |   | December 31, 2007 |  
|                                                                                                                                                        |  | (Unaudited)        |              |   |                   |  
|ASSETS                                                                                                                                                  |  |                    |              |   |                   |   |              |  
|Current assets:                                                                                                                                         |  |                    |              |   |                   |   |              |  
|Cash and cash equivalents                                                                                                                               |  | $                  | 14,704,842   |   |                   | $ | 3,677,637    |  
|Accounts receivable                                                                                                                                     |  |                    | 2,459,227    |   |                   |   | 3,142,196    |  
|Inventory                                                                                                                                               |  |                    | 3,799,491    |   |                   |   | 3,327,289    |  
|Prepaid interest                                                                                                                                        |  |                    | 1,050,000    |   |                   |   |             |  
|Prepaid expenses and other current assets                                                                                                               |  |                    | 814,864      |   |                   |   | 908,168      |  
|                                                                                                                                                        |  |                    |              |   |                   |   |              |  
|Total current assets                                                                                                                                    |  |                    | 22,828,424   |   |                   |   | 11,055,290   |  
|Noncurrent inventory                                                                                                                                    |  |                    | 664,666      |   |                   |   | 627,020      |  
|Property, plant and equipment, net                                                                                                                      |  |                    | 4,116,860    |   |                   |   | 3,217,608    |  
|Patents and other intangibles, net                                                                                                                      |  |                    | 2,167,737    |   |                   |   | 1,810,987    |  
|Investment in joint venture                                                                                                                             |  |                    | 1,421,462    |   |                   |   | 27,440       |  
|Deferred financing costs                                                                                                                                |  |                    | 364,000      |   |                   |   |             |  
|Other assets                                                                                                                                            |  |                    | 170,249      |   |                   |   | 135,815      |  
|                                                                                                                                                        |  |                    |              |   |                   |   |              |  
|Total assets                                                                                                                                            |  | $                  | 31,733,398   |   |                   | $ | 16,874,160   |  
|                                                                                                                                                        |  |                    |              |   |                   |   |              |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                   |  |                    |              |   |                   |   |              |  
|Current liabilities:                                                                                                                                    |  |                    |              |   |                   |   |              |  
|Accounts payable                                                                                                                                        |  | $                  | 1,627,617    |   |                   | $ | 1,328,272    |  
|Accrued expenses                                                                                                                                        |  |                    | 2,509,997    |   |                   |   | 1,983,558    |  
|Current portion - deferred licensing fees                                                                                                               |  |                    | 1,288,006    |   |                   |   | 1,313,006    |  
|Current portion - capital lease obligations                                                                                                             |  |                    | 5,126        |   |                   |   | 40,078       |  
|                                                                                                                                                        |  |                    |              |   |                   |   |              |  
|Total current liabilities                                                                                                                               |  |                    | 5,430,746    |   |                   |   | 4,664,914    |  
|Notes payable  stockholders                                                                                                                            |  |                    | 15,737,517   |   |                   |   | 15,737,517   |  
|Note payable  Victory Park  net of discount of $1,676,250                                                                                             |  |                    | 13,323,750   |   |                   |   |             |  
|Accrued interest  principally to stockholders                                                                                                          |  |                    | 1,760,501    |   |                   |   | 783,279      |  
|Deferred licensing fees, excluding current portion                                                                                                      |  |                    | 11,040,262   |   |                   |   | 11,982,829   |  
|Capital lease obligations, excluding current portion                                                                                                    |  |                    |             |   |                   |   | 1,865        |  
|Deferred compensation                                                                                                                                   |  |                    | 382,031      |   |                   |   | 374,500      |  
|Due to joint venture, net of discount of $160,064                                                                                                       |  |                    | 814,936      |   |                   |   |             |  
|                                                                                                                                                        |  |                    |              |   |                   |   |              |  
|Total liabilities                                                                                                                                       |  |                    | 48,489,743   |   |                   |   | 33,544,904   |  
|                                                                                                                                                        |  |                    |              |   |                   |   |              |  
|Commitments and contingencies                                                                                                                           |  |                    |              |   |                   |   |              |  
|Stockholders deficit:                                                                                                                                  |  |                    |              |   |                   |   |              |  
|Common Stock - par value $.01 per share, authorized 135,000,000 shares, issued and outstanding: 90,150,520 shares in 2008 and 87,753,715
shares in 2007 |  |                    | 901,505      |   |                   |   | 877,537      |  
|Additional paid-in capital                                                                                                                              |  |                    | 109,336,838  |   |                   |   | 105,705,387  |  
|Accumulated deficit                                                                                                                                     |  |                    | (126,994,688 | ) |                   |   | (123,253,668 | )
|                                                                                                                                                        |  |                    |              |   |                   |   |              |  
|Total stockholders deficit                                                                                                                             |  |                    | (16,756,345  | ) |                   |   | (16,670,744  | )
|                                                                                                                                                        |  |                    |              |   |                   |   |              |  
|Total liabilities and stockholders deficit                                                                                                             |  | $                  | 31,733,398   |   |                   | $ | 16,874,160   |  
|                                                                                                                                                        |  |                    |              |   |                   |   |              |  

See notes to condensed financial statements.



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UNIGENE LABORATORIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                  |  | Three months endedSeptember 30, |            |   | Nine months endedSeptember 30, |  
|                                                                  |  | 2008                            |            |   | 2007                           |   |            | 2008 |  |   | 2007       |  
|Revenue:                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Product sales                                                     |  | $                               | 2,644,567  |   |                                | $ | 4,142,635  |      |  | $ | 7,931,708  |   |  | $ | 11,258,044 |  
|Royalties                                                         |  |                                 | 1,632,737  |   |                                |   | 1,628,476  |      |  |   | 4,245,962  |   |  |   | 4,548,575  |  
|Licensing revenue                                                 |  |                                 | 314,187    |   |                                |   | 280,691    |      |  |   | 942,567    |   |  |   | 859,237    |  
|Development fees and other                                        |  |                                 | 492,329    |   |                                |   | 291,668    |      |  |   | 1,255,534  |   |  |   | 724,098    |  
|                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                                  |  |                                 | 5,083,820  |   |                                |   | 6,343,470  |      |  |   | 14,375,771 |   |  |   | 17,389,954 |  
|                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Operating expenses:                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Cost of goods sold                                                |  |                                 | 1,455,684  |   |                                |   | 2,685,720  |      |  |   | 4,557,210  |   |  |   | 6,365,124  |  
|Research, development and facility expenses                       |  |                                 | 2,170,671  |   |                                |   | 1,911,673  |      |  |   | 6,660,815  |   |  |   | 6,214,768  |  
|General and administrative                                        |  |                                 | 1,791,593  |   |                                |   | 1,706,563  |      |  |   | 5,907,367  |   |  |   | 5,685,886  |  
|                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|                                                                  |  |                                 | 5,417,948  |   |                                |   | 6,303,956  |      |  |   | 17,125,392 |   |  |   | 18,265,778 |  
|                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Operating (loss) income                                           |  |                                 | (334,128   | ) |                                |   | 39,514     |      |  |   | (2,749,621 | ) |  |   | (875,824   | )
|Other income (expense):                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Interest and other (expense) income                               |  |                                 | (4,465     | ) |                                |   | 91,214     |      |  |   | 36,887     |   |  |   | 240,914    |  
|Interest expense-principally to stockholders                      |  |                                 | (347,922   | ) |                                |   | (285,656   | )    |  |   | (1,028,286 | ) |  |   | (1,058,225 | )
|                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Loss before income taxes                                          |  |                                 | (686,515   | ) |                                |   | (154,928   | )    |  |   | (3,741,020 | ) |  |   | (1,693,135 | )
|Income tax expense                                                |  |                                 |           |   |                                |   | (85,000    | )    |  |   |           |   |  |   | (85,000    | )
|                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                                          |  | $                               | (686,515   | ) |                                | $ | (239,928   | )    |  | $ | (3,741,020 | ) |  | $ | (1,778,135 | )
|                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Loss per share  basic and diluted:                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net loss per share                                                |  | $                               | (0.01      | ) |                                | $ | (0.00      | )    |  | $ | (0.04      | ) |  | $ | (0.02      | )
|                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Weighted average number of shares outstanding - basic and diluted |  |                                 | 88,854,264 |   |                                |   | 87,749,919 |      |  |   | 88,328,206 |   |  |   | 87,739,140 |  
|                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  

See notes to condensed financial statements.



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UNIGENE LABORATORIES, INC.

CONDENSED STATEMENT OF STOCKHOLDERS DEFICIT

Nine Months Ended September 30,
2008

(Unaudited)



|                                                                                       |  |                 |  |                          |         |  |                    |             |   |       |   |              |   |  |   |             |  
|-------------------------------------------------------------------------------------- |  | --------------- |  | ------------------------ | ------- |  | ------------------ | ----------- | - | ----- | - | ------------ | - |  | - | ----------- | -
|                                                                                       |  | Common Stock    |  | AdditionalPaid-inCapital |         |  | AccumulatedDeficit |             |   | Total |  
|                                                                                       |  | Number ofShares |  | Par Value                |         |  |                   
|Balance, January 1, 2008                                                               |  | 87,753,715      |  | $                        | 877,537 |  | $                  | 105,705,387 |   |       | $ | (123,253,668 | ) |  | $ | (16,670,744 | )
|Sale of common stock to CPG at $1.86 per share (net of cash issuance costs of $74,000) |  | 1,080,000       |  |                          | 10,800  |  |                    | 1,923,505   |   |       |   |             |   |  |   | 1,934,305   |  
|Issuance of stock to Victory Park                                                      |  | 1,125,000       |  |                          | 11,250  |  |                    | 1,215,000   |   |       |   |             |   |  |   | 1,226,250   |  
|Recognition of stock option compensation expense  employees and directors             |  |                |  |                          |        |  |                    | 357,565     |   |       |   |             |   |  |   | 357,565     |  
|Recognition of stock option compensation benefit - consultants                         |  |                |  |                          |        |  |                    | (114,015    | ) |       |   |             |   |  |   | (114,015    | )
|Discount on 2 year obligation to JV partner                                            |  |                |  |                          |        |  |                    | 160,064     |   |       |   |             |   |  |   | 160,064     |  
|Issuance of restricted stock                                                           |  | 143,961         |  |                          | 1,440   |  |                    | (1,440      | ) |       |   |             |   |  |   |            |  
|Recognition of restricted stock compensation expense                                   |  |                |  |                          |        |  |                    | 91,250      |   |       |   |             |   |  |   | 91,250      |  
|Cashless warrant exercise                                                              |  | 47,844          |  |                          | 478     |  |                    | (478        | ) |       |   |             |   |  |   |            |  
|Net loss                                                                               |  |                |  |                          |        |  |                    |            |   |       |   | (3,741,020   | ) |  |   | (3,741,020  | )
|                                                                                       |  |                 |  |                          |         |  |                    |             |   |       |   |              |   |  |   |             |  
|Balance, September 30, 2008                                                            |  | 90,150,520      |  | $                        | 901,505 |  | $                  | 109,336,838 |   |       | $ | (126,994,688 | ) |  | $ | (16,756,345 | )
|                                                                                       |  |                 |  |                          |         |  |                    |             |   |       |   |              |   |  |   |             |  

See notes to condensed financial statements.



