##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended June 30, 2005



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



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Unigene Laboratories, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 22-2328609                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                             |  |           
|-------------------------------------------- |  | ----------
|110 Little Falls Road, Fairfield, New Jersey |  | 07004     
|(Address of principal executive offices)     |  | (Zip Code)



Registrants
telephone number, including area code: (973) 882-0860





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



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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 an accelerated filer (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 81,980,456 shares as of August 26, 2005



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##### Table of Contents

INDEX



UNIGENE LABORATORIES, INC.



|                                                                                              |  |                                                     |  |     
|--------------------------------------------------------------------------------------------- |  | --------------------------------------------------- |  | ----
|                                                                                              |  |                                                     |  | PAGE
|                                                                                              | 
|PART I.
FINANCIAL INFORMATION                                                                 |  |                                                    
|                                                                                              | 
|Item 1.
Financial Statements (Unaudited)                                                      |  |                                                    
|                                                                                              | 
|Condensed Balance Sheets-June 30, 2005 and December 31, 2004                                  |  | 3                                                  
|                                                                                              | 
|Condensed Statements of Operations-Three and six months ended June 30, 2005 and 2004          |  | 4                                                  
|                                                                                              | 
|Condensed Statement of Stockholders DeficitSix months ended June 30, 2005                    |  | 5                                                  
|                                                                                              | 
|Condensed Statements of Cash Flows-Three and six months ended June 30, 2005 and 2004          |  | 6                                                  
|                                                                                              | 
|Notes to Condensed Financial Statements                                                       |  | 7                                                  
|                                                                                              | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 18                                                 
|                                                                                              | 
|Item 3.
Quantitative and Qualitative Disclosures About Market Risk                            |  | 36                                                 
|                                                                                              | 
|Item 4.
Controls and Procedures                                                               |  | 36                                                 
|                                                                                              | 
|PART II.
OTHER INFORMATION                                                                    |  |                                                    
|                                                                                              |  |                                                    
|Item 3.                                                                                       |  | Defaults Upon Senior Securities                     |  | 38  
|                                                                                              |  |                                                    
|Item 4.                                                                                       |  | Submission of Matters to a Vote of Security Holders |  | 38  
|                                                                                              |  |                                                    
|Item 6.                                                                                       |  | Exhibits                                            |  | 39  
|                                                                                              | 
|SIGNATURES                                                                                    |  | 40                                                 
|                                                                                              | 
|INDEX OF EXHIBITS                                                                             |  | 41                                                 



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements



UNIGENE LABORATORIES, INC.

CONDENSED BALANCE SHEETS



|                                                                                                                                       |  |               |              |   |                   |   |              |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                                                       |  | June 30, 2005 |              |   | December 31, 2004 |  
|                                                                                                                                       |  | (Unaudited)   |              |   |                   |  
|ASSETS                                                                                                                                 |  |               |              |   |                   |   |              |  
|Current assets:                                                                                                                        |  |               |              |   |                   |   |              |  
|Cash and cash equivalents                                                                                                              |  | $             | 292,480      |   |                   | $ | 4,235,801    |  
|Accounts receivable                                                                                                                    |  |               | 1,055,608    |   |                   |   | 625,955      |  
|Prepaid expenses                                                                                                                       |  |               | 531,493      |   |                   |   | 606,173      |  
|Deferred asset for USL inventory shipments                                                                                             |  |               | 452,856      |   |                   |   |             |  
|Inventory                                                                                                                              |  |               | 2,466,976    |   |                   |   | 1,370,275    |  
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total current assets                                                                                                                   |  |               | 4,799,413    |   |                   |   | 6,838,204    |  
|                                                                                                                                       |  |              
|Property, plant and equipment, net                                                                                                     |  |               | 1,875,593    |   |                   |   | 1,831,203    |  
|Investment in joint venture                                                                                                            |  |               | 33,367       |   |                   |   | 33,000       |  
|Patents and other intangibles, net                                                                                                     |  |               | 1,171,013    |   |                   |   | 1,058,040    |  
|Other assets                                                                                                                           |  |               | 399,039      |   |                   |   | 377,178      |  
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total assets                                                                                                                           |  | $             | 8,278,425    |   |                   | $ | 10,137,625   |  
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                  |  |               |              |   |                   |   |              |  
|Current liabilities:                                                                                                                   |  |               |              |   |                   |   |              |  
|Accounts payable                                                                                                                       |  | $             | 696,149      |   |                   | $ | 637,786      |  
|Accrued expenses                                                                                                                       |  |               | 1,531,886    |   |                   |   | 1,744,036    |  
|Deferred licensing fees                                                                                                                |  |               | 756,752      |   |                   |   | 756,752      |  
|Deferred revenue for USL inventory shipments                                                                                           |  |               | 1,986,238    |   |                   |   |             |  
|Customer deposit for inventory purchases                                                                                               |  |               |             |   |                   |   | 357,456      |  
|Notes payable - stockholders                                                                                                           |  |               | 10,553,323   |   |                   |   | 10,553,323   |  
|Accrued interest  stockholders                                                                                                        |  |               | 6,560,194    |   |                   |   | 5,850,307    |  
|Current portion - capital lease obligations                                                                                            |  |               | 186,081      |   |                   |   | 243,908      |  
|Note payable  Tail Wind                                                                                                               |  |               |             |   |                   |   | 920,167      |  
|Liabilities to be settled in common stock                                                                                              |  |               |             |   |                   |   | 2,500,002    |  
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total current liabilities                                                                                                              |  |               | 22,270,623   |   |                   |   | 23,563,737   |  
|                                                                                                                                       |  |              
|Deferred licensing fees, excluding current portion                                                                                     |  |               | 9,291,394    |   |                   |   | 9,669,773    |  
|Capital lease obligations, excluding current portion                                                                                   |  |               | 55,987       |   |                   |   | 57,982       |  
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total liabilities                                                                                                                      |  |               | 31,618,004   |   |                   |   | 33,291,492   |  
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|Commitments and contingencies                                                                                                          |  |               |              |   |                   |   |              |  
|                                                                                                                                       |  |              
|Stockholders deficit:                                                                                                                 |  |               |              |   |                   |   |              |  
|Common Stock - par value $.01 per share, authorized 100,000,000 shares, issued 81,980,456 shares in 2005 and 78,395,895 shares in
2004 |  |               | 819,805      |   |                   |   | 783,959      |  
|Additional paid-in capital                                                                                                             |  |               | 89,107,299   |   |                   |   | 83,588,804   |  
|Accumulated deficit                                                                                                                    |  |               | (113,265,652 | ) |                   |   | (107,525,599 | )
|Less: Treasury stock, at cost, 7,290 shares                                                                                            |  |               | (1,031       | ) |                   |   | (1,031       | )
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|Total stockholders deficit                                                                                                            |  |               | (23,339,579  | ) |                   |   | (23,153,867  | )
|                                                                                                                                       |  |               |              |   |                   |   |              |  
|                                                                                                                                       |  | $             | 8,278,425    |   |                   | $ | 10,137,625   |  
|                                                                                                                                       |  |               |              |   |                   |   |              |  



See notes to condensed financial
statements.