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UNIGENE LABORATORIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                                          |  |                                |            |   |      |   |            |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                                          |  | Nine months endedSeptember 30, |           
|                                                                                                          |  | 2008                           |            |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                     |  |                                |            |   |      |   |            |  
|Net loss                                                                                                  |  | $                              | (3,741,020 | ) |      | $ | (1,778,135 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                 |  |                                |            |   |      |   |            |  
|Amortization of deferred revenue                                                                          |  |                                | (1,111,317 | ) |      |   | (859,237   | )
|Non-cash stock option and restricted stock compensation                                                   |  |                                | 334,800    |   |      |   | 766,284    |  
|Depreciation, amortization and impairment of long-lived assets                                            |  |                                | 505,179    |   |      |   | 466,186    |  
|Increase in accrued interest-stockholders                                                                 |  |                                | 977,222    |   |      |   | 1,034,555  |  
|Increase in deferred compensation                                                                         |  |                                | 7,531      |   |      |   | 35,039     |  
|Changes in operating assets and liabilities:                                                              |  |                                |            |   |      |   |            |  
|Decrease (increase) in accounts receivable                                                                |  |                                | 682,969    |   |      |   | (2,175,847 | )
|Increase in prepaid interest                                                                              |  |                                | (1,050,000 | ) |      |   |           |  
|(Increase) decrease in inventory                                                                          |  |                                | (509,848   | ) |      |   | 2,160,817  |  
|Decrease (increase) in other assets                                                                       |  |                                | 113,178    |   |      |   | (12,495    | )
|Increase in accounts payable and accrued expenses                                                         |  |                                | 639,784    |   |      |   | 390,803    |  
|Increase in deferred revenue                                                                              |  |                                | 143,750    |   |      |   | 5,500,000  |  
|                                                                                                          |  |                                |            |   |      |   |            |  
|Net cash (used in) provided by operating activities                                                       |  |                                | (3,007,772 | ) |      |   | 5,527,970  |  
|                                                                                                          |  |                                |            |   |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                     |  |                                |            |   |      |   |            |  
|Investment in joint venture                                                                               |  |                                | (477,665   | ) |      |   |           |  
|Construction of leasehold and building improvements                                                       |  |                                | (510,649   | ) |      |   | (25,402    | )
|Purchase of equipment and furniture                                                                       |  |                                | (826,626   | ) |      |   | (416,436   | )
|Increase in patents and other intangibles                                                                 |  |                                | (423,906   | ) |      |   | (375,428   | )
|Decrease (increase) in other assets                                                                       |  |                                | 4,335      |   |      |   | (9,396     | )
|                                                                                                          |  |                                |            |   |      |   |            |  
|Net cash used in investing activities                                                                     |  |                                | (2,234,511 | ) |      |   | (826,662   | )
|                                                                                                          |  |                                |            |   |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                     |  |                                |            |   |      |   |            |  
|Issuance of note payable                                                                                  |  |                                | 14,372,000 |   |      |   |           |  
|Proceeds from sale of stock, net                                                                          |  |                                | 1,934,305  |   |      |   |           |  
|Repayment of short-term stockholder notes                                                                 |  |                                |           |   |      |   | (1,010,000 | )
|Repayment of capital lease obligations                                                                    |  |                                | (36,817    | ) |      |   | (54,408    | )
|Proceeds from exercise of stock options                                                                   |  |                                |           |   |      |   | 9,946      |  
|                                                                                                          |  |                                |            |   |      |   |            |  
|Net cash provided by (used in) financing activities                                                       |  |                                | 16,269,488 |   |      |   | (1,054,462 | )
|                                                                                                          |  |                                |            |   |      |   |            |  
|Net increase in cash and cash equivalents                                                                 |  |                                | 11,027,205 |   |      |   | 3,646,846  |  
|Cash and cash equivalents at beginning of period                                                          |  |                                | 3,677,637  |   |      |   | 3,357,351  |  
|                                                                                                          |  |                                |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                                                |  | $                              | 14,704,842 |   |      | $ | 7,004,197  |  
|                                                                                                          |  |                                |            |   |      |   |            |  
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                                       |  |                                |            |   |      |   |            |  
|Non-cash investing and financing activities:                                                              |  |                                |            |   |      |   |            |  
|Issuance of long-term stockholder notes in exchange for short-term stockholder notes and accrued interest |  |                                |           |   |      | $ | 15,737,517 |  
|Contribution to joint venture financed through interest-free note payable to joint venture partner        |  | $                              | 975,000    |   |      |   |           |  
|Common stock issued with debt financing (see Note G)                                                      |  | $                              | 1,226,250  |   |      |   |           |  
|Cash payments:                                                                                            |  |                                |            |   |      |   |            |  
|Cash paid for interest                                                                                    |  | $                              | 1,082,000  |   |      | $ | 14,000     |  
|Cash paid for income taxes                                                                                |  |                                |           |   |      | $ | 2,000      |  

See notes to condensed financial statements.



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UNIGENE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

NOTE A - BASIS OF PRESENTATION AND RECENT
ACCOUNTING PRONOUNCEMENTS

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, which are of a normal and recurring nature only, have
been included. Operating results for the three-month and nine-month periods ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, please
refer to our financial statements and footnotes thereto included in Unigenes annual report on Form 10-K for the year ended December 31, 2007.

New Accounting Pronouncements

In April 2008, the Financial Accounting Standard Board (FASB) issued FASB Staff Position
(FSP) SFAS No. 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP SFAS No. 142-3 is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited. We are
currently evaluating the impact of the pending adoption of FSP SFAS No. 142-3 on our financial statements.

In December 2007, the Emerging Issues Task
Force EITF issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements. EITF 07-1 provides guidance concerning: determining whether an arrangement constitutes a collaborative arrangement within the scope of the
Issue; how costs incurred and revenue generated on sales to third parties should be reported in the income statement; how an entity should characterize payments on the income statement; and what participants should disclose in the notes to the
financial statements about a collaborative arrangement. The provisions of EITF 07-1 will be adopted in 2009. We are in the process of evaluating the impact, if any, of adopting EITF 07-1 on our financial statements.

In June 2007, the FASB ratified EITF No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities (EITF No. 07-3). EITF No. 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and
capitalized and recognized as an expense as the goods are delivered or the related services are performed. EITF No. 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007. We adopted EITF
No. 07-3 effective January 1, 2008 and the adoption did not have a significant effect on our financial statements.

In February 2007, the FASB
issued Statement No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB No. 115. SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. This statement is effective for the beginning of the first fiscal year that begins after November 15, 2007. We adopted SFAS 159 effective January 1, 2008 and the adoption did not have a
significant effect on our financial statements.



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In September 2006, the FASB issued FASB Statement 157, Fair Value Measurements (FAS 157). FAS 157
defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly,
FAS 157 does not require any new fair value measurements. However, for some entities, the application of FAS 157 will change current practice. The changes to current practice resulting from the application of FAS 157 relate to the definition of fair
value, the methods used to measure fair value and the expanded disclosures about fair value measurements. The provisions of FAS 157 are effective as of January 1, 2008, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. However, delayed application of this statement is permitted for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We adopted FAS 157 effective January 1, 2008 for financial assets and the adoption
did not have a significant effect on our financial statements. We expect to adopt the remaining provisions of SFAS No. 157 beginning in 2009.

NOTE B
 LIQUIDITY

At September 30, 2008, we had cash and cash equivalents of $14,705,000, an
increase of $11,027,000 from December 31, 2007, and we had working capital of approximately $17,400,000. On September 30, 2008 we entered into a financing agreement with Victory Park Management, LLC (Victory Park) pursuant to
which we borrowed $15,000,000 from Victory Park and, in connection therewith, we issued to Victory Park a three-year senior secured non-convertible term note and 1,125,000 shares of our common stock. We received net proceeds of $14,372,000 after
fees and closing expenses (see Note G). Other cash received during 2008 was primarily from Fortical® sales and royalties received under our agreement with Upsher-Smith Laboratories, Inc.
(USL). Our primary sources of cash have historically been (1) licensing fees for new agreements, (2) milestone payments under licensing or development agreements, (3) bulk peptide sales under licensing or supply
agreements, (4) stockholder loans and (5) the sale of our common stock. Since August 2005, we have also generated cash from Fortical sales and royalties. We cannot be certain that any of these cash sources will continue to be available to
us in future years. Licensing fees from new collaborations are dependent upon the successful completion of complex and lengthy negotiations. Milestone payments are based upon progress achieved in collaborations, which cannot be guaranteed, and are
often subject to factors that are controlled neither by our licensees nor us. Product sales to our partners under these agreements are based upon our licensees needs, which are sometimes difficult to predict. Sale of our common stock is
dependent upon our ability to attract interested investors, our ability to negotiate favorable terms and the performance of the stock market in general and biotechnology investments in particular. We may choose to issue an additional $5,000,000 of
term notes to Victory Park, under the same terms as the issued notes, by September 30, 2010. Future Fortical sales and royalties will be affected by competition and further acceptance in the marketplace and could be impacted by manufacturing,
distribution or regulatory issues.

To satisfy our short-term liquidity needs, Jay Levy, our Chairman of the Board and an officer, Warren Levy and Ronald
Levy, each a director and executive officer of Unigene, and another Levy family member (collectively, the Levys), from time to time (prior to 2003) made loans to us. The total owed aggregated $15,737,517 and was restructured on
May 10, 2007 as eight-year term notes with a fixed simple interest rate of 9% per annum. Required quarterly payments of principal and interest under these new notes begin in May 2010 and continue over a five-year period (see Note F).



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We believe that in the short-term we will generate cash to apply toward funding our operations primarily through sales of
Fortical to our U.S. licensee, USL, royalties on USLs sales of Fortical and the achievement of milestones under our existing license agreements and, in the long-term, on sales and royalties from the sale of Fortical and other licensed products
and technologies. We are actively seeking additional licensing and/or supply agreements with pharmaceutical companies for oral and nasal forms of calcitonin, as well as for other peptides, for our peptide manufacturing technology and for our
site-directed bone growth (SDBG) technology. However, we may not be successful in achieving milestones under our current agreements, in obtaining regulatory approval for our other products or in licensing any of our other products or
technologies.

In April 2002, we signed a licensing agreement with GlaxoSmithKline (GSK) for a value before royalties, bulk product sales and
reimbursement for development expenses of up to $150,000,000 to develop an oral formulation of an analog of parathyroid hormone (PTH), currently in clinical development for the treatment of osteoporosis. PTH is in an early stage of
development and it is too early to speculate on the probability or timing of a marketable PTH product (see Note C).

In November 2002, we signed an
exclusive U.S. licensing agreement with USL for a value before royalties of $10,000,000 to market Fortical, our patented nasal formulation of calcitonin for the treatment of osteoporosis. During the first nine months of 2008, Fortical sales were
$7,932,000 and Fortical royalties were $4,246,000. We expect Fortical sales and royalties to continue in future years, but we cannot predict the levels of activity (see Note D).

In April 2004, we signed a worldwide licensing agreement with Novartis Pharma AG (Novartis) for a value before royalties of up to $18,700,000 to allow Novartis to manufacture calcitonin using our patented
peptide production process. We will receive royalties on sales of any existing or future Novartis products that contain calcitonin manufactured by Novartis using our process. We plan to continue to develop our own calcitonin products (see Note E).

We are engaged in the research, production and delivery of peptide-related products. Our primary focus has been on the development of manufacturing
processes and delivery technologies for various peptide products for the treatment of osteoporosis, including nasal and oral calcitonin and oral PTH. We are also developing potential products in the area of SDBG. In general, we seek to develop the
basic product or technology and then license the product or technology to an established pharmaceutical, biotechnology or medical device company to complete the development, clinical trials and regulatory process. As a result, we will not control
the nature, timing or cost of bringing our products and technologies to market. Each of these products and technologies is in various stages of completion.



| |  |  | For nasal calcitonin, a license agreement was signed in November 2002 with USL. Fortical was approved by the Food and Drug Administration (FDA) and
launched by USL in August 2005, generating recurring sales and royalties.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For oral calcitonin, we have interests in two ongoing programs. An external program with our licensee Novartis is currently in Phase III. The anticipated completion
date is outside our control. For our internal program, we are seeking a licensee to participate in our products development. A small, short-term Phase I human study was initiated and successfully concluded in 2007. In February 2008, we
initiated and successfully concluded a Phase I/II clinical study for oral calcitonin. The costs of future clinical trials will most likely be borne by a future licensee. Because additional clinical trials are still necessary for our oral calcitonin
product, and we have not yet licensed the product, it is too early to speculate on the probability or timing of a marketable oral calcitonin product. We may incur certain additional development costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | For oral PTH, we signed a license agreement with GSK in April 2002. A Phase I human trial, which commenced in 2004, demonstrated positive preliminary results. A
small, short-term Phase I human study was initiated in October 2008 using our improved oral delivery technology. PTH is in an early stage of development and it is therefore too early to speculate on the probability or timing of a marketable oral PTH
product. We may incur certain additional development costs. GSK may ultimately purchase, and thereby acquire the rights to, our data from this study and our development activities, but we have no assurances that they will do so.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Under the terms of various agreements related to a joint venture in China with Shijiazhuang Pharmaceutical Group Corporation (SPG) and China
Pharmaceutical Group Limited (CPG), we are obligated to contribute up to $3,150,000 as our initial capital contribution, consisting of $1,050,000 in cash and the balance in certain technologies and know-how which we are licensing to the
joint venture (see Note J).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For our SDBG program, we have conducted various preclinical studies. This program is in a very early stage of development and, therefore, it is too early to
speculate on the probability or timing of a license agreement for this technology or on a possible commercial product.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Due to our
limited financial resources, any decline in Fortical sales, or delay in achieving milestones under our existing license agreements, or in signing new license or distribution agreements for our products, or loss of patent protection, may have an
adverse effect on our cash flow and operations. In July 2006, we and USL jointly filed a patent infringement lawsuit against Apotex Inc. and Apotex Corp., its U.S. subsidiary (together, Apotex), for infringement of our nasal calcitonin
patent. If we are unsuccessful in our lawsuit, and if Apotex receives FDA approval and is able to launch its generic version of our product, the launch could have an adverse effect on our cash flow and operations. In addition, any material
interruption or failure in manufacturing, marketing or distribution of Fortical will have an adverse effect on our cash flow and operations.

If USL cannot
continue to successfully market Fortical, or if we are unable to achieve significant milestones or sales under our existing agreements and/or enter into a new significant revenue generating license or other arrangement we would need to secure
another source of funding in order to satisfy our working capital needs or significantly curtail our operations. Should the funding we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the
consequence would be a material adverse effect on our business, operating results, financial condition and prospects. We believe that satisfying our capital requirements over the long term will require the successful commercialization of one or more
of our oral or nasal calcitonin products, our oral PTH product, our SDBG program or another peptide product in the U.S. and/or abroad. However, it is uncertain whether or not any of our products other than Fortical will be approved or will be
commercially successful.

We have incurred annual operating losses since our inception and, as a result, at September 30, 2008, had an accumulated
deficit of approximately $127,000,000. Our cash requirements to operate our research and peptide manufacturing facilities and develop our products have increased due to higher spending on internal research projects, including oral calcitonin, oral
PTH and SDBG, as well as patent infringement litigation costs. In addition, over the next year, we have committed to purchase approximately $800,000 of materials for use in our internal development programs.



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NOTE C- GLAXOSMITHKLINE AGREEMENT

In April 2002, we signed a licensing agreement with GSK for a value before royalties, PTH sales and reimbursement for development expenses, of up to $150,000,000 to develop an oral formulation of an analog of PTH currently in clinical
development for the treatment of osteoporosis. Under the terms of the agreement, GSK received an exclusive worldwide license to develop and commercialize the product. In addition, GSK will reimburse us for certain development activities during the
program, including our activities in the production of raw material for development and clinical supplies, and will pay us a royalty on its worldwide sales of the product, if commercialized. The royalty rate will be increased if certain sales
milestones are achieved. Revenue recognition of the up-front licensing fee and first milestone payment has been deferred over the estimated 15-year performance period of the license agreement. An aggregate of $8,000,000 in up-front and milestone
payments has been received from inception through September 30, 2008. We have also received an additional $5,000,000 from GSK for PTH sales and in support of our PTH development activities from inception through September 30, 2008. For the
three and nine months ended September 30, 2008 and 2007 we recognized $50,000 and $150,000, respectively, in licensing revenue. There have been no PTH sales to GSK since 2005. Bulk product sales to licensees, prior to product approval, are
typically inconsistent and subject to the needs of the licensee. GSK could make additional milestone payments in the aggregate amount of up to $142,000,000 subject to the progress of the compound through clinical development and through to the
market. A small, short term Phase I human study was initiated in October 2008 using our improved oral delivery technology. GSK may acquire the data from the development activities and the studys results for a fixed purchase price. However,
there are no assurances that this test will be successful or that GSK will acquire the studys results.

This agreement is subject to certain
termination provisions. Either party may terminate the license agreement if the other party (i) materially breaches the license agreement, which breach is not cured within 60 days (or 30 days for a payment default), (ii) voluntarily files,
or has served against it involuntarily, a petition in bankruptcy or insolvency, which, in the case of involuntary proceedings, remains undismissed for 60 days, or (iii) makes an assignment for the benefit of creditors. Additionally, GSK may
terminate the license agreement at any time for various reasons including safety or efficacy concerns of the PTH product, significant increases in development timelines or costs, or significant changes in the osteoporosis market or in government
regulations.

NOTE D  UPSHER-SMITH AGREEMENT

In
November 2002, we signed an exclusive U.S. licensing agreement with USL for a value before royalties of $10,000,000 to market our patented nasal formulation of calcitonin for the treatment of osteoporosis. We are responsible for manufacturing the
product and USL packages the product and distributes it nationwide. Under the terms of the agreement, we received an up-front payment of $3,000,000 from USL in 2002. Revenue recognition of the up-front licensing fee has been deferred over the
estimated 19-year performance period of the license agreement. During 2003, we received a $3,000,000 milestone payment from USL for the FDAs acceptance for review of our nasal calcitonin new drug application (NDA). Fortical was
approved by the FDA and launched by USL in August 2005. During 2005, we received the final $4,000,000 milestone payment for the FDAs approval of Fortical. Revenue for the three months ended September 30, 2008 consisted of the recognition
of $39,000 of licensing revenue from USL, in addition to $2,645,000 in sales to USL and $1,633,000 in royalties from USL. Revenue for the three months ended September 30, 2007 consisted of $4,143,000 in Fortical sales, $1,628,000 in royalties
and $39,000 in licensing revenue. Revenue for the nine months ended September 30, 2008 consisted of the recognition of $118,000 of licensing revenue, $7,932,000 in sales to USL and $4,246,000 in royalties from USL. Revenue for the nine months
ended September 30, 2007 consisted of $9,058,000 in Fortical sales to USL, $4,549,000 in royalties and $118,000 in licensing revenue. At September 30, 2008, our accounts receivable from USL for sales and royalties were approximately
$2,286,000. From August 2005 through September 2008, we have recognized $27,791,000 in Fortical sales and $14,882,000 in Fortical royalties. We recognize USL royalty revenue based upon the quarterly USL royalty report. This provides for a reliable
measure as well as reasonable assurances of collectibility. Royalty revenue is earned on sales of Fortical by



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USL and is recognized in the period Fortical is sold by USL. USLs royalty reports prior to 2007 were based on their manufacturing quarters which
differed from calendar quarters by one month. Therefore, our quarterly reporting periods prior to 2007 did not include royalty revenue for the last month of that period as such information was not available and could not be reliably estimated at
that time. Beginning in the first quarter of 2007, USL provided, and will continue to provide, royalty information for the last month of each calendar quarter. Therefore, our March 31, 2007 quarter (and only that quarter) included royalty
revenue for four months, from December 2006 through March 2007. The effect of the inclusion of the 4thmonth of revenue in the quarter ended
March 31, 2007 was an additional $536,000 of revenue. All subsequent quarters have reported three months of royalty revenue, corresponding to our calendar quarters. Future sales and royalties are contingent upon many factors including
competition, including possible generic competition, pricing, marketing and acceptance in the marketplace and, therefore, are difficult to predict. It is uncertain whether or not USL will be able to continue to increase market share for Fortical.
This agreement may be terminated by either party by mutual agreement or due to breach of any material provision of the agreement not cured within 60 days. We may terminate the agreement in the event of a net sales shortfall. In addition, USL may
terminate the agreement under certain circumstances where USL assigns the agreement and we do not approve the assignment.

NOTE E  NOVARTIS AGREEMENT

In April 2004, we signed a worldwide licensing agreement with Novartis for a value before royalties of up to $18,700,000 to allow Novartis to manufacture
calcitonin using our patented peptide production process. We received $5,600,000 from Novartis in April 2004 consisting of a $3,500,000 up-front payment and a partial prepayment on Novartis purchases of calcitonin from us in the amount of
$2,100,000. Novartis purchased an additional $600,000 of calcitonin from us in 2004. In August 2004, we received $2,000,000 from Novartis for a technology transfer milestone. Revenue recognition of the up-front licensing fee and the milestone has
been deferred over the estimated 14-year performance period of the license agreement. Revenue recognition of the prepayment for calcitonin purchases was recognized as we shipped product to Novartis during 2004. In 2007, we received a $5,500,000
milestone payment from Novartis for the initiation of their oral calcitonin Phase III clinical study for osteoporosis. This milestone will be recognized over the estimated remaining 11-year performance period of the license agreement. We have
received an aggregate of $13,700,000 from Novartis under this agreement. For the three months and nine months ended September 30, 2008, we recognized an aggregate of $223,000 and $670,000, respectively, in licensing revenue. For the three
months and nine months ended September 30, 2007, we recognized an aggregate of $223,000 and $586,000, respectively, in licensing revenue.

During
2004, Novartis purchased calcitonin from us for use in their oral calcitonin development program and implemented our patented manufacturing process at Novartis facilities. Sandoz, a Novartis affiliate, concluded a manufacturing campaign in 2005
based on our process and produced multiple kilograms of calcitonin at a scale that represents a ten-fold increase above our current production capacity. Calcitonin produced by Sandoz is being used by Novartis in their ongoing Phase III clinical
trials. Novartis is conducting all product development and clinical trials for its oral calcitonin product. Therefore, the anticipated completion date is outside our control. If we and Novartis each successfully develop our oral calcitonin products,
we would be competing in this area. We will receive royalties on sales of any existing or future Novartis products that contain calcitonin manufactured by Novartis using our technology. This agreement may be terminated by either party due to a
material breach not cured within 60 days or due to insolvency or bankruptcy proceedings not dismissed within 60 days and for other customary events of default.

We will continue to develop our oral, nasal and injectable calcitonin products. If our oral calcitonin product is successfully developed, we would purchase calcitonin from Novartis, thereby eliminating our need to construct a second,
larger-scale calcitonin manufacturing facility.



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NOTE F  NOTES PAYABLE  STOCKHOLDERS

To satisfy our short-term liquidity needs, the Levys from time to time (prior to 2003) made loans to us. We did not make principal and interest payments on certain loans when due. However, the Levys waived all default
provisions including additional interest penalties due under these loans through December 31, 2000. Beginning January 1, 2001 and ending May 10, 2007, interest on loans originated through March 4, 2001 increased an additional
5% per year and was calculated on both past due principal and interest.

At May 10, 2007, after principal repayments of $1,010,000 during 2007,
the outstanding principal and interest were $7,095,000 and $8,642,517, respectively, with interest rates ranging from 8.5% to 14.2%. The total owed aggregated $15,737,517, of which approximately $8,900,000 in principal and interest were in default
and was restructured on May 10, 2007 as eight-year term notes, none of which are in default, with a fixed simple interest rate of 9% per annum. No gain or loss was recognized on the restructuring transaction. Required quarterly payments of
principal and interest under these new notes begin in May 2010 and continue over a five-year period, but payments may be made earlier without penalty. Total interest expense on all Levy loans was approximately $328,000 and $275,000, respectively,
for the three months ended September 30, 2008 and 2007 and $966,000 and $1,038,000, respectively, for the nine months ended September 30, 2008 and 2007. As of September 30, 2008, total accrued interest on all Levy loans was $1,749,501
and the outstanding loans by these persons to us, classified as long-term debt, totaled $15,737,517 for an aggregate owed to them of $17,487,018. These loans are collateralized by secondary security interests in our equipment, real property and
certain of our patents.

Outstanding stockholder loans consisted of the following at September 30, 2008 and December 31, 2007 (in thousands):



|                                             |  |      |        |      |   |       
|-------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                             |  | 2008 |        | 2007
|Jay Levy long-term loan (1)                  |  | $    | 8,319  |      | $ | 8,319 
|Levy Partnership long-term loan (1)          |  |      | 7,419  |      |   | 7,419 
|                                             |  |      |        |      |   |       
|                                             |  |      | 15,738 |      |   | 15,738
|Accrued interest                             |  |      | 1,749  |      |   | 783   
|                                             |  |      |        |      |   |       
|Total loans and interest due to stockholders |  | $    | 17,487 |      | $ | 16,521
|                                             |  |      |        |      |   |       



|(1) | These loans, held by Jay Levy and the Jaynjean Levy Family Limited Partnership (the Levy Partnership), resulted from the May 2007 restructuring of non-default notes and
accrued interest. Warren Levy and Ronald Levy are general partners in the Levy Partnership. These loans consist of eight-year term notes with fixed simple interest rates of 9% per annum. Interest expense is calculated using an effective
interest method, at a rate of 7.6%, over the life of the agreements due to the deferred payment schedule contained in the notes. Quarterly payments of principal and interest will be made over a five-year period beginning in May 2010. Accrued
interest on these loans at September 30, 2008 was approximately $1,749,000. The Jay Levy loan is collateralized by secondary security interests in certain of our fixed and other assets, including real property. The Levy Partnership loan is
collateralized by secondary security interests in certain of our patents and patent applications. These loans have been subordinated to the Victory Park note as of September 30, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE G  NOTE PAYABLE  VICTORY PARK

On September 30, 2008
we entered into a financing agreement with Victory Park pursuant to which we borrowed $15,000,000 from Victory Park and, in connection therewith, we issued to Victory Park a three-year senior secured non-convertible term note. We received net
proceeds of $14,372,000 after fees and closing expenses paid as of September 30, 2008. The term note was purchased by Victory Park at a 3% discount



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to the face amount. Pursuant to the financing agreement, we also issued to Victory Park 1,125,000 shares of our common stock. These shares are subject to a
lock-up agreement prohibiting their sale for one year. The closing price for our common stock on September 30, 2008 was $1.09 per share, valuing the 1,125,000 shares at an aggregate of $1,226,250. The debt discount of $450,000 and the stock
value aggregated $1,676,250 and reduced the amount of the note payable on the balance sheet to $13,323,750. The $1,676,250 debt discount will be recognized as interest expense over the three-year term of the note under the effective rate method. We
also incurred legal and due diligence expenses of $364,000 which are shown as deferred financing costs on our balance sheet. This amount will also be recognized as additional interest expense over the three-year term of the note. At closing, we also
prepaid six months of interest on the note in the amount of $1,050,000.

This note bears interest at the prime rate plus 7%, subject to a floor of
14% per annum and a cap of 18% per annum. We have the right to prepay the note without penalty for prepayments up to $5,000,000 and for any prepayments after the first year.

In conjunction with this financing, loans held by Jay Levy and by the Levy Partnership were subordinated to the Victory Park note. We have pledged all of our assets, including intellectual property, as collateral
under the Victory Park note. We may choose to issue an additional $5,000,000 of term notes, under the same terms as the issued note, along with 375,000 shares of our common stock, by September 30, 2010.