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##### Table of Contents

UNIGENE LABORATORIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                  |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                  |  | Three months ended June 30, |            |   | Six months ended June 30, |  
|                                                                  |  | 2005                        |            |   | 2004                      |   |            | 2005 |  |   | 2004       |  
|Licensing and other revenue:                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Licensing revenue                                                 |  | $                           | 189,189    |   |                           | $ | 653,473    |      |  | $ | 378,378    |   |  | $ | 744,448    |  
|Product sales                                                     |  |                             |           |   |                           |   | 202,000    |      |  |   | 357,456    |   |  |   | 250,700    |  
|Development services                                              |  |                             | 11,729     |   |                           |   |           |      |  |   | 11,729     |   |  |   | 122,172    |  
|Other                                                             |  |                             | 14,221     |   |                           |   | 14,017     |      |  |   | 55,780     |   |  |   | 75,493     |  
|                                                                  |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                                  |  |                             | 215,139    |   |                           |   | 869,490    |      |  |   | 803,343    |   |  |   | 1,192,813  |  
|                                                                  |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Operating expenses:                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Research and development                                          |  |                             | 1,066,789  |   |                           |   | 2,378,494  |      |  |   | 2,526,610  |   |  |   | 4,012,711  |  
|Cost of goods sold                                                |  |                             |           |   |                           |   | 145,760    |      |  |   | 292,848    |   |  |   | 194,760    |  
|Inventory reserve                                                 |  |                             |           |   |                           |   |           |      |  |   | 887,419    |   |  |   |           |  
|General and administrative                                        |  |                             | 1,260,568  |   |                           |   | 898,552    |      |  |   | 2,111,149  |   |  |   | 1,695,726  |  
|                                                                  |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                                  |  |                             | 2,327,357  |   |                           |   | 3,422,806  |      |  |   | 5,818,026  |   |  |   | 5,903,197  |  
|                                                                  |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Operating loss                                                    |  |                             | (2,112,218 | ) |                           |   | (2,553,316 | )    |  |   | (5,014,683 | ) |  |   | (4,710,384 | )
|                                                                  |  |                             |            |  
|Other income (expense):                                           |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Gain on the extinguishment of debt and related interest           |  |                             |           |   |                           |   | 223,197    |      |  |   |           |   |  |   | 286,466    |  
|Interest income                                                   |  |                             | 4,610      |   |                           |   | 10,564     |      |  |   | 11,305     |   |  |   | 12,768     |  
|Interest expense-principally to stockholders                      |  |                             | (373,209   | ) |                           |   | (354,905   | )    |  |   | (726,675   | ) |  |   | (715,966   | )
|                                                                  |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Loss before income taxes                                          |  |                             | (2,480,817 | ) |                           |   | (2,674,460 | )    |  |   | (5,730,053 | ) |  |   | (5,127,116 | )
|                                                                  |  |                             |            |  
|Income tax expense                                                |  |                             | (5,000     | ) |                           |   |           |      |  |   | (10,000    | ) |  |   |           |  
|                                                                  |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                                          |  | $                           | (2,485,817 | ) |                           | $ | (2,674,460 | )    |  | $ | (5,740,053 | ) |  | $ | (5,127,116 | )
|                                                                  |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Loss per share  basic and diluted:                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net loss per share                                                |  | $                           | (0.03      | ) |                           | $ | (0.03      | )    |  | $ | (0.07      | ) |  | $ | (0.07      | )
|                                                                  |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Weighted average number of shares outstanding - basic and diluted |  |                             | 81,837,622 |   |                           |   | 77,357,965 |      |  |   | 80,757,644 |   |  |   | 75,831,607 |  
|                                                                  |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



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UNIGENE LABORATORIES, INC.

CONDENSED STATEMENT OF STOCKHOLDERS DEFICIT

Six Months Ended June 30, 2005

(Unaudited)



|                                                                                                   |  |                  |  |           |         |                            |   |            |                    |  |   |               |   |  |       |        |   |  |   |             |  
|-------------------------------------------------------------------------------------------------- |  | ---------------- |  | --------- | ------- | -------------------------- | - | ---------- | ------------------ |  | - | ------------- | - |  | ----- | ------ | - |  | - | ----------- | -
|                                                                                                   |  | Common Stock     |  |           |         |                            |   |            |                    |  |   |               |   | 
|                                                                                                   |  | Number of Shares |  | Par Value |         | Additional Paid-in Capital |   |            | AccumulatedDeficit |  |   | TreasuryStock |   |  | Total |       
|Balance, January 1, 2005                                                                           |  | 78,395,895       |  | $         | 783,959 |                            | $ | 83,588,804 |                    |  | $ | (107,525,599  | ) |  | $     | (1,031 | ) |  | $ | (23,153,867 | )
|                                                                                                   |  |                  |  |           |         |                           
|Sale of common stock to Fusion at $1.87 to $2.00 per share (net of cash issuance costs of $12,000) |  | 1,302,140        |  |           | 13,021  |                            |   | 2,474,725  |                    |  |   |              |   |  |       |       |   |  |   | 2,487,746   |  
|                                                                                                   |  |                  |  |           |         |                           
|Exercise of stock options and warrants                                                             |  | 159,279          |  |           | 1,593   |                            |   | 123,280    |                    |  |   |              |   |  |       |       |   |  |   | 124,873     |  
|                                                                                                   |  |                  |  |           |         |                           
|Sale of common stock and warrants to Fusion (net of cash issuance costs of $54,847)                |  | 2,123,142        |  |           | 21,232  |                            |   | 2,923,921  |                    |  |   |              |   |  |       |       |   |  |   | 2,945,153   |  
|Recognition (reversal) of stock option compensation expense                                        |  |                 |  |           |        |                            |   | (3,431     | )                  |  |   |              |   |  |       |       |   |  |   | (3,431      | )
|Net loss, six months ended June 30, 2005                                                           |  |                 |  |           |        |                            |   |           |                    |  |   | (5,740,053    | ) |  |       |       |   |  |   | (5,740,053  | )
|                                                                                                   |  |                  |  |           |         |                            |   |            |                    |  |   |               |   |  |       |        |   |  |   |             |  
|Balance, June 30, 2005                                                                             |  | 81,980,456       |  | $         | 819,805 |                            | $ | 89,107,299 |                    |  | $ | (113,265,652  | ) |  | $     | (1,031 | ) |  | $ | (23,339,579 | )
|                                                                                                   |  |                  |  |           |         |                            |   |            |                    |  |   |               |   |  |       |        |   |  |   |             |  



See notes to condensed financial
statements.