At any time after the earlier of the expiration of the lock-up period and the termination of the lock-up
agreement, if the investors are not able to sell or transfer all of the registrable securities without restriction or condition pursuant to Rule 144 promulgated under the 1933 Act, upon the written request by the holders we shall prepare and file
with the SEC a registration statement covering the resale of all the registrable securities. If a registration statement covering all the registrable securities is not filed with the SEC on or before the 30thday after the filing deadline (as defined in the agreement) or filed with the SEC but not declared effective by the SEC on or before the 30thday after the effectiveness deadline (as defined in the agreement) or on any day after the effective date sales of all of the registrable securities cannot be made, then we shall
become liable for payment of an amount in cash equal to 2% per month of the aggregate value of such registrable securities. We do not believe that this penalty provision will have a material impact on our financial condition.

Beginning October 1, 2008, so long as our note balance is at least $5,000,000, we must maintain a cash balance equal to at least 10% of the principal amount of the
notes and our cash flow (as defined in the agreement) must be at least $2,000,000 in any fiscal quarter or $9,000,000 in any three consecutive quarters. The agreement specifies certain events of default including, without limitation: failure to pay
principal or interest; filing for bankruptcy; breach of covenants, representations or warranties; the occurrence of a material adverse effect (as defined in the agreement); if Warren Levy or Ronald Levy shall, at any time for reasons other than
health or without the endorsement of the other Unigene directors, cease to be employed in the same position with similar duties; and any material decline or depreciation in the value or market price of the collateral. Upon any default, among other
remedies, both principal and interest would be accelerated and additional charges would apply.



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NOTE H  INVENTORY

Inventories consisted of the following as of September 30, 2008 and December 31, 2007:



|                                                                          |  |      |           |      |   |          
|------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                                          |  | 2008 |           | 2007
|Current Inventory                                                         |  |      |           |      |   |          
|Finished goods  net of allowances of $640,000 and $810,000, respectively |  | $    | 2,006,442 |      | $ | 1,702,303
|Work in process                                                           |  |      | 399,714   |      |   | 423,422  
|Raw materials                                                             |  |      | 1,393,335 |      |   | 1,201,564
|                                                                          |  |      |           |      |   |          
|Total                                                                     |  | $    | 3,799,491 |      | $ | 3,327,289
|                                                                          |  |      |           |      |   |          
|Noncurrent Inventory                                                      |  |      |           |      |   |          
|Raw materials                                                             |  | $    | 664,666   |      | $ | 627,020  
|                                                                          |  |      |           |      |   |          

Typically, finished goods and work in process inventory are fully reserved except for the amounts deemed saleable
by management based upon current or anticipated orders, primarily under contractual arrangements. Our reserves for finished goods and work in process production were $640,000 at September 30, 2008, a decrease of $170,000 from December 31,
2007. Based upon expected future orders, $665,000 of our raw material inventory was classified as a noncurrent asset at September 30, 2008. We expect this inventory to be fully recoverable, therefore no reserve was established.

NOTE I  FINANCING

In 2006, in conjunction with an equity financing,
we issued a five-year warrant to purchase up to 1,000,000 shares of our common stock to Magnetar Capital Master Fund, Ltd. (Magnetar) pursuant to a common stock purchase agreement. Magnetar subsequently assigned the common stock warrant
to Victory Park. The five-year warrant is exercisable immediately at an exercise price per share of $4.25 and was outstanding at September 30, 2008.

In 2005, in conjunction with an equity financing, we issued a five-year warrant to purchase up to 1,061,571 shares of our common stock (which remained outstanding at September 30, 2008) at an exercise price per share of $1.77 to Fusion
Capital Fund II, LLC (Fusion) pursuant to a common stock purchase agreement. As a result of a prior financing with Fusion in 2003, there was an additional five-year warrant outstanding to purchase 250,000 shares of common stock,
exercisable at $0.90 per share. This warrant was exercised in full in September 2008 in a cashless exercise whereby we issued to Fusion 47,844 shares of our common stock.

On May 10, 2008, we entered into a common stock purchase agreement with a wholly-owned subsidiary of CPG and sold 1,080,000 shares of our common stock at a price of $1.86 per share for gross proceeds of
$2,008,800, before expenses of approximately $74,000.

NOTE J  CHINA JOINT VENTURE

In June 2000, we entered into a joint venture agreement with SPG, a pharmaceutical company in the Peoples Republic of China, formally creating a contractual joint venture between the two entities. We own 45% of
the contractual joint venture and will have a 45% interest in the entitys profits and losses. In the first phase of the collaboration, SPG temporarily contributed its existing



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injectable calcitonin license to the joint venture, which allowed the entity to sell its injectable calcitonin product in China. An NDA for injectable and
nasal calcitonin products was filed in China in 2003. The approval of our NDA in China, and the timing of such approval, is uncertain. The contractual joint venture began operations and sales of its injectable calcitonin product in 2002 under the
aforementioned SPG license. Sales by the contractual joint venture have been used to offset its costs. We account for our investment in the joint venture under the equity method. Our share of the losses in the joint venture for the three months and
nine months ended September 30, 2008 was approximately $56,000 and $59,000, respectively, and is included in general and administrative expenses.

Unigene and SPG have expanded the activities of the joint venture to allow for the development and marketing of other pharmaceutical products. In April 2008, ground was broken for the global biotechnology park in the Shijiazhuang Economic
and Technology Development Zone of Hebei Province, China that will house the joint venture. The joint venture, named Unigene Biotechnology Co. Ltd., will initially focus on manufacturing and research and development of salmon calcitonin and
parathyroid hormone and related products for China and possibly other global markets. Construction of the first building, which will ultimately house the research and development facilities of the joint venture, is scheduled for completion in 2009.
It is anticipated that construction will begin this year on manufacturing facilities which will be designed for peptide production and manufacture of injectable, oral and nasal final products. The combined capital investment commitment of both
parties for the joint venture is $15,000,000, representing contributions of cash, technology and know-how which we are licensing to the joint venture. Unigenes 45% share is therefore $6,750,000. The technologies and know-how that we have
agreed to license to the joint venture have been assigned a total value of $4,500,000, leaving us with cash obligations of $2,250,000 which are payable in two installments of $1,050,000 ($75,000 of which has been paid, leaving a balance of $975,000)
and $1,200,000. The cash contribution of $975,000 is payable after the joint venture is officially registered with the Chinese government, which occurred in May 2008 with the issuance to the joint venture of its certificate of incorporation. SPG has
assigned its joint venture rights and obligations to its subsidiary, CPG. CPG has agreed to lend us the balance of our initial cash contribution of $975,000 for two years on an interest-free basis. We have therefore increased our investment in the
joint venture balance sheet account by $1,050,000 and we have recorded our repayment obligation at a discounted net present value of $814,936 using an effective interest rate of 9%. The discount of $160,064 was credited to additional paid-in capital
representing a capital contribution by a related-party. We have also increased our investment in the joint venture by an additional $403,000, representing engineering costs that we have incurred on behalf of the joint venture. In lieu of cash
repayment of our initial cash contribution or future cash capital contributions, we may reduce our equity participation in the joint venture or provide additional technologies, or rights to products for China, to the joint venture. If we and our
joint venture partner agree, in addition to or in lieu of future contributions, if any, by the partners, the joint venture may seek government or third party financing.

On May 10, 2008, we entered into a common stock purchase agreement with a wholly-owned subsidiary of CPG and sold 1,080,000 shares of our common stock at a price of $1.86 per share for gross proceeds of
$2,008,800, before expenses of approximately $74,000.

NOTE K  STOCK OPTION COMPENSATION

We have shareholder-approved stock option plans for employees and directors under which we have granted non-qualified and incentive stock options. Options granted under
these plans must be at a price per share not less than the fair market value per share of common stock on the date the option is granted. The options generally vest over a one to four-year period and typically expire ten years from the date of
grant. Shares for option exercises are issued from authorized and unissued shares. At September 30, 2008, we had reserved approximately 2,142,000 shares for future grants.



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We account for stock options and warrants issued to consultants on a fair value basis in accordance with SFAS
No. 123(R) and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Compensation expense is
calculated each quarter for consultants using the Black-Scholes option pricing model, until the option is fully vested. Based upon options issued to consultants, we recognized compensation benefits of $98,000 and $114,000, respectively, for the
three months and nine months ended September 30, 2008. We recognized a compensation benefit of $59,000 and compensation expense of $85,000, respectively, for the three months and nine months ended September 30, 2007. These amounts are
included in research, development and facility expenses.

Under SFAS 123(R), compensation cost for the three months and nine months ended
September 30, 2008 and 2007 for options granted to employees and directors includes 1) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated
in accordance with the original provisions of SFAS 123; and 2) compensation cost for all share-based payments granted on or after January 1, 2006, based on the grant-date fair value estimated in accordance with SFAS 123(R). For the three months
ended September 30, 2008, we recognized share-based compensation cost of $95,000, which consisted of $79,000 in general and administrative expenses and $16,000 in research, development and facility expenses. For the three months ended
September 30, 2007, we recognized share-based compensation cost of $144,000, which consisted of $135,000 in general and administrative expenses and $9,000 in research, development and facility expenses. For the nine months ended
September 30, 2008, we recognized share-based compensation costs of $358,000, which consisted of $317,000 in general and administrative expense and $41,000 in research, development and facility expense. For the nine months ended
September 30, 2007, we recognized share-based compensation costs of $682,000, which consisted of $508,000 in general and administrative expense and $174,000 in research, development and facility expense. We did not capitalize any share-based
compensation cost.

As of September 30, 2008, there was $842,000 of total unrecognized compensation cost related to nonvested share-based compensation
arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of approximately 2 years.

The
following table shows the weighted average assumptions we used to develop the fair value estimates for employee and director stock options:



|                         |  |                                 |  |      |                                |  |      |   |  |      |  
|------------------------ |  | ------------------------------- |  | ---- | ------------------------------ |  | ---- | - |  | ---- | -
|                         |  | Three Months EndedSeptember 30, |  |      | Nine Months EndedSeptember 30, | 
|                         |  | 2008                            |  | 2007 |                                |  | 2008 |   |  | 2007 |  
|Expected volatility      |  | N/A                             |  | 59.6 | %                              |  | 58.8 | % |  | 67.4 | %
|Expected dividends       |  | N/A                             |  |     |                                |  |     |   |  |     |  
|Expected term (in years) |  | N/A                             |  | 5.3  |                                |  | 5.3  |   |  | 5.3  |  
|Risk-free rate           |  | N/A                             |  | 4.3  | %                              |  | 3.0  | % |  | 4.6  | %
|Forfeiture rate          |  | N/A                             |  | 20   | %                              |  | 20   | % |  | 20   | %

For the nine months ended September 30, 2008 and for the three months and nine months ended
September 30, 2007, we estimated the fair value of each option award on the date of grant using the Black-Scholes model. We utilized the risk-free interest rate for periods equal to the expected term of the option based upon U.S. Treasury
securities in effect at the time of the grant. We have no present intention of declaring any dividends. We based expected volatility on historical volatility. We estimated the expected term of stock options using historical exercise experience.
There were no options exercised during 2008 and there were no stock option grants during the three-month period ended September 30, 2008.



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A summary of option activity as of September 30, 2008 and changes during the nine months then ended is presented
below:



|                                  |  |           |   |  |                               |      |                                          |     |                         |   |          
|--------------------------------- |  | --------- | - |  | ----------------------------- | ---- | ---------------------------------------- | --- | ----------------------- | - | ---------
|Options                           |  | Shares    |   |  | Weighted-AverageExercisePrice |      | Weighted-AverageRemainingContractualTerm |     | AggregateIntrinsicValue
|Outstanding at January 1, 2008    |  | 3,962,215 |   |  | $                             | 1.43 |                                          |     |                         |   |          
|Granted                           |  | 977,000   |   |  |                               | 1.51 |                                          |     |                         |   |          
|Exercised                         |  |          |   |  |                               |     |                                          |     |                         |   |          
|Forfeited or expired              |  | (315,900  | ) |  |                               | 2.02 |                                          |     |                         |   |          
|                                  |  |           |   |  |                               |      |                                          |     |                         |   |          
|Outstanding at September 30, 2008 |  | 4,623,315 |   |  | $                             | 1.41 |                                          | 5.9 |                         | $ | 1,260,000
|                                  |  |           |   |  |                               |      |                                          |     |                         |   |          
|Exercisable at September 30, 2008 |  | 3,423,040 |   |  | $                             | 1.32 |                                          | 4.7 |                         | $ | 1,260,000
|                                  |  |           |   |  |                               |      |                                          |     |                         |   |          

The weighted-average grant-date fair value of options granted during the three months ended September 30,
2007 was $1.17. The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2008 and 2007 was $0.82 and $1.38, respectively. The total intrinsic value, which represents the difference between the
underlying stocks market price and the options exercise price, of options exercised during the three months ended September 30, 2007 was $22,000, and the total intrinsic value of options exercised during the nine months ended
September 30, 2007 was $34,000.