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##### Table of Contents

UNIGENE LABORATORIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                      |  |                           |            |   |      |   |           |  
|----------------------------------------------------- |  | ------------------------- | ---------- | - | ---- | - | --------- | -
|                                                      |  | Six months ended June 30, |           
|                                                      |  | 2005                      |            |   | 2004 |  
|Net cash provided by (used in) operating activities   |  | $                         | (5,564,087 | ) |      | $ | 2,044,826 |  
|                                                      |  |                           |            |   |      |   |           |  
|Investing activities:                                 |  |                           |            |   |      |   |           |  
|Purchase of equipment and furniture                   |  |                           | (252,176   | ) |      |   | (227,140  | )
|Increase in patents and other intangibles             |  |                           | (170,241   | ) |      |   | (61,620   | )
|Increase in other assets                              |  |                           | (4,053     | ) |      |   | (8,490    | )
|Construction of leasehold and building improvements   |  |                           | (2,846     | ) |      |   | (17,666   | )
|                                                      |  |                           |            |   |      |   |           |  
|Net cash used in investing activities                 |  |                           | (429,316   | ) |      |   | (314,916  | )
|                                                      |  |                           |            |   |      |   |           |  
|Financing activities:                                 |  |                           |            |   |      |   |           |  
|Proceeds from sale of stock, net                      |  |                           | 2,932,897  |   |      |   | 3,467,292 |  
|Repayment of stockholder notes                        |  |                           |           |   |      |   | (500,000  | )
|Repayment of notes payable  Tail Wind                |  |                           | (920,167   | ) |      |   | (39,902   | )
|Repayment of capital lease obligations                |  |                           | (87,521    | ) |      |   | (75,965   | )
|Proceeds from exercise of stock options and warrants  |  |                           | 124,873    |   |      |   | 502,762   |  
|                                                      |  |                           |            |   |      |   |           |  
|Net cash provided by financing activities             |  |                           | 2,050,082  |   |      |   | 3,354,187 |  
|                                                      |  |                           |            |   |      |   |           |  
|Net increase (decrease) in cash and cash equivalents  |  |                           | (3,943,321 | ) |      |   | 5,084,097 |  
|                                                      |  |                          
|Cash and cash equivalents at beginning of period      |  |                           | 4,235,801  |   |      |   | 511,865   |  
|                                                      |  |                           |            |   |      |   |           |  
|Cash and cash equivalents at end of period            |  | $                         | 292,480    |   |      | $ | 5,595,962 |  
|                                                      |  |                           |            |   |      |   |           |  
|SUPPLEMENTAL CASH FLOW INFORMATION:                   |  |                           |            |   |      |   |           |  
|                                                      |  |                          
|Non-cash investing and financing activities:          |  |                           |            |   |      |   |           |  
|                                                      |  |                          
|Purchase of equipment through capital leases          |  | $                         | 27,699     |   |      |   |          |  
|                                                      |  |                           |            |   |      |   |           |  
|Issuance of common stock in settlement of liabilities |  | $                         | 2,500,002  |   |      |   |          |  
|                                                      |  |                           |            |   |      |   |           |  
|Cash paid for interest                                |  | $                         | 193,179    |   |      | $ | 17,400    |  
|                                                      |  |                           |            |   |      |   |           |  
|Cash paid for income taxes                            |  | $                         | 10,000     |   |      | $ | 5,200     |  
|                                                      |  |                           |            |   |      |   |           |  



See notes to condensed financial
statements.



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##### Table of Contents

UNIGENE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 30, 2005

(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 and six-month periods ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. 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, 2004.



Certain reclassifications have been made to the 2004 financial statements to conform to the current presentation.



New Accounting Pronouncements



In May 2005, the Financial Accounting Standards Board (FASB) issued FASB
Statement 154, Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB Statement No. 3 (FAS 154). FAS 154 changes the requirements for the accounting for and reporting of a change in
accounting principle. The provisions of FAS 154 require, unless impracticable, retrospective application to prior periods financial statements of (1) all voluntary changes in accounting principles and (2) changes required by a new accounting
pronouncement, if a specific transition is not provided. FAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate, which requires
prospective application of the new method. FAS 154 is effective for all accounting changes made in fiscal years beginning after December 15, 2005.



In March 2005, FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations  an Interpretation of FASB Statement No.
143 (FIN 47). This Interpretation clarifies that the term conditional asset retirement obligationas used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation is effective no later than the
end of fiscal years ending after December 15, 2005 (December 31, 2005, for calendar-year enterprises). We adopted FIN 47 during the first quarter of 2005 and the adoption did not have a material effect on our financial position or results of
operations.



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##### Table of Contents

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)).
This statement revises SFAS No. 123, Accounting for Stock-Based Compensation, which provided alternative methods of disclosure for stock-based employee compensation. It also supercedes APB Opinion No. 25 Accounting for Stock Issued
to Employees, (APB 25) and its related implementation guidance. SFAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS 123(R) requires a
public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award  the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service.
SFAS 123(R) eliminates the alternative to use APB 25s intrinsic value method of accounting that was provided in SFAS 123 as originally issued. Under APB 25, issuing stock options to employees generally resulted in recognition of no
compensation cost. The effective date for SFAS 123(R) was modified by the SEC in April 2005 and now is effective for public entities that do not file as small business issuers as of the beginning of the next fiscal year that begins after June 15,
2005 and applies to all awards granted after the required effective date and to awards modified, repurchased or cancelled after that date. The cumulative effect of initially applying this statement, which we currently estimate to be approximately
$600,000 based upon the non-vested portion of current stock options, will be recognized as of the required effective date in 2006. Compensation cost is recognized on or after the required effective date for the portion of outstanding awards for
which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123(R) for either recognition or pro forma disclosures. The adoption of SFAS 123(R), in addition to the cumulative effect
discussed above, will also have an impact on our results of operations based upon the grant of future options, the materiality of which will be determined by the amount and fair value of future stock option grants.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets 
an amendment of APB Opinion No. 29 (SFAS 153). This statement addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive
assets in APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. This statement specifies that a nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect the adoption
of SFAS 153 to have an impact on our financial condition or results of operations.



In December 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43B, Chapter 4 (SFAS 151). SFAS 151 retains the general principle of ARB 43, Chapter 4, Inventory Pricing, that
inventories are presumed to be stated at cost; however, it amends ARB 43 to clarify that abnormal amounts of idle facilities, freight, handling costs, and spoilage should be recognized as charges of the current period and allocation of fixed
production overheads to inventories should be based on the normal capacity of the production facilities. SFAS 151 defines normal capacity as the production expected to be achieved over a number of periods or seasons under normal
circumstances, taking into account the loss of capacity resulting from planned maintenance. Accordingly, an entity will have to use judgment to determine when production is outside the range of expected variation in production (either abnormally low
or abnormally high). In periods of abnormally low production the amount of fixed overhead allocated to each unit of production should not be increased. However, in periods of abnormally high production the amount of fixed overhead allocated to each
unit of production is decreased to assure inventories are not measured above cost. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005 and should be applied prospectively. We do not expect the
adoption of SFAS 151 to have a material impact on our financial condition or results of operations.



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NOTE B  LIQUIDITY



At June 30, 2005, we had cash and cash equivalents of $292,000, a decrease of $3,943,000 from December 31, 2004.