Cash received from option exercises under all share-based payment arrangements for the three months ended
September 30, 2007 was $5,000 and cash received from option exercises under all share-based payment arrangements for the nine months ended September 30, 2007 was $10,000. No tax benefit was realized from option exercises of the share-based
payment arrangements for the three months and nine months ended September 30, 2008 and 2007.

Restricted Stock Awards

During the second quarter of 2008, we granted restricted stock awards to certain officers and other employees that vest one year from their grant date. We recognized
$52,000 and $91,000, respectively, of compensation expense during the three-month and nine-month periods ended September 30, 2008 related to the restricted stock awards.

The following table summarizes restricted stock activity:



|                                        |  |         |  |                                     |     
|--------------------------------------- |  | ------- |  | ----------------------------------- | ----
|                                        |  | Shares  |  | WeightedAverageGrant-DateFair Value
|Nonvested balance at January 1, 2008    |  |        |  |                                     |    
|Changes during the period:              |  |         |  |                                     |     
|Shares granted                          |  | 143,961 |  | $                                   | 1.46
|Shares vested                           |  |        |  |                                     |    
|Shares forfeited                        |  |        |  |                                     |    
|                                        |  |         |  |                                     |     
|Nonvested balance at September 30, 2008 |  | 143,961 |  | $                                   | 1.46
|                                        |  |         |  |                                     |     



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As of September 30, 2008, there was $119,000 of total unrecognized compensation cost related to restricted stock
awards. That cost is expected to be recognized over a weighted-average period of less than 1 year.

NOTE L  NET LOSS PER SHARE

We compute and present both basic and diluted earnings per share (EPS) on the face of the statement of operations. Basic EPS is computed using the weighted
average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock at the beginning of the
period (or as of the date of issuance if issued in the current year) being reported on, and the effect was dilutive. Our weighted average shares outstanding used for computing diluted loss per share were the same as those used for computing basic
loss per share for each of the three-month and nine-month periods ended September 30, 2008 and 2007 because inclusion of our stock options, restricted stock and warrants (approximately 7,098,000 and 6,264,000 shares of common stock, if
exercised, for the three-month periods ended September 30, 2008 and September 30, 2007, respectively, and approximately 6,852,000 and 6,206,000 shares of common stock, if exercised, for the nine-month periods ended September 30, 2008
and September 30, 2007, respectively) would be antidilutive. The securities mentioned above include warrants to purchase an aggregate of 2,121,571 shares of common stock at exercise prices ranging from $1.77 to $4.25 per share, with expiration
dates ranging from 2010 to 2015.

NOTE M  PATENTS AND OTHER INTANGIBLES

As of September 30, 2008, nine of our patents had issued in the U.S., seventy-eight had issued in various foreign countries and various other applications were pending.

Details of intangible assets are summarized as follows:



|                    |  |                   |           |                         |   |           |  |      |           |                         |   |           |  |   |           |  |   |          
|------------------- |  | ----------------- | --------- | ----------------------- | - | --------- |  | ---- | --------- | ----------------------- | - | --------- |  | - | --------- |  | - | ---------
|                    |  | September 30,2008 |           | December 31,2007       
|                    |  | Cost              |           | AccumulatedAmortization |   | Net       |  | Cost |           | AccumulatedAmortization |   | Net      
|Trademarks          |  | $                 | 144,000   |                         | $ | 140,000   |  | $    | 4,000     |                         | $ | 144,000   |  | $ | 138,000   |  | $ | 6,000    
|Patents             |  |                   | 1,463,000 |                         |   | 1,041,000 |  |      | 422,000   |                         |   | 1,409,000 |  |   | 975,000   |  |   | 434,000  
|Deferred Patents    |  |                   | 1,727,000 |                         |   |          |  |      | 1,727,000 |                         |   | 1,356,000 |  |   |          |  |   | 1,356,000
|Deferred Trademarks |  |                   | 15,000    |                         |   |          |  |      | 15,000    |                         |   | 15,000    |  |   |          |  |   | 15,000   
|                    |  |                   |           |                         |   |           |  |      |           |                         |   |           |  |   |           |  |   |          
|                    |  | $                 | 3,349,000 |                         | $ | 1,181,000 |  | $    | 2,168,000 |                         | $ | 2,924,000 |  | $ | 1,113,000 |  | $ | 1,811,000
|                    |  |                   |           |                         |   |           |  |      |           |                         |   |           |  |   |           |  |   |          

NOTE N  DEFERRED COMPENSATION PLAN

In December 2005, our Board of Directors approved the adoption of a deferred compensation plan for Dr. Ronald
Levy, Executive Vice President and Director of the Company, and Dr. Warren Levy, President, Chief Executive Officer and Director of the Company. Previously, Drs. Levy were the beneficiaries of split-dollar life insurance policies owned by the
Company with a face value of $1,000,000 each that were originally purchased in 1988. These policies were terminated without any consideration paid to them in 2005 due to changes in the tax law as well as Sarbanes-Oxley regulations, and we received
the entire cash proceeds. In recognition of the services of Drs. Levy and the cancellation of the split-dollar life insurance policies, the Board recommended the adoption of a deferred compensation plan. The major features of the plan are as
follows: the Company agreed to credit a book account with $25,000 per year on January 1stof such year beginning on January 1, 2006 and
ending on January 1, 2014 for each participant; the credits to



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the accounts would be 100% vested; upon the death of a participant, any remaining contributions would be made to his account; and in the event of a
change in control of Unigene, all remaining contributions shall be made to each participants account. The related contracts were finalized and executed in February 2006. Therefore, we recognized this liability in the first quarter
of 2006 in the amount of $304,000 which represented the net present value of the future payments. As of September 30, 2008, this liability was approximately $382,000. As of September 30, 2008, both of these accounts had been funded to date
in the aggregate amount of $159,000 ($150,000 plus $9,000 in interest and gains) and these accounts are included on the Balance Sheet in other assets.

The
entire value of each account would be distributed as follows: upon attainment of age 75, 25% of balance, upon attainment of age 76, 33.33% of remaining balance, upon attainment of age 77, 50% of remaining balance, and the remainder of the balance
upon attainment of age 78; in the event of a participants death or disability, 50% of the participants account balance would be distributed following his death or disability and the remainder distributed on the first anniversary of his
death or disability.

NOTE O - LEGAL PROCEEDINGS

Fortical,
our nasal calcitonin product for the treatment of postmenopausal osteoporosis, is covered by U.S. Patent No. 6,440,392 (the Fortical Patent). In June 2006, we received a Paragraph IV certification letter from Apotex, a
Canadian generic pharmaceutical manufacturer, alleging that this patent is invalid and therefore not infringed by Apotexs nasal calcitonin product which is the subject of an Apotex pending Abbreviated NDA, or ANDA. On July 24, 2006, we
and USL jointly filed a lawsuit against Apotex in the U.S. District Court for the Southern District of New York for infringement of our Fortical Patent. Due to our filing of the above-mentioned lawsuit, the Hatch-Waxman Act provides for an automatic
stay of FDA approval for Apotexs ANDA of up to 30 months. We are seeking a ruling that Apotexs ANDA and its nasal calcitonin product infringe our Fortical Patent and its ANDA should not be approved before the expiration date of the
Fortical Patent. We are also seeking an injunction to prevent Apotex from commercializing its ANDA product before the expiration of the Fortical Patent and to recover the attorneys fees and costs which we and USL incur in connection with these
proceedings. However, there is the usual litigation risk that we will not be successful in the suit. In the event that we do not prevail, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives
FDA approval. This could have a material adverse impact on our results and financial position.

NOTE P  RIGHTS PLAN

In December 2002, pursuant to a rights agreement, we distributed common stock purchase rights to stockholders of record as a dividend at the rate of one right for each
share of common stock. Each right entitles the holder to purchase from us one ten-thousandth of a share of common stock at an exercise price of $4.00. Initially the rights are attached to the common stock and are not exercisable. There is one right
outstanding for every share of common stock outstanding.

The rights become exercisable and will separate from the common stock ten calendar days after a
person or group acquires beneficial ownership of fifteen percent or more of our common stock, or ten business days (or a later date following such announcement as determined by our Board of Directors) after the announcement of a tender offer or an
exchange offer to acquire fifteen percent or more of our outstanding common stock.



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The rights are redeemable for $.00001 per right at the option of the Board of Directors at any time prior to the close of
business on the tenth calendar day after a person or group acquires beneficial ownership of fifteen percent or more of our common stock. If not redeemed, the rights will expire on December 30, 2012. Prior to the date upon which the rights would
become exercisable under the rights agreement, our outstanding stock certificates will represent both the shares of common stock and the rights, and the rights will trade only with the shares of common stock.

Generally, if the rights become exercisable, then each stockholder, other than the stockholder whose acquisition has caused the rights to become exercisable, is entitled
to purchase, for the exercise price, that number of shares of common stock that, at the time of the transaction, will have a market value of two times the exercise price of the rights. In addition, if, after the rights become exercisable, we are
acquired in a merger or other business combination, or fifty percent or more of our assets, cash flow or earning power are sold, each right will entitle the holder to purchase, at the exercise price of the rights, that number of shares of common
stock of the acquiring company that, at the time of the transaction, will have a market value of two times the exercise price of the rights.

The rights
plan is intended to improve the ability of our Board of Directors to protect the interests of Unigene and our stockholders in the event of an unsolicited proposal to acquire a significant interest in Unigene.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007,
including the financial statements and notes contained therein.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements regarding us and our business, financial condition, results of operations and prospects. Such forward-looking
statements include those which express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. We have based these forward-looking statements on our current expectations
and projections about future events and they are subject to risks and uncertainties known and unknown which could cause actual results and developments to differ materially from those expressed or implied in such statements. Words such as
expects, anticipates, intends, plans, believes, seeks, estimates, and similar expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying forward-looking statements. These forward-looking statements include statements about the following: our financial condition, competition, our dependence on other companies to commercialize, manufacture and sell
products using our technologies, the uncertainty of results of animal and human testing, the risk of product liability and liability for human clinical trials, our dependence on patents and other proprietary rights, dependence on key management
officials, the availability and cost of capital, the availability of qualified personnel, changes in, or the failure to comply with, governmental regulations, the delay in obtaining or the failure to obtain regulatory approvals for our products and
litigation. Factors that could cause or contribute to differences in results and outcomes include, without limitation, those discussed in Risk Factors below and in our Annual Report on Form 10-K for the year ended December 31, 2007,
such as uncertain revenue levels, rapidly changing technologies, stock price volatility and other factors discussed in our various filings with the Securities and Exchange Commission (SEC).



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RESULTS OF OPERATIONS

Introduction

We are a biopharmaceutical company engaged in the research, production and delivery of small proteins, referred to as
peptides, for medical use. We have a patented manufacturing technology for producing many peptides cost-effectively. We also have patented oral and nasal delivery technologies that have been shown to deliver medically useful amounts of various
peptides into the bloodstream. We currently have three operating locations: administrative and regulatory offices in Boonton, New Jersey, a laboratory research facility in Fairfield, New Jersey and a pharmaceutical production facility in Boonton,
New Jersey.

Our primary focus has been on the development of calcitonin and other peptide products for the treatment of osteoporosis and other
indications. Our revenue for the past three years has primarily been derived from domestic sources. We have licensed worldwide rights to our manufacturing and delivery technologies for oral PTH for the treatment of osteoporosis to GSK. We have also
licensed in the U.S. our nasal calcitonin product for the treatment of osteoporosis, which we have trademarked as Fortical, to USL. Fortical was approved by the FDA in August 2005. This is our first product approval in the United States. We have
also licensed worldwide rights to our patented manufacturing technology for the production of calcitonin to Novartis. We have licensed to our Chinese joint venture certain proprietary technologies and know-how to support the research, development
and manufacturing of recombinant salmon calcitonin and parathyroid hormone, as well as other possible products, in the Peoples Republic of China.

To
expand our product pipeline: we are developing our SDBG technology in conjunction with Yale University; we have in-licensed technology from Queen Mary, University of London relating to potential therapies for inflammation and cardiovascular disease;
and we periodically perform feasibility studies for third parties. Our products, other than Fortical in the United States, will require clinical trials and/or approvals from regulatory agencies and all of our products will require acceptance in the
marketplace. There are risks that these clinical trials will not be successful and that we will not receive regulatory approval or significant revenue for these products.

We compete with specialized biotechnology companies, major pharmaceutical and chemical companies and universities and research institutions. Most of these competitors have substantially greater resources than we do.

We generate revenue through licensing and supply agreements with pharmaceutical companies and by achieving milestones, product sales and royalties under
these agreements. Those agreements, to date, have not been sufficient to generate all of the cash necessary to meet our needs. In addition, there are risks that current collaborations will not be successful and that future collaborations will not be
consummated. We have tried to mitigate these risks by developing additional proprietary technologies and by pursuing additional licensing opportunities but there is no guarantee that these efforts will be successful. We are also seeking to generate
additional revenue from increased sales of Fortical, but there is no guarantee that Fortical will generate significant additional revenue.