Fortical® was approved by the FDA on August 12, 2005 and launched on August 16, 2005 (see Note O). This approval triggers the
final $4,000,000 milestone payment from USL, payable within 30 days, as well as anticipated sales and royalties if USL successfully markets the product. We believe that we will generate cash to apply toward funding our operations through sales of
Fortical® to USL, royalties from USLs sales
of Fortical®, the achievement of milestones in the
GlaxoSmithKline (GSK), Upsher-Smith Laboratories (USL), or Novartis Pharma AG (Novartis) agreements and through the sale of parathyroid hormone (PTH) to GSK. In addition, in April 2005, we completed a
$3,000,000 private placement with Fusion Capital Fund II, LLC (Fusion) and terminated the 2003 financing agreement with Fusion. However, we expect to have sufficient cash for the next twelve months if USL successfully markets
Fortical® or if we sign a new significant
revenue-generating license agreement, and/or enter into a new financing agreement in the near-term. Our financial position could be considerably improved by significant sales of our product to USL and royalties on USLs sales of Fortical®. We have incurred annual operating losses since our
inception and, as a result, at June 30, 2005, had an accumulated deficit of approximately $113,000,000 and a working capital deficiency of approximately $17,000,000. Our cash requirements to operate our research and peptide manufacturing facilities
and develop our products are approximately $12,000,000 to $13,000,000 per year. In addition, we have principal and interest obligations under the outstanding notes payable to Jay Levy, Warren Levy and Ronald Levy (collectively the
Levys), officers of Unigene, as well as obligations relating to our current and former joint venture agreements in China. As discussed in Note F to the financial statements, we have stockholder demand notes in default at June 30, 2005.
These factors, among others, raise substantial doubt about our ability to continue as a going concern. The financial statements have been prepared on a going concern basis and as such do not include any adjustments that might result from the outcome
of this uncertainty.



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, of which an aggregate
of $8,000,000 in up-front and milestone payments has been received through June 30, 2005. 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. We have also received an additional $5,000,000 from GSK for PTH sales and for support of our PTH development activities from inception through June 30, 2005 (see Note C).



In November 2002, we signed an exclusive U.S. licensing agreement with USL for a value before
royalties of up to $10,000,000 to market our patented nasal formulation of calcitonin for the treatment of osteoporosis. Under the terms of the agreement, we received an up-front payment of $3,000,000 from USL in 2002 and a milestone payment of
$3,000,000 in 2003. During the second quarter of 2005, we shipped completed Fortical® product to USL with an invoice value of approximately $1,986,000. Revenue for this transaction was not recognized in the second quarter of 2005, as all elements required to recognize such revenues had not yet
been met. Accordingly, the $1,986,000 invoiced to USL is considered deferred revenue and the corresponding cost to produce such product is included as deferred asset at June 30, 2005 (see Note D). We will receive an additional payment of $1,218,000
from USL for these shipments, which amount had not been recognized as revenue or deferred revenue at June 30, 2005 as it was considered a contingent payment pending FDA



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approval. Fortical® was approved by the FDA on August 12, 2005 and launched by USL on August 16, 2005 (see Note O). This approval triggers the final $4,000,000 milestone
payment from USL, payable within 30 days, as well as anticipated sales and royalties if USL successfully markets the product. In the third quarter of 2005 we expect to recognize $3,204,000 of revenue and $453,000 of costs relating to shipments
occurring prior to June 30, 2005.



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 in April 2004 from Novartis in an up-front payment
and a partial prepayment for calcitonin purchases. In August 2004, we received $2,000,000 from Novartis for a technology transfer milestone. In January 2005, we received $600,000 from Novartis for the final payment on their calcitonin purchases (see
Note E).



Our future ability to generate cash from operations will depend
primarily, in the short-term, upon sales of Fortical® to USL and royalties on USLs sales of Fortical®, the achievement of milestones in our existing license agreements, GSK-reimbursed development activities, and the sale of PTH to GSK, 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, nasal and injectable forms of calcitonin as well as for other peptides and for our manufacturing technology. However, we may
not be successful in achieving milestones in our current agreements, in obtaining regulatory approval for our products or in licensing any of our other products or technologies.



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 return,
GSK made a $2,000,000 up-front licensing fee payment and a $1,000,000 licensing-related milestone payment to us in 2002. In addition, GSK will fund all 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. In June 2004, we received a $4,000,000 milestone payment for the commencement of a Phase I human trial for oral PTH.
An aggregate of $8,000,000 in up-front and milestone payments has been received from inception through June 30, 2005. 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 June 30, 2005. For the three and six months ended June 30, 2005 we recognized $0 and $357,000, respectively, for PTH sales and an aggregate of $50,000 and $100,000 in licensing revenue, respectively. 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. 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.



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NOTE D  UPSHER-SMITH AGREEMENT



In November 2002, we signed an exclusive U.S. licensing agreement with USL for a value before royalties of up to $10,000,000 to market our
patented nasal formulation of calcitonin for the treatment of osteoporosis. We will be responsible for manufacturing the product and USL will package the product and will distribute 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). Revenue for the three and six-month periods ended June 30, 2005 consists of the recognition of $39,000 and $78,000, respectively, of
licensing revenue from USL. In January 2004 we announced the receipt of an approvable letter from the FDA. The letter is an official communication from the FDA indicating that the agency is prepared to approve the NDA upon the finalization of the
labeling and the resolution of specific remaining issues, including the submission of additional information and data, which the company subsequently provided to FDA. Fortical® was approved by the FDA on August 12, 2005 and launched by USL on August 16, 2005 (see Note O). This approval triggers
the final $4,000,000 milestone payment from USL, payable within 30 days, as well as anticipated sales and royalties if USL successfully markets the product. 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.



During the second quarter of 2005, we shipped completed Fortical® product to USL with an invoice value of approximately $1,986,000. Revenue for
this transaction was not recognized in the second quarter of 2005, as all elements required to recognize such revenues had not yet been met. Accordingly, the $1,986,000 invoiced to USL is considered deferred revenue and the corresponding cost to
produce such product is included as a deferred asset at June 30, 2005. We will receive an additional payment of $1,218,000 from USL for these shipments, which amount had not been recognized as revenue or deferred revenue at June 20, 2005 as it was
considered a contingent payment pending FDA approval. In the third quarter of 2005 we expect to recognize $3,204,000 of revenue and $453,000 of costs relating to shipments occurring prior to June 30, 2005.



We may terminate 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. 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. For the three and six months ended June 30, 2005, we recognized $98,000 and $196,000 in licensing revenue. During 2004, Novartis purchased calcitonin from us for use in their oral calcitonin development program.
Currently, Novartis is implementing our patented manufacturing process at Novartis facilities to fulfill some of their calcitonin product needs. We will receive royalties on sales of any existing or future Novartis products that contain calcitonin
manufactured by Novartis using our technology. We will continue to develop our oral, nasal and injectable calcitonin products. If our oral



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calcitonin product is successfully developed, we would purchase calcitonin from Novartis, thereby eliminating our need to
construct a second, larger-scale calcitonin manufacturing facility. 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.



NOTE F  NOTES PAYABLE 
STOCKHOLDERS



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, from time to time have made loans to us. We have not made 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, interest on loans originated through March 4, 2001 increased an additional
5% per year and is calculated on both past due principal and interest. This additional interest was approximately $405,000 and $210,000, and total interest expense on all Levy loans was approximately $367,000 and $710,000 for the three and six
months ended June 30, 2005, respectively. As of June 30, 2005, total accrued interest on all Levy loans was approximately $6,560,000 and the outstanding loans by these individuals to us, classified as short-term debt, totaled $10,553,323. These
loans are secured by security interests in our equipment, real property and/or certain of our patents.