We have also
generated cash from loans, including officer loans, as well as from stock offerings. The loans have added debt to our balance sheet and, the officer loans, after being restructured in 2007, require repayment over a five-year period beginning in May
2010. The Victory Park loan is due in full in 2011. Our various stock offerings have provided needed cash but it is uncertain whether we can obtain future financing under favorable terms, or at all.



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The current need of major pharmaceutical companies to add products to their pipeline is a favorable sign for us and for
other small biopharmaceutical companies. However, this need is subject to rapid change and it is uncertain whether any additional pharmaceutical companies will have interest in licensing our products or technologies.

Revenue

Our revenue is summarized as follows for the three-month and
nine-month periods ended September 30, 2008 and 2007:



|                           |  |                                 |           |                                |   |           |  |      |            |  |   |           
|-------------------------- |  | ------------------------------- | --------- | ------------------------------ | - | --------- |  | ---- | ---------- |  | - | ----------
|                           |  | Three Months EndedSeptember 30, |           | Nine Months EndedSeptember 30,
|                           |  | 2008                            |           | 2007                           |   | 2008      |  | 2007
|Product Sales              |  | $                               | 2,644,567 |                                | $ | 4,142,635 |  | $    | 7,931,708  |  | $ | 11,258,044
|Royalties                  |  |                                 | 1,632,737 |                                |   | 1,628,476 |  |      | 4,245,962  |  |   | 4,548,575 
|Licensing Revenue          |  |                                 | 314,187   |                                |   | 280,691   |  |      | 942,567    |  |   | 859,237   
|Development Fees and other |  |                                 | 492,329   |                                |   | 291,668   |  |      | 1,255,534  |  |   | 724,098   
|                           |  |                                 |           |                                |   |           |  |      |            |  |   |           
|                           |  | $                               | 5,083,820 |                                | $ | 6,343,470 |  | $    | 14,375,771 |  | $ | 17,389,954
|                           |  |                                 |           |                                |   |           |  |      |            |  |   |           

Revenue for the three months ended September 30, 2008 decreased $1,259,000, or 20%, to $5,084,000 from
$6,343,000 in the comparable period in 2007. Revenue for the nine months ended September 30, 2008 decreased $3,014,000, or 17%, to $14,376,000 from $17,390,000 in the comparable period in 2007. The three month decrease was attributable to
decreased Fortical sales of $1,498,000, partially offset by increased other revenue of $201,000, primarily from development fees. The nine month decrease was primarily due to a decrease in revenue from Novartis of $2,500,000, due to the revenue
recognized in 2007 under the 2007 supply agreement with Novartis, as compared to 2008. Under this supply agreement, we recognized $2,200,000 in product sales and $300,000 in development service fees for the nine months ended September 30, 2007.
Fortical sales to USL decreased 36% to $2,645,000 for the three months ended September 30, 2008 as compared to $4,143,000 for the three months ended September 30, 2007 and decreased 12% to $7,932,000 for the nine months ended
September 30, 2008 from $9,058,000 for the nine months ended September 30, 2007. Fortical sales fluctuate each quarter based upon USLs ordering schedule. Fortical royalties for the quarter ended September 30, 2008 increased
$5,000 to $1,633,000 from $1,628,000 in the comparable period of 2007 and, for the nine months ended September 30, 2008, decreased $303,000, or 7%, to $4,246,000 from $4,549,000 in the comparable period of 2007. Royalties for the nine months
ended September 30, 2007 included an extra month of royalty revenue (see below). Fortical royalties fluctuate each quarter based upon the timing of USLs shipment to its customers. Royalty revenue is earned on sales of Fortical by USL and
is recognized in the period Fortical is sold by USL. USLs royalty reports are based on their manufacturing quarters which prior to 2007 differed from calendar quarters by one month. Starting in the first quarter of 2007, USL began providing
royalty information for the last month of the calendar quarter. Therefore, our March 31, 2007 quarter (and only that quarter) included royalty revenue for four months, from December 2006 through March 2007. Subsequent quarters have reported
three months of royalty revenue, corresponding to our calendar quarters. The effect of the inclusion of the fourth month of royalty revenue in the nine months ended September 30, 2007 was an additional $536,000 of royalty revenue.



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Future sales and royalties are contingent upon many factors including competition, pricing, marketing and acceptance in
the marketplace and, therefore, are difficult to predict. Licensing revenue represents the partial recognition of milestones and up-front payments received in prior years. Milestone revenue is based upon one-time events and is generally correlated
with the development strategy of our licensees and is therefore subject to uncertain timing and not predictive of future revenue. Bulk peptide sales to our partners under license or supply agreements prior to product approval are typically of
limited quantity and duration and also not necessarily predictive of future revenue. Additional peptide sales are dependent upon the future needs of our partners, which we cannot currently estimate. Sales revenue and royalty revenue could increase
in future years if USL is able to continue to increase market share for Fortical. Sales revenue from Fortical in future years will depend on Forticals continued acceptance in the marketplace, as well as competition and other factors. It is
uncertain whether or not Fortical alone will eventually generate sufficient revenue for us to achieve profitability.

Costs and Expenses

Cost of goods sold varies by product and consists primarily of material costs, personnel costs, manufacturing supplies and overhead costs, such as depreciation and
maintenance. Cost of goods sold decreased 46% to $1,456,000 from $2,686,000 for the three months ended September 30, 2008 as compared to the same period in 2007 and decreased 28% to $4,557,000 from $6,365,000 for the nine months ended
September 30, 2008 as compared to the same period in 2007. Cost of goods sold were higher in 2007 due to the additional sales to Novartis and USL. Cost of goods sold for 2008 represented our costs associated with Fortical production for USL,
whose purchases from us fluctuate each quarter. Cost of goods sold for 2007 represented our costs associated with our Fortical production for USL and our peptide production for Novartis. Future production related expenses for 2008 and later years
are dependent upon the level of future Fortical sales, as well as possible peptide production to meet our partners needs.

Research, development and
facility expenses primarily consist of costs for personnel, supplies, outside testing and consultants primarily related to our research and development efforts or activities related to our license agreements, as well as depreciation and amortization
expense. All of our production and a portion of our research, development and facility costs are associated with our manufacturing facility in Boonton, New Jersey, where costs are relatively fixed month-to-month. We allocate such costs to the
manufacture of production batches for inventory purposes, to cost of goods sold or to research, development and facility activities, based upon the activities undertaken by the personnel in Boonton each period.

Research, development and facilities expense increased 14% to $2,171,000 from $1,912,000 for the three months ended September 30, 2008 as compared to the same
period in 2007. Payroll expenses increased $185,000 due to increased health insurance costs, salaries and personnel. In addition, contractual research increased $69,000, primarily due to outside testing expenses related to our ongoing feasibility
studies.

Research, development and facilities expense increased 7% to $6,661,000 from $6,215,000 for the nine months ended September 30, 2008 as
compared to the same period in 2007. Cost of materials and supplies decreased $984,000, primarily due to the higher calcitonin production for inventory in the first nine months of 2008 which reduced 2008 material expense allocated to research and
development. Payroll expenses increased $579,000 in 2008 primarily reflecting the reduced allocation of payroll expenses to Fortical in 2008 as compared to the higher allocation of payroll expenses to production for USL and Novartis in 2007. In
addition, expenses for contractual research increased $336,000 primarily due to in-licensing of technology from Queen Mary, University of London; expenses for our oral calcitonin program increased $330,000, primarily due to an already completed
clinical trial; and expenses for utilities increased $199,000 due to increased energy costs. Research and development expenses may further increase in 2008, as compared to 2007, due to our continuing expenditures to further develop our oral
calcitonin and oral PTH products (including one or more clinical trials). Expenses could decline if we are reimbursed for certain of our development costs.



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General and administrative expenses increased 5% to $1,792,000 from $1,707,000 for the three months ended
September 30, 2008 as compared to the same period in 2007. The increase was primarily attributed to increases of $169,000 in personnel expenses and $218,000 in various other expenses including joint venture, utilities and travel expenses,
mostly offset by a decrease of $319,000 in professional fees due to reduced legal fees related to the Apotex litigation. General and administrative expenses increased 4% to $5,907,000 from $5,686,000 for the nine months ended September 30, 2008
as compared to the same period in 2007. The increase was primarily attributed to increases of $287,000 in personnel expenses, an increase of $105,000 in travel expenses, an increase of $255,000 in joint venture, office, investor relations expenses
and depreciation, mostly offset by a decrease of $406,000 in professional fees due to reduced legal fees related to the Apotex litigation. We expect general and administrative expenses to continue to increase in 2008, as compared to 2007, due to
additional joint venture and depreciation expenses and to possible additional personnel costs.

Other Income/Expense

Interest expense increased 22% in the third quarter of 2008 to $348,000 from $286,000 in the third quarter of 2007, and decreased 3% for the nine months ended
September 30, 2008 to $1,028,000 from $1,058,000 for the nine months ended September 30, 2007. The three month increase was due to increased accrued interest on the Levy loans. The nine month decrease was due to the loan restructuring
described below. On May 10, 2007, the outstanding principal and interest on all stockholder loans totaled $15,737,517 after an aggregate of $1,010,000 in repayments during 2007. On that date, interest rates ranged from 8.5% to 14.2% with
certain loans accruing compound interest. The total of $15,737,517 in principal and interest was restructured as eight-year term notes with a fixed simple interest rate of 9% per annum. Interest expense is calculated using an effective interest
method, at a rate of 7.6%, over the life of the restructured loans due to the deferred payment schedule contained in the notes. Required quarterly payments of principal and interest under these new notes begin in May 2010 over a five-year period. We
expect interest expense to increase in future years due to our $15,000,000 note issued to Victory Park. This note will increase our cash and non-cash interest expense by approximately $700,000 or more per quarter, depending on prevailing interest
rates.

Net Loss

Net loss for the three months ended
September 30, 2008 increased approximately $447,000, or 186%, to $687,000 from $240,000 for the corresponding period in 2007. This was due to decreased revenue of $1,260,000, primarily due to decreased Fortical sales This was partially offset
by a decrease in operating expenses of $886,000, primarily a result of decreased cost of goods sold of $1,230,000, partially offset by an increase in research and development and general and administrative expenses. Net loss for the nine months
ended September 30, 2008 increased approximately $1,963,000, or 110%, to $3,741,000 from $1,778,000 for the corresponding period in 2007. This was due to decreased revenue of $3,014,000 primarily from Novartis, partially offset by a decrease in
operating expenses of $1,140,000 mainly from a decrease in cost of goods sold due to the 2007 peptide sales to Novartis. Net losses are likely to continue unless we achieve non-deferred revenue from milestones under our GSK and Novartis agreements,
sign new revenue generating research, licensing or distribution agreements or generate sufficient sales and royalties from Fortical.



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LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2008, we had cash and cash equivalents of $14,705,000, an increase of $11,027,000 from December 31, 2007, and we had working capital of approximately $17,400,000. On September 30, 2008,
we entered into a financing agreement with Victory Park pursuant to which we borrowed $15,000,000 from Victory Park and, in connection therewith, we issued to Victory Park a three-year senior secured non-convertible term note and 1,125,000 shares of
our common stock. We received net proceeds of $14,372,000 after fees and closing expenses (see Item 1, Note G to the financial statements). Other cash received during 2008 was primarily from Fortical sales and royalties received under our
agreement with USL. Our primary sources of cash have historically been (1) licensing fees for new agreements, (2) milestone payments under licensing or development agreements, (3) bulk peptide sales under licensing or supply
agreements, (4) stockholder loans and (5) the sale of our common stock. Since August 2005, we have also generated cash from Fortical sales and royalties. We cannot be certain that any of these cash sources will continue to be available to
us in future years. Licensing fees from new collaborations are dependent upon the successful completion of complex and lengthy negotiations. Milestone payments are based upon progress achieved in collaborations, which cannot be guaranteed, and are
often subject to factors that are controlled neither by our licensees nor us. Product sales to our partners under these agreements are based upon our licensees needs, which are sometimes difficult to predict. Sale of our common stock is
dependent upon our ability to attract interested investors, our ability to negotiate favorable terms and the performance of the stock market in general and biotechnology investments in particular. We may choose to issue an additional $5,000,000 of
term notes to Victory Park, under the same terms as the issued notes, by September 30, 2010. Future Fortical sales and royalties will be affected by competition and further acceptance in the marketplace and could be impacted by manufacturing,
distribution or regulatory issues.

To satisfy our short-term liquidity needs, the Levys from time to time (prior to 2003) made loans to us. The total owed
aggregated $15,737,517 and was restructured on May 10, 2007 as eight-year term notes with a fixed simple interest rate of 9% per annum. Required quarterly payments of principal and interest under these new notes begin in May 2010 and
continue over a five-year period (see Item 1, Note F to the financial statements).

We believe that in the short-term we will generate cash to apply
toward funding our operations primarily through sales of Fortical to our U.S. licensee, USL, royalties on USLs sales of Fortical and the achievement of milestones under our existing license agreements and, in the long-term, on sales and
royalties from the sale of Fortical and other licensed products and technologies. We are actively seeking additional licensing and/or supply agreements with pharmaceutical companies for oral and nasal forms of calcitonin, as well as for other
peptides, for our peptide manufacturing technology and for our SDBG technology. However, we may not be successful in achieving milestones under our current agreements, in obtaining regulatory approval for our other products or in licensing any of
our other products or technologies.