Outstanding stockholder loans consist of the following at June 30, 2005 and December 31, 2004 (in thousands):



|                                             |  |      |        |      |   |       
|-------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                             |  | 2005 |        | 2004
|Jay Levy term loans (1)                      |  | $    | 1,870  |      | $ | 1,870 
|Jay Levy demand loans (2)                    |  |      | 8,225  |      |   | 8,225 
|Warren Levy demand loans (3)                 |  |      | 235    |      |   | 235   
|Ronald Levy demand loans (4)                 |  |      | 223    |      |   | 223   
|                                             |  |      |        |      |   |       
|                                             |  |      | 10,553 |      |   | 10,553
|Accrued interest                             |  |      | 6,560  |      |   | 5,850 
|                                             |  |      |        |      |   |       
|Total loans and interest due to stockholders |  | $    | 17,113 |      | $ | 16,403
|                                             |  |      |        |      |   |       

---

|(1) | Loans from Jay Levy in the aggregate principal amount of $1,870,000 evidenced by term notes that matured January 2002, and bearing interest at the fixed rate of 11% per year. These
loans were originally at 6%. These loans are secured by a security interest in all of our equipment and a mortgage on our real property. The terms of the notes required us to make installment payments of principal and interest beginning in October
1999 and ending in January 2002 in an aggregate amount of $72,426 per month. No installment payments have been made to date. Accrued interest on these loans at June 30, 2005 was approximately $1,458,000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Loans from Jay Levy in the aggregate principal amount of $2,525,000, which are evidenced by demand notes bearing a floating interest rate equal to the Merrill Lynch Margin Loan Rate
plus 5.25% (11.55% at June 30, 2005). These loans were originally at the Merrill Lynch Margin Loan Rate plus .25%. These loans are secured by a security interest in our equipment and real property. Accrued interest on these loans at June 30, 2005
was approximately $3,057,000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Loans from Jay Levy in 2001 and 2002 in the aggregate principal amount of $5,700,000 which are evidenced by demand notes bearing a floating interest rate equal to the Merrill Lynch
Margin Loan Rate plus .25%, (6% at June 30, 2005) and are secured by a security interest in certain of our patents. Accrued interest on these loans at June 30, 2005 was approximately $1,277,000. On
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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February 15, 2005, Jay Levy transferred these $5,700,000 of demand notes to the Jaynjean Levy Family
Limited Partnership in exchange for partnership units. Warren Levy and Ronald Levy are general partners of that partnership.

|(3) | Loans from Warren Levy in the aggregate principal amount of $230,000 which are evidenced by demand notes bearing a floating interest rate equal to the Merrill Lynch Margin Loan Rate
plus 5.25% (11.55% at June 30, 2005). These loans were originally at the Merrill Lynch Margin Loan Rate plus .25%. An additional loan in the amount of $5,000 bears interest at the Merrill Lynch Loan Rate plus .25% (6% at June 30, 2005). These loans
are secured by a secondary security interest in our equipment and real property. Accrued interest on these loans at June 30, 2005 was approximately $388,000.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Loans from Ronald Levy in the aggregate principal amount of $218,323 which are evidenced by demand notes bearing a floating interest rate equal to the Merrill Lynch Margin Loan Rate
plus 5.25% (11.55% at June 30, 2005). These loans were originally at the Merrill Lynch Margin Loan Rate plus .25%. An additional loan in the amount of $5,000 bears interest at the Merrill Lynch Margin Loan Rate plus .25% (6% at June 30, 2005). These
loans are secured by a secondary security interest in our equipment and real property. Accrued interest on these loans at June 30, 2005 was approximately $380,000.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE G  NOTE PAYABLE  TAIL WIND



In June 1998, we completed a private placement of $4,000,000 in principal amount of 5% convertible debentures to the Tail Wind Fund, Ltd. (Tail Wind) from
which we realized net proceeds of approximately $3,750,000. Because of our failure to make certain interest and debenture redemption payments to Tail Wind, an event of default occurred. As a result, Tail Wind filed a demand for arbitration against
us in July 2000. In April 2002, we entered into a settlement with Tail Wind. Pursuant to the terms of the settlement agreement, Tail Wind surrendered to us the $2,000,000 in principal amount of convertible debentures that remained outstanding and
released all claims against us relating to Tail Winds purchase of the convertible debentures, which were approximately $4,500,000 including accrued interest and penalties in the approximate amount of $2,500,000. In exchange, we issued to Tail
Wind a $1,000,000 promissory note secured by our Fairfield, New Jersey building and equipment and 2,000,000 shares of Unigene common stock. The note bore interest at a rate of 6% per annum and principal and interest were due in February 2005. The
note was paid in full February 2005, with principal and interest aggregating $1,092,000.



NOTE H  INVENTORY



Inventories are
stated at the lower of cost (using the first-in, first-out method) or market and consist of the following:



|                                                                              |  |              |           |                  |   |          
|----------------------------------------------------------------------------- |  | ------------ | --------- | ---------------- | - | ---------
|                                                                              |  | June 30,2005 |           | December 31,2004
|Finished goods  net of allowances of $1,986,335 and $1,762,000, respectively |  | $            | 1,043,600 |                  | $ |         
|Work in process  net of allowances of $0 and $146,000, respectively          |  |              | 181,864   |                  |   | 292,848  
|Raw materials                                                                 |  |              | 1,241,512 |                  |   | 1,077,427
|                                                                              |  |              |           |                  |   |          
|Total                                                                         |  | $            | 2,406,976 |                  | $ | 1,370,275
|                                                                              |  |              |           |                  |   |          



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NOTE I  FUSION CAPITAL FINANCING



On April 7, 2005, we completed the sale of a total of 2,123,142 shares of our common stock and a common stock purchase warrant to purchase
up to 1,061,571 shares of our common stock at an exercise price per share of $1.77 to Fusion in a private placement pursuant to a common stock purchase agreement for gross proceeds to us of $3,000,000. The shares became freely tradable after a
registration statement, filed April 25, 2005, was declared effective by the SEC on July 1, 2005. In connection with the private placement, we elected to terminate our October 2003 financing agreement with Fusion.



In October 2003, we entered into a common stock purchase agreement, as amended, with Fusion
under which Fusion agreed, if so requested by Unigene and subject to certain conditions, to purchase on each trading day during the term of the agreement $30,000 of our common stock up to an aggregate of $15,000,000. This agreement was terminated by
us in April 2005. We had the ability to decrease or suspend purchases or terminate the agreement at any time. The sales price per share to Fusion was equal to the lesser of: the lowest sale price of our common stock on the day of purchase by Fusion,
or the average of the lowest three closing sale prices of our common stock during the twelve trading days prior to the date of purchase by Fusion. As compensation for its commitment, we issued to Fusion in October 2003, 1,000,000 shares of common
stock and a five-year warrant, as amended, to purchase 250,000 shares of common stock at an exercise price of $0.90 per share which was charged to additional paid-in-capital. Fusion may sell the shares issued as a commitment fee or the shares
issuable upon the exercise of the warrant. In December 2004, we received an advance from Fusion in the aggregate amount of $2,500,002. This was classified on our balance sheet as Liability to be settled in common stock. This sale was
contingent upon a prior Fusion registration statement becoming effective, which occurred in January 2005. Therefore, in January 2005 we issued an aggregate of 1,302,140 shares to Fusion to settle this liability. From December 1, 2003 through June
30, 2005, under this financing, we have received approximately $8,900,000 through the sale of 8,288,330 shares of common stock to Fusion. In December 2000, we issued a five-year warrant to purchase 373,002 shares of Unigene common stock to an
investment banker as a fee in connection with our first Fusion financing agreement. The warrant has an exercise price of $1.126. During the first quarter of 2005, 30,779 shares of common stock were issued as a result of a cashless exercise of 58,500
warrant shares. As a result, there are 314,502 shares remaining to be issued under this warrant.