In April 2002, we signed a licensing agreement with GSK for a value before royalties, bulk product sales and
reimbursement for development expenses of up to $150,000,000 to develop an oral formulation of an analog of PTH, currently in clinical development for the treatment of osteoporosis. PTH is in an early stage of development and it is too early to
speculate on the probability or timing of a marketable PTH product (see Item 1, Note C to the financial statements).

In November 2002, we signed an
exclusive U.S. licensing agreement with USL for a value before royalties of $10,000,000 to market Fortical, our patented nasal formulation of calcitonin for the treatment of osteoporosis. During the first nine months of 2008, Fortical sales were
$7,932,000 and Fortical royalties were $4,246,000. We expect Fortical sales and royalties to continue in future years, but we cannot predict the levels of activity (see Item 1, Note D to the financial statements).



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In April 2004, we signed a worldwide licensing agreement with Novartis for a value before royalties of up to $18,700,000
to allow Novartis to manufacture calcitonin using our patented peptide production process. We will receive royalties on sales of any existing or future Novartis products that contain calcitonin manufactured by Novartis using our process. We plan to
continue to develop our own calcitonin products. (see Item 1, Note E to the financial statements).

We are engaged in the research, production and
delivery of peptide-related products. Our primary focus has been on the development of manufacturing processes and delivery technologies for various peptide products for the treatment of osteoporosis, including nasal and oral calcitonin and oral
PTH. We are also developing potential products in the area of SDBG. In general, we seek to develop the basic product or technology and then license the product or technology to an established pharmaceutical, biotechnology or medical device company
to complete the development, clinical trials and regulatory process. As a result, we will not control the nature, timing or cost of bringing our products and technologies to market. Each of these products and technologies is in various stages of
completion.



| |  |  | For nasal calcitonin, a license agreement was signed in November 2002 with USL. Fortical was approved by the FDA and launched by USL in August 2005, generating
recurring sales and royalties.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For oral calcitonin, we have interests in two ongoing programs. An external program with our licensee Novartis is currently in Phase III. The anticipated completion
date is outside our control and unknown to us. For our internal program, we are seeking a licensee to participate in our products development. A small, short-term Phase I human study was initiated and successfully concluded in 2007. In
February 2008, we initiated and successfully concluded a Phase I/II clinical study. The costs of future clinical trials will most likely be borne by a future licensee. Because additional clinical trials are still necessary for our oral calcitonin
product, and we have not yet licensed the product, it is too early to speculate on the probability or timing of a marketable product. We may incur certain additional development costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For oral PTH, we signed a license agreement with GSK in April 2002. A Phase I human trial, which commenced in 2004, demonstrated positive preliminary results. A
small, short-term Phase I human study was initiated in October 2008 using our improved oral delivery technology. PTH is in an early stage of development and it is therefore too early to speculate on the probability or timing of a marketable oral PTH
product. We may incur certain additional development costs. GSK may ultimately purchase, and thereby acquire the rights to, our data from this study and our development activities, but we have no assurances that they will do so.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Under the terms of various agreements related to a joint venture in China with SPG and CPG, we are obligated to contribute up to $3,150,000 as our initial capital
contribution, consisting of $1,050,000 in cash and the balance in certain technologies and know-how which we are licensing to the joint venture. (See Item 1, Note I to the financial statements).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For our SDBG program, we have conducted various preclinical studies. This program is in a very early stage of development and, therefore, it is too early to
speculate on the probability or timing of a license agreement for this technology or on a possible commercial product.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Due to our
limited financial resources, any decline in Fortical sales, or delay in achieving milestones under our existing license agreements, or in signing new license or distribution agreements for our products, or loss of patent protection, may have an
adverse effect on our cash flow and operations. In July 2006, we and USL jointly filed a patent infringement lawsuit against Apotex for



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infringement of our nasal calcitonin patent. If we are unsuccessful in our lawsuit, and if Apotex receives FDA approval and is able to launch its generic
version of our product, the launch could have an adverse effect on our cash flow and operations. In addition, any material interruption or failure in manufacturing, marketing or distribution of Fortical will have an adverse effect on our cash flow
and operations.

If USL cannot continue to successfully market Fortical, or if we are unable to achieve significant milestones or sales under our existing
agreements and/or enter into a new significant revenue generating license or other arrangement we would need to secure another source of funding in order to satisfy our working capital needs or significantly curtail our operations. Should the
funding we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequence would be a material adverse effect on our business, operating results, financial condition and prospects. We
believe that satisfying our capital requirements over the long term will require the successful commercialization of one or more of our oral or nasal calcitonin products, our oral PTH product, our SDBG program or another peptide product in the U.S.
and/or abroad. However, it is uncertain whether or not any of our products other than Fortical will be approved or will be commercially successful.

We
have incurred annual operating losses since our inception and, as a result, at September 30, 2008, had an accumulated deficit of approximately $127,000,000. Our cash requirements to operate our research and peptide manufacturing facilities and
develop our products have increased over the past two years due to higher spending on internal research projects, including oral calcitonin, oral PTH and SDBG, as well as patent infringement litigation costs. In addition, over the next year, we have
committed to purchase approximately $800,000 of materials for use in our internal development programs.

SUMMARY OF CRITICAL ACCOUNTING POLICIES

The SEC defines critical accounting policies as those that are both important to the portrayal of a companys financial condition and
results, and require managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

The following discussion of critical accounting policies represents our attempt to bring to the attention of the readers of this report those accounting policies which
we believe are critical to our financial statements and other financial disclosure. It is not intended to be a comprehensive list of all of our significant accounting policies, which are more fully described in Note 3 of the Notes to the Financial
Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for managements judgment in the
application of GAAP.

Revenue Recognition: We recognize revenue from the sale of products and from royalties, licensing agreements, research
services and grants. Revenue from the sale of product is recognized when title to product and risk of loss are transferred, collection is reasonably assured and we have no further obligations. If there are elements of the revenue recognition
requirements that are not met at the time of shipment, the revenue is deferred and the corresponding cost of the product is included on our balance sheet as a deferred asset. Revenue from research services is recognized when services are rendered.
We occasionally apply to various government agencies for research grants. Revenue from such research grants is recognized when work is conducted under the grant. Sales and grant revenues generally do not involve difficult, subjective or complex
judgments. We recognize royalty revenue on an accrual basis in accordance with the terms of individual agreements. If the receipt of royalty revenue is contingent on a future event,



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revenue would be recognized when that event has occurred. Typically, royalties are recognized when third party results can be reliably measured and
collectibility is reasonably assured. In the case of USL, we recognize royalty revenue based upon the quarterly USL royalty report. This enables a reliable measure, as well as reasonable assurances of collectibility. Royalty revenue is earned on
sales of Fortical by USL and is recognized in the period Fortical is sold by USL. USLs royalty reports are based on their manufacturing quarters which prior to 2007 differed from calendar quarters by one month. Starting in the first quarter of
2007, USL began providing royalty information for the last month of the calendar quarter. Therefore, our March 31, 2007 quarter (and only that quarter) included royalty revenue for four months, from December 2006 through March 2007. All
subsequent quarters have reported three months of royalty revenue, corresponding to our calendar quarters.

Licensing agreements typically include several
elements of revenue, such as up-front payments, milestones, royalties upon sales of product and the delivery of product and/or research services to the licensee. We follow the accounting guidance of SEC Staff Accounting Bulletin No. 104 (which
superseded SEC Staff Accounting Bulletin No. 101) (SAB 104), an analogy to EITF No. 91-6 and EITF No. 00-21 (which became effective for contracts entered into after June 2003). Non-refundable license fees received upon
execution of license agreements where we have continuing involvement are deferred and recognized as revenue over the estimated performance period of the agreement. This requires management to estimate the expected term of the agreement or, if
applicable, the estimated life of its licensed patents. For our USL and GSK agreements, the following describes our revenue recognition accounting policy. Non-refundable milestone payments that represent the completion of a separate earnings process
and a substantive step in the research and development process are recognized as revenue when earned at the lesser of 1) the non-refundable cash received or 2) the proportionate level of effort expended to date during the development stage
multiplied by the development stage revenue. This sometimes requires management to judge whether or not a milestone has been met and when it should be recognized in the financial statements. Payments for milestones for which the completion of the
earnings process is not yet complete (for example, payment received for the commencement of an activity that represents a separate earnings process) are recognized over the estimated performance period of such activity. This is to comply with the
provisions of SAB 104, which provides for revenue to be recognized once delivery has occurred or services have been rendered. Royalties and/or milestones relating to sales of products by our licensees, and the delivery of products and research
services, will be recognized as such events occur as they represent the completion of a separate earnings process.

In addition, EITF No. 00-21 requires a
company to evaluate its arrangements under which it will perform multiple revenue-generating activities. For example, a license agreement with a pharmaceutical company may involve a license, research and development activities and/or contract
manufacturing. Management is required to determine if the separate components of the agreement have value on a standalone basis and qualify as separate units of accounting, whereby consideration is allocated based upon their relative fair
values or, if not, the consideration should be allocated based upon the residual method. The adoption of EITF No. 00-21 had a significant impact on our 2004 and 2007 financial statements due to the deferral of revenue from
milestones achieved in those years under our 2004 Novartis license agreement. Accordingly, development stage milestone payments will be deferred and recognized as revenue over the performance period of such license agreement. As of
September 30, 2008, approximately $6,113,000 of milestone payments from Novartis was being deferred over the estimated performance period through 2018.

Accounting for Stock Options: For stock options granted to employees and directors, we recognize compensation expense based on the grant-date fair value estimated in accordance with SFAS 123(R). We estimate the fair value of each
option award on the date of grant using the Black-Scholes option pricing model. Stock options and warrants issued to consultants are accounted for in accordance with SFAS 123(R) and EITF No. 96-18. Compensation expense is calculated each
quarter for consultants using the Black-Scholes option pricing model until the option is fully vested and is included in research, development and facility expenses.



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Inventory: Production inventories, at our Boonton, NJ location are stated at the lower of cost or market, valued
at actual cost which approximates FIFO. Research inventories, at our Fairfield, NJ location, are stated at the lower of cost (using the FIFO method) or market. Typically, finished goods and work in process inventory are fully reserved except for the
amounts deemed saleable by management based upon current or anticipated orders, primarily under contractual arrangements.

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

Patents and Other Intangibles: Amounts paid for patents and trademarks are capitalized. Patent and trademark costs are deferred pending the successful outcome of
the relevant applications. These costs primarily consist of outside legal fees and typically relate to filings and prosecution of applications for improvements to existing patents or to the filings of foreign applications based upon domestic
patents. Most of these applications relate to our patented peptide manufacturing and patented oral delivery technologies. Internal costs related to intangible assets are expensed as incurred. Successful patent costs are amortized using the
straight-line method over the lives of the patents, typically five to fifteen years. Successful trademark costs are amortized using the straight-line method over their estimated useful lives of typically five to ten years. We assess the impairment
of identifiable intangibles and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable, or we decide not to support the applications in certain jurisdictions. Some factors we
consider important which could trigger an impairment review include (i) significant underperformance relative to expected historical or projected future operating results; (ii) significant changes in the manner of our use of the acquired
assets or the strategy for our overall business; and (iii) significant negative industry or economic trends.

When we determine that the carrying
value of intangible assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we first will perform an assessment of the assets recoverability based on expected undiscounted future net cash
flow, and if the amount is less than the assets value, we will measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current
business model. Unsuccessful patent costs are expensed when determined worthless or when patent applications will no longer be pursued. Other intangibles are recorded at cost and are amortized over their estimated useful lives.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Prior
to our May 2007 debt restructuring, we were exposed to fluctuations in interest rates due to the use of variable rate debt as a component of the funding of our operations. We did not employ specific strategies, such as the use of derivative
instruments or hedging, to manage our interest rate exposure. Beginning in the first quarter of 2001, our interest rate exposure on our notes payable-stockholders was affected by our failure to make principal and interest payments when due. In May
2007, these notes were restructured into long-term notes with a fixed simple interest rate. For a further discussion, please see Managements Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources, as well as Item 1, Note F. On September 30, 2008 we entered into a financing agreement with Victory Park whereby Victory Park purchased $15,000,000 of



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three-year senior secured non-convertible term notes from us. These notes bear interest at the prime rate plus 7%, subject to a floor of 14% per annum
and a cap of 18% per annum. Therefore, beginning in the fourth quarter of 2008, we will be exposed to interest rate fluctuations in the near-term and long-term until these notes are repaid in full. We estimate that, due to the short-term nature
of our cash and investments, a change of 100 basis points in interest rates would not have materially affected their fair value.