NOTE J  CHINA JOINT VENTURES



Current joint venture



In June 2000, we
entered into a joint venture agreement with Shijiazhuang Pharmaceutical Group (SPG), a pharmaceutical company in the Peoples Republic of China, formally creating a contractual joint venture between the two entities. Upon approval
of an official business license from the Chinese authorities, which we anticipate will follow the approval of the NDA, we expect that the resulting joint venture will manufacture and distribute injectable and nasal calcitonin products in China (and
possibly, with our approval, other selected Asian markets) for the treatment of osteoporosis. 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 will contribute its existing injectable calcitonin license to the joint venture, which will allow the entity to sell its injectable calcitonin product in China. An NDA for injectable and nasal calcitonin products was filed in China in the third
quarter of 2003. Approval of our NDA in China will require a review of more than two years. During this review process, brief local human trials will be required. If the product is successful, the joint venture may establish a facility in China to
fill injectable and nasal calcitonin products using bulk calcitonin supplied by us. Eventually



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the joint venture may manufacture bulk calcitonin in China at a new facility that would be constructed by it. This would
require local financing by the joint venture. The existing joint venture began operations in March 2002 and sales of its injectable calcitonin product began in April 2002. Initial sales will be used by the joint venture to offset startup costs. The
existing joint ventures results to date have been immaterial to our overall results of operations. We account for our investment in the joint venture under the equity method. Our investment and our share of the earnings in the existing joint
venture have been immaterial to date.



Under the terms of the joint venture
agreement in China with SPG, we are obligated to contribute up to $405,000 in cash after approval of its Chinese NDA and up to an additional $495,000 in cash within two years thereafter. However, these amounts may be reduced or offset by our share
of joint venture profits, if any.



Former
joint venture



In 2000, we became obligated to pay to the Qingdao General
Pharmaceutical Company (Qingdao), our former joint venture partner in China, an aggregate of $350,000 in monthly principal installment payments of $5,000 in order to terminate this joint venture of which $45,000 is remaining as of June
30, 2005. We recognized the entire $350,000 obligation as an expense in 2000.



NOTE K  GAIN ON THE EXTINGUISHMENT OF DEBT AND RELATED INTEREST



In July 2003, we were named in a lawsuit filed by Covington and Burling, our former attorneys, in the Superior Court of the District of Columbia. Covington and Burling alleged that we failed to pay certain statements rendered by the law
firm for legal services and costs advanced and that we failed to pay the principal and interest on two promissory notes executed by us in favor of the law firm. Covington and Burling sought damages in the amount of $918,209, which amount had been
accrued, plus interest and counsel fees. In December 2003, we entered into a settlement agreement with Covington and Burling. Under the agreement, any payments we made to Covington and Burling before December 31, 2004 would reduce our total
obligation of $1,098,000, consisting of principal and interest, by a multiple of the payment (multiples ranged from 1.46 to 1.19 depending on the month of payment). Until the obligation was paid in full, we agreed to remit to Covington and Burling
certain percentages or dollar amounts of funds we received from licensing or financing arrangements and Covington and Burling received a security interest in certain of our assets. During the three month period ended March 31, 2004, we made payments
to Covington and Burling in the aggregate amount of $150,000. These payments had an average multiple of 1.42 and reduced our debt to Covington and Burling by $213,269. We therefore recognized a gain on extinguishment of debt in the amount of $63,269
in the first quarter of 2004. In April 2004, pursuant to the terms of the settlement agreement, we paid Covington and Burling $660,725, at a multiple of 1.33944, which resulted in full satisfaction of the outstanding indebtedness of $885,002,
thereby recognizing a gain on extinguishment of debt in the amount of $223,197 in the second quarter of 2004.



NOTE L  STOCK OPTIONS



We account for
stock options issued to employees and directors in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on fixed stock
option grants for employees and directors only if the current market price of the underlying stock exceeded the exercise price of the option at the date of grant and it is recognized on a straight-line basis over the vesting period; compensation
expense on variable stock option grants is estimated until the measurement date. As permitted by SFAS No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, we provide pro forma net loss and pro forma loss per share
disclosures for employee and director stock option grants



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as if the fair-value-based method defined in SFAS No. 123 had been applied. We account for stock options and warrants
issued to consultants on a fair value basis in accordance with SFAS No. 123 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. Under SFAS No. 123 (revised 2004) Share Based Payment, effective for our first quarter of 2006, we will recognize compensation cost for all awards granted after the effective date using the fair value
method.



Had compensation cost for options granted to employees and directors
been determined consistent with the fair value method under SFAS No. 123, our pro forma net loss and pro forma net loss per share would have been as follows for the three and six-month periods ended June 30, 2005 and 2004:



|                                                                                                                |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                |  | Three months ended June 30, |            |   | Six months ended June 30, |  
|                                                                                                                |  | 2005                        |            |   | 2004                      |   |            | 2005 |  |   | 2004       |  
|Net loss:                                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                                                                                |  |                             |            |  
|As reported                                                                                                     |  | $                           | (2,485,817 | ) |                           | $ | (2,674,460 | )    |  | $ | (5,740,053 | ) |  | $ | (5,127,116 | )
|Add: Total employee and director stock-based compensation recognized                                            |  |                             |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |  |                             | (122,268   | ) |                           |   | (18,634    | )    |  |   | (195,831   | ) |  |   | (34,408    | )
|                                                                                                                |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Pro forma net loss                                                                                              |  | $                           | (2,608,085 | ) |                           | $ | (2,693,094 | )    |  | $ | (5,935,884 | ) |  | $ | (5,161,524 | )
|                                                                                                                |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per share:                                                                           |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                                                                                |  |                             |            |  
|As reported                                                                                                     |  | $                           | (0.03      | ) |                           | $ | (0.03      | )    |  | $ | (0.07      | ) |  | $ | (0.07      | )
|                                                                                                                |  |                             |            |  
|Pro forma                                                                                                       |  | $                           | (0.03      | ) |                           | $ | (0.03      | )    |  | $ | (0.07      | ) |  | $ | (0.07      | )



NOTE M  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 being reported on. 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 (as of date of issuance if issued in the current year) being reported on, and the effect was dilutive. Our net loss and
weighted average shares outstanding used for computing diluted loss per share were the same as those used for computing basic loss per share for the three and six-month periods ended June 30, 2005 and 2004 because our stock options and warrants
(approximately 5,898,000 and 6,546,000 potential shares of common stock for the three and six month periods ended June 30, 2005 and approximately 5,768,000 and 6,112,000 potential shares of common stock for the three and six month periods ended June
30, 2004) would be antidilutive.