The information below
summarizes our market risks associated with interest bearing debt obligations as of September 30, 2008. The table below presents principal cash flows and related interest rates by year of maturity based on the terms of the debt. Given our
financial condition described in Liquidity and Capital Resources it is not practicable to estimate the fair value of our debt instruments.



|                                |  |                |            |               |      |       |      |   |       |  |      |           |            |   |            |  |   |           |  |   |          
|------------------------------- |  | -------------- | ---------- | ------------- | ---- | ----- | ---- | - | ----- |  | ---- | --------- | ---------- | - | ---------- |  | - | --------- |  | - | ---------
|                                |  | CarryingAmount |            | Calendar Year
|Debt Obligations                |  |                | 2008       |               | 2009 |       | 2010 |   | 2011  |  | 2012 |           | Thereafter
|Note payable  Victory Park     |  |                |            |               |      |       |      |   |       |  |      |           |            |   |            |  |   |           |  |   |          
|Variable interest rate: 14% (1) |  | $              | 15,000,000 |               | $    |      |      | $ |      |  | $    |          |            | $ | 15,000,000 |  | $ |          |  | $ |         
|Notes payable - stockholders    |  |                | 15,737,517 |               |      |      |      |   |      |  |      | 2,360,628 |            |   | 3,147,503  |  |   | 3,147,503 |  |   | 7,081,883
|Fixed interest rate: 9%         |  |                |            |               |      |       |      |   |       |  |      |           |            |   |            |  |   |           |  |   |          
|Capital leases                  |  |                | 5,126      |               |      | 3,260 |      |   | 1,866 |  |      |          |            |   |           |  |   |          |  |   |         
|                                |  |                |            |               |      |       |      |   |       |  |      |           |            |   |            |  |   |           |  |   |          
|Fixed interest rates: 9%-12%    |  |                |            |               |      |       |      |   |       |  |      |           |            |   |            |  |   |           |  |   |          
|Total                           |  | $              | 30,742,643 |               | $    | 3,260 |      | $ | 1,866 |  | $    | 2,360,628 |            | $ | 18,147,503 |  | $ | 3,147,503 |  | $ | 7,081,883
|                                |  |                |            |               |      |       |      |   |       |  |      |           |            |   |            |  |   |           |  |   |          



|(1) | Prime rate plus 7%, with a floor of 14% and a cap of 18%.
|--- | ---------------------------------------------------------



|Item 4. | Controls and Procedures
|------- | -----------------------

For the quarterly period ending
September 30, 2008, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this report. Based upon this
evaluation, our principal executive officer and our principal financial officer concluded that, as of September 30, 2008, our disclosure controls and procedures were designed and were being operated in a manner that provides reasonable
assurance that the information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Furthermore, our
principal executive officer and our principal financial officer concluded that there were no significant changes in our disclosure controls and procedures or in other factors that could significantly affect our disclosure controls and procedures
during the quarterly period ended September 30, 2008.

Our management, including the principal executive officer and principal financial officer, does
not expect that our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, cannot provide assurance that the objectives of the control system are met, and no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.



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Additionally, our principal executive officer and principal financial officer determined that there were no changes in
our internal control over financial reporting during the quarterly period ended September 30, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|Item 1A. | Risk Factors
|-------- | ------------

We make various statements in this section which
constitute forward-looking statements under Section 27A of the Securities Act of 1933, as amended. See Special Note Regarding Forward-Looking Statements in Part 1, Item 2 of this Quarterly Report.

Our performance and financial results are subject to risks and uncertainties including, but not limited to, the specific risks disclosed in Part I, Item 1A, Risk
Factors, in our Annual Report on Form 10-K for the year ended December 31, 2007. Except as noted below, no material changes to the risk factors disclosed in the 10-K have been identified during the three months ended September 30, 2008:

We have significant historical losses and may continue to incur losses in the future.

We have incurred annual losses since our inception. As a result, at September 30, 2008, we had an accumulated deficit of approximately $127,000,000. Our gross revenues for the nine months ended September 30,
2008, and the years ended December 31, 2007, 2006 and 2005 were $14,376,000, $20,423,000, $6,059,000 and $14,276,000, respectively. Our revenues have not been sufficient to sustain our operations. Revenue for the nine months ended
September 30, 2008 consisted primarily of Fortical sales and royalties. As of September 30, 2008, we had three material revenue generating license agreements. We believe that to achieve profitability we will require at least the successful
commercialization of our oral or nasal calcitonin products, our oral PTH product, our SDBG technology or another peptide product in the U.S. or abroad.

For the nine months ended September 30, 2008 we had an operating loss of $2,750,000. For 2007 and 2006 we had losses from operations of $3,099,000 and $10,980,000, respectively. For 2005, we had operating income of $594,000. Our
net loss for the nine months ended September 30, 2008 was $3,741,000. Our net losses for the years ended December 31, 2007, 2006 and 2005 were $3,448,000, $11,784,000 and $496,000, respectively. We might never be profitable.

The exercise of warrants and options, as well as other issuances of shares, will likely have a dilutive effect on our stock price.

As of September 30, 2008, there were outstanding warrants to purchase 2,121,571 shares of our common stock, all but 20,000 of which were exercisable at
September 30, 2008, at an average exercise price of $2.95 per share. There were also outstanding stock options to purchase an aggregate of 4,623,315 shares of common stock, at an average exercise price of $1.41, of which 3,423,040 were
exercisable. The exercise of warrants or options at prices below the market price of our common stock could adversely affect the price of our common stock. Additional dilution may result from the issuance of shares of our common stock in connection
with collaborations or licensing agreements or in connection with financing efforts, such as our issuance of stock in connection with our loan from Victory Park.



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We have financial obligations under the various agreements related to our joint venture in China.

Under the terms of the various agreements related to our joint venture in China, we are obligated to contribute in cash an aggregate of $2,250,000. Our initial cash
contribution, is $1,050,000 of which $75,000 has been paid. SPG has assigned its joint venture rights and obligations to its subsidiary, CPG, and CPG has agreed to lend us the balance of our initial cash contribution of $975,000 for two years on an
interest-free basis. Following our initial contribution we are obligated to contribute up to an additional $1,200,000 in cash. In lieu of cash repayment of our initial cash contribution or future cash contributions, we may reduce our equity
participation in the joint venture or provide additional technologies to the joint venture.

The global financial crisis may adversely affect our
business and financial results.

The global credit crisis that began in 2007 was further exacerbated by events occurring in the financial markets in the
fall of 2008. These events have negatively impacted the ability of corporations to raise capital through equity financings or borrowings. The credit crisis may continue for the foreseeable future. If it continues until that time when we may need
additional financing, we may not be able to raise such capital on reasonable terms, if at all. In addition, uncertainty about current and future global economic conditions may cause consumers to defer purchases of prescription medicines, such as
Fortical, in response to tighter credit, decreased cash availability and declining consumer confidence. Accordingly, future demand for our product could differ from our current expectations.



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|Item 6. | Exhibits
|------- | --------



|       |  |                                                                                                                                                                                                                                                                            
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                                                                
|       | 
|10.1   |  | Financing Agreement, dated as of September 30, 2008, by and among the Company, the Lenders and Victory Park Management, LLC, as agent, incorporated
by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K filed on October 6, 2008 (the 8-K Report).
|       | 
|10.2   |  | Senior Secured Term Note, dated September 30, 2008, issued by the Company in favor of the Lender signatory to the Financing Agreement, incorporated by reference from Exhibit 10.2 to the 8-K
Report.                                                                      
|       | 
|10.3   |  | Pledge and Security Agreement, dated as of September 30, 2008, by and among the Company, Victory Park Management, LLC, as agent, and the Secured Parties, incorporated by reference from Exhibit
10.3 to the 8-K Report. *                                                 
|       | 
|10.4   |  | Registration Rights Agreement, dated as of September 30, 2008, by and among the Company and the Lenders, incorporated by reference from Exhibit 10.4 to the 8-K Report.                                                                                                    
|       | 
|10.5   |  | Affiliate Subordination Agreement, dated as of September 30, 2008, by and among the Company, Jay Levy, Jaynjean Levy Family Limited Partnership and Victory Park Management, LLC, as agent for the
Lenders, incorporated by reference from Exhibit 10.5 to the 8-K Report. 
|       | 
|10.6   |  | Amended and Restated Secured Promissory Note, dated September 30, 2008, issued by the Company in favor of Jay Levy, incorporated by reference from Exhibit 10.6 to the 8-K
Report.                                                                                         
|       | 
|10.7   |  | Amended and Restated Secured Promissory Note, dated September 30, 2008, issued by the Company in favor of the Jaynjean Levy Family Limited Partnership, incorporated by reference from Exhibit
10.7 to the 8-K Report.                                                     
|       | 
|10.8   |  | Third Modification of Mortgage and Security Agreement, dated September 30, 2008, by and between the Company and Jay Levy, incorporated by reference from Exhibit 10.8 to the 8-K
Report.                                                                                   
|       | 
|10.9   |  | Lock-Up Agreement, dated as of September 30, 2008, by and among the Company and the Lenders, incorporated by reference from Exhibit 10.9 to the 8-K Report.                                                                                                                
|       | 
|31.1   |  | Certification by Warren P. Levy pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                 
|       | 
|31.2   |  | Certification by William Steinhauer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                             
|       | 
|32.1   |  | Certification by Warren P. Levy pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                 
|       | 
|32.2   |  | Certification by William Steinhauer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                             



|* | Portions of the exhibit have been omitted pursuant to a request for confidential treatment.
|- | -------------------------------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                        |  |  |  |                            |  |                                                               
|----------------------- |  |  |  | -------------------------- |  | --------------------------------------------------------------
|                        |  |  |  | UNIGENE LABORATORIES, INC.
|                        |  |  |  | (Registrant)              
|                        |  |  | 
|Date: November 10, 2008 |  |  |  | By:                        |  | /s/ Warren P. Levy                                            
|                        |  |  |  |                            |  | Warren P. Levy, President                                     
|                        |  |  |  |                            |  | (Chief Executive Officer)                                     
|                        |  |  | 
|                        |  |  |  | By:                        |  | /s/ William Steinhauer                                        
|                        |  |  |  |                            |  | William Steinhauer, Vice President of Finance                 
|                        |  |  |  |                            |  | (Principal Financial Officer and Principal Accounting
Officer)



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##### Table of Contents

UNIGENE LABORATORIES, INC.

INDEX TO EXHIBITS



|     |  |                                                                                                                                                                                                                                                                            
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.  |  | EXHIBIT                                                                                                                                                                                                                                                                    
|     | 
|10.1 |  | Financing Agreement, dated as of September 30, 2008, by and among the Company, the Lenders and Victory Park Management, LLC, as agent, incorporated by reference from Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on October 6, 2008 (the 8-K Report).
|     | 
|10.2 |  | Senior Secured Term Note, dated September 30, 2008, issued by the Company in favor of the Lender signatory to the Financing Agreement, incorporated by reference from Exhibit 10.2 to the 8-K
Report.                                                                      
|     | 
|10.3 |  | Pledge and Security Agreement, dated as of September 30, 2008, by and among the Company, Victory Park Management, LLC, as agent, and the Secured Parties, incorporated by reference from Exhibit
10.3 to the 8-K Report. *                                                 
|     | 
|10.4 |  | Registration Rights Agreement, dated as of September 30, 2008, by and among the Company and the Lenders, incorporated by reference from Exhibit 10.4 to the 8-K Report.                                                                                                    
|     | 
|10.5 |  | Affiliate Subordination Agreement, dated as of September 30, 2008, by and among the Company, Jay Levy, Jaynjean Levy Family Limited Partnership and Victory Park Management, LLC, as agent for the
Lenders, incorporated by reference from Exhibit 10.5 to the 8-K Report. 
|     | 
|10.6 |  | Amended and Restated Secured Promissory Note, dated September 30, 2008, issued by the Company in favor of Jay Levy, incorporated by reference from Exhibit 10.6 to the 8-K
Report.                                                                                         
|     | 
|10.7 |  | Amended and Restated Secured Promissory Note, dated September 30, 2008, issued by the Company in favor of the Jaynjean Levy Family Limited Partnership, incorporated by reference from Exhibit
10.7 to the 8-K Report.                                                     
|     | 
|10.8 |  | Third Modification of Mortgage and Security Agreement, dated September 30, 2008, by and between the Company and Jay Levy, incorporated by reference from Exhibit 10.8 to the 8-K
Report.                                                                                   
|     | 
|10.9 |  | Lock-Up Agreement, dated as of September 30, 2008, by and among the Company and the Lenders, incorporated by reference from Exhibit 10.9 to the 8-K Report.                                                                                                                
|     | 
|31.1 |  | Section 302 Certification of the Principal Executive Officer                                                                                                                                                                                                               
|     | 
|31.2 |  | Section 302 Certification of the Principal Financial Officer                                                                                                                                                                                                               
|     | 
|32.1 |  | Section 906 Certification of the Principal Executive Officer                                                                                                                                                                                                               
|     | 
|32.2 |  | Section 906 Certification of the Principal Financial Officer                                                                                                                                                                                                               



|* | Portions of the exhibit have been omitted pursuant to a request for confidential treatment
|- | ------------------------------------------------------------------------------------------



36