NOTE N  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. 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



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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. 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 an asset 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. As of June 30, 2005, nine of our patents had issued in the U.S. and forty had issued in various foreign countries. Various
other applications are still pending.



Details of intangible assets are
summarized as follows:



|                    |  |               |           |                          |   |         |  |      |           |                         |   |           |  |   |         |  |   |          
|------------------- |  | ------------- | --------- | ------------------------ | - | ------- |  | ---- | --------- | ----------------------- | - | --------- |  | - | ------- |  | - | ---------
|                    |  | June 30, 2005 |           | December 31, 2004       
|                    |  | Cost          |           | Accumulated Amortization |   | Net     |  | Cost |           | AccumulatedAmortization |   | Net      
|Trademark           |  | $             | 144,000   |                          | $ | 128,000 |  | $    | 16,000    |                         | $ | 144,000   |  | $ | 125,000 |  | $ | 19,000   
|Patents             |  |               | 1,200,000 |                          |   | 715,000 |  |      | 485,000   |                         |   | 1,116,000 |  |   | 678,000 |  |   | 438,000  
|Deferred Patents    |  |               | 653,000   |                          |   | 0       |  |      | 653,000   |                         |   | 580,000   |  |   | 0       |  |   | 580,000  
|Deferred Trademarks |  |               | 17,000    |                          |   | 0       |  |      | 17,000    |                         |   | 21,000    |  |   | 0       |  |   | 21,000   
|                    |  |               |           |                          |   |         |  |      |           |                         |   |           |  |   |         |  |   |          
|                    |  | $             | 2,014,000 |                          | $ | 843,000 |  | $    | 1,171,000 |                         | $ | 1,861,000 |  | $ | 803,000 |  | $ | 1,058,000
|                    |  |               |           |                          |   |         |  |      |           |                         |   |           |  |   |         |  |   |          



NOTE O  SUBSEQUENT EVENT: FDA
APPROVAL OF FORTICAL® AND LAUNCH BY USL



Fortical® was approved by the FDA on August 12, 2005 and launched by USL on August 16, 2005. This is our first product approval
in the United States. This approval triggers the final $4,000,000 milestone payment from USL, payable within 30 days, as well as anticipated sales and royalties if USL successfully markets the product. The $1,986,000 invoiced to USL for second
quarter shipments as well as the $1,218,000 in contingent payments for the shipments (see Note D) are expected to be recognized as revenue in the third quarter of 2005 as a result of the FDA approval of Fortical®.



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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, 2004, including the financial statements and notes contained therein.



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS



This Form 10-Q contains forward-looking statements regarding our company 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, 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), including our Annual Report on Form 10-K for the year ended December 31, 2004.



RESULTS OF OPERATIONS



Introduction



Unigene is a
biopharmaceutical company with two locations in New Jersey. Our single business segment focuses on research, production and delivery of peptides for medical use. We have concentrated most of our efforts to date on one peptide, calcitonin, for the
treatment of osteoporosis and other indications. Our first approved product in Europe was injectable calcitonin. This product has not generated significant revenue. Our nasal calcitonin product, Fortical®, for the treatment of postmenopausal osteoporosis, was approved by the FDA on August
12, 2005 and was launched by USL on August 16, 2005. This is our first product approval in the United States. This approval triggers the final $4,000,000 milestone payment from USL, payable within 30 days, as well as anticipated sales and royalties
if USL successfully markets the product. We licensed this product to USL in 2002. We are also developing other potential peptide products including parathyroid hormone, or PTH, for osteoporosis. For oral PTH, licensed to GSK in 2002, a Phase I human
trial in 2004 demonstrated positive preliminary results by showing that the PTH delivered was intact and biologically active. In 2004, we licensed worldwide rights to our manufacturing technology to Novartis for their production of calcitonin.
Currently, Novartis is implementing our patented manufacturing process at Novartis facilities to fulfill some of their calcitonin product needs. Our peptide products require clinical trials and/or approvals from regulatory agencies as well as
acceptance in the



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marketplace. There are risks that these clinical trials will not be successful and that we will not receive FDA approval
or significant sales 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 agreements with pharmaceutical
companies and by achieving milestones in these agreements. These agreements, to date, have not been sufficient to generate all of the cash to meet our needs. In addition, there are risks that current agreements will not be successful and that future
agreements 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 future revenue from sales of our nasal calcitonin product, but there is no guarantee that the product will generate significant revenue.



We have also generated cash from officer loans and from stock offerings. The officer loans, some of which are in default, have added debt to
our balance sheet and will require repayment at some time in the future. Our various stock offerings have provided needed cash but it is uncertain whether they will be available in the future or, if available, on favorable terms.



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. But this need is subject to rapid change and it is uncertain whether any additional pharmaceutical companies would have interest in our products or technologies.



Revenue



Revenue is summarized as follows for the three and six-month periods ended June 30, 2005 and 2004:



|                     |  |                             |         |                           |   |         |  |      |         |  |   |          
|-------------------- |  | --------------------------- | ------- | ------------------------- | - | ------- |  | ---- | ------- |  | - | ---------
|                     |  | Three Months Ended June 30, |         | Six Months Ended June 30,
|                     |  | 2005                        |         | 2004                      |   | 2005    |  | 2004
|Licensing Revenue    |  | $                           | 189,189 |                           | $ | 653,473 |  | $    | 378,378 |  | $ | 744,448  
|Development Services |  |                             | 11,729  |                           |   |        |  |      | 11,729  |  |   | 122,172  
|Product Sales        |  |                             |        |                           |   | 202,000 |  |      | 357,456 |  |   | 250,700  
|Other                |  |                             | 14,221  |                           |   | 14,017  |  |      | 55,780  |  |   | 75,493   
|                     |  |                             |         |                           |   |         |  |      |         |  |   |          
|                     |  | $                           | 215,139 |                           | $ | 869,490 |  | $    | 803,343 |  | $ | 1,192,813
|                     |  |                             |         |                           |   |         |  |      |         |  |   |          



Revenue for the three months ended
June 30, 2005 decreased 75% to $215,000 from $869,000, in the comparable period in 2004. Revenue for the six months ended June 30, 2005 decreased 33% to $803,000 from $1,193,000 in the comparable period in 2004. Revenue for the three and six months
ended June 30, 2005 and 2004 consisted primarily of sales of PTH and calcitonin sales and licensing revenue from previously deferred up-front and milestone payments. There were no product sales recognized in the second quarter of 2005.



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



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revenue. In addition, product sales to our partners under license or supply agreements are typically of limited quantity
and duration and also not necessarily predictive of future revenue. Additional sales of PTH to GSK will fluctuate based upon GSKs future needs, which cannot currently be estimated. Sales revenue could increase in 2005 and future years if USL
is able to successfully market and distribute Fortical®. We received FDA approval for Fortical® on August 12, 2005 and the product was launched by USL on August 16, 2005, but it is uncertain that the product will be marketed successfully.



During the second quarter of 2005, we shipped filled Fortical® product to USL with an aggregate invoice value of approximately $1,986,000. Revenue for this transaction was not
recognized in the second quarter of 2005, as all elements required to recognize such revenues had not yet been met. Accordingly, the $1,986,000 invoiced to USL is considered deferred revenue and the corresponding cost to produce such product is
included as deferred asset at June 30, 2005. We will receive an additional payment of $1,218,000 from USL for these shipments as a result of FDA approval, which amount had not been recognized as revenue or a deferred asset at June 30, 2005, since it
was considered contingent payment. Fortical® was
approved by the FDA on August 12, 2005 and launched by USL on August 16, 2005. Therefore, the $1,986,000 invoiced to USL for second quarter shipments as well as the $1,218,000 in contingent payments for the shipments will both be recognized as
revenue in the third quarter of 2005 as a result of FDA approval.



Costs and
Expenses



Research and development, traditionally our largest expense,
decreased 55% to $1,067,000 from $2,378,000 for the three months ended June 30, 2005, and decreased 37% to $2,527,000 from $4,013,000 for the six months ended June 30, 2005 as compared to the same periods in 2004. The three-and six-month decrease
was primarily attributable to a reduction in salaries and production related costs due to the recharacterization of certain manufacturing expenses as inventory production functions (classified as inventory or deferred asset) rather than research and
development functions due to our required calcitonin and Fortical® production under the USL agreement. There was a reduction in depreciation expense due to machinery and equipment becoming fully depreciated in 2004, outside research cost reductions of approximately $100,000 for the
six months ended June 30, 2005 due to the scale-down of both the testing relating to the GSK project and a university collaboration, partially offset by increased personnel costs of approximately $150,000.



Cost of goods sold consists primarily of material costs, personnel costs, manufacturing
supplies and overhead costs such as depreciation and maintenance. Cost of goods sold were $0 and $293,000 for the three and six months ended June 30, 2005 and $146,000 and $195,000 for the comparable periods in 2004. The 2004 periods and first
quarter 2005 cost of sales relates to PTH production under our agreements with GSK and/or calcitonin production under our Novartis agreements. Production related expenses should continue to increase in 2005 and future years as we anticipate a
successful Fortical® launch, as well as increased
peptide production to meet our partners needs.



The inventory reserve
recorded during the three months ended March 31, 2005 of $887,000 represents the cost of calcitonin produced during our manufacturing start-up phase, for intended use in our nasal calcitonin product. Management determined that the saleability of the
calcitonin inventory produced in the first quarter of 2005 did not meet all technical specifications. While the possible future use of this inventory may be discussed with regulatory authorities, this uncertainty contributed to managements
decision to fully reserve inventory produced during the first quarter of 2005. For second quarter 2005 production, Unigene resolved the production issues and recent batches have met all technical specifications. Based on this, management believes
that production for the second quarter of 2005 will likely be saleable, and no additional reserve was deemed necessary.



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General and administrative expenses increased 40% to $1,261,000 from $899,000 for the three months ended June 30, 2005,
and increased 24% to $2,111,000 from $1,696,000 for the six months ended June 30, 2005 as compared to the same periods in 2004. The three-month increase was primarily due to increased salaries and related increases in payroll taxes and employee
benefits of approximately $113,000, and increased professional fees of $270,000 primarily due to increased audit fees and Sarbanes-Oxley compliance costs. The six-month increase was primarily attributable to increased salaries of $219,000 and
related increases in payroll taxes and employee benefits, increased professional fees of approximately $305,000 due to increased audit fees and Sarbanes-Oxley compliance costs and increased insurance expense of $25,000. The Company promoted three
individuals to officers during 2005 and increased headcount by seven individuals between January 2005 and June 2005.



Other Income/Expense



Gain on the extinguishment of debt and related interest in 2004 resulted from our December 2003 settlement agreement with Covington and Burling. Under the agreement, any payments that we made to Covington and Burling
before December 31, 2004 would reduce our total obligation of $1,098,000, consisting of principal and interest, by a multiple of the amount of the payment (multiples ranged from 1.46 to 1.19 depending on the month of payment). Until the obligation
was paid in full, we agreed to remit to Covington and Burling certain percentages or dollar amounts of funds we received from licensing or financing arrangements and Covington and Burling received a temporary security interest in certain of our
assets. During the three-month and six-month periods ended June 30, 2004, we made payments to Covington and Burling in the aggregate amounts of $660,725 and $810,725, respectively. These payments had average multiples of approximately 1.339 and
1.355 and reduced our debt to Covington and Burling by approximately $885,000 and $1,098,000, respectively, for the three-month and six-month periods ended June 30, 2004. We therefore recognized gains on extinguishment of debt in the amounts of
approximately $223,000 and $286,000, respectively, for the three-month and six-month periods ended June 30, 2004.



Interest expense increased $18,000 and $11,000 or 5% and 2% to $373,000 and $727,000 for the three and six months ended June 30, 2005 from $355,000 and $716,000 for the
comparable periods in 2004. Each year was affected by the fact that in 2001 we did not make principal and interest payments on certain officers loans when due. Therefore, the interest rate on certain prior loans increased an additional 5% per
year and applied to both past due principal and interest. This additional interest for the three and six-month periods was approximately $210,000 and $405,000 for 2005 and $181,000 and $360,000 for 2004. These increases were partially offset due to
the February 2005 pay-off of the Tail Wind debt and a decrease in officers loans to us of $720,000 during 2004.



Net Loss



Due to a decrease in research and development expenses and cost of goods sold resulting from the recharacterization as inventory or deferred asset of certain manufacturing and personnel costs, partially offset by a
decrease in revenue, a decrease in gain on the extinguishment of debt and an increase in general and administration expenses over the comparable period, net loss for the three months ended June 30, 2005 decreased 7% or approximately $188,000 to
$2,486,000 from $2,674,000 for the corresponding period in 2004.



Due to an
increase in the inventory reserve (in the first quarter of 2005) and higher general and administrative expenses, partially offset by decreased research and development costs and decreased gain on the extinguishment of debt over the comparable
period, net loss for the six months ended June 30, 2005 increased 12% or approximately $613,000 to $5,740,000 from $5,127,000 for the corresponding period in 2004.



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LIQUIDITY AND CAPITAL RESOURCES



We have a number of future payment obligations under various agreements. They are summarized at June 30, 2005 as follows:



|                                         |  |       |            |               |            |      |         |      |         |      |         |            |         |  |        
|---------------------------------------- |  | ----- | ---------- | ------------- | ---------- | ---- | ------- | ---- | ------- | ---- | ------- | ---------- | ------- |  | -------
|Contractual Obligations                  |  | Total |            | Calendar Year
|                                         |  | 2005  |            | 2006          |            | 2007 |         | 2008 |         | 2009 |         | Thereafter
|Notes payable - stockholders             |  | $     | 10,553,323 |               | 10,553,323 |      |        |      |        |      |        |            |        |  |       
|Capital leases                           |  |       | 242,068    |               | 168,954    |      | 34,252  |      | 30,923  |      | 7,939   |            |        |  |       
|Operating leases                         |  |       | 1,758,591  |               | 109,013    |      | 213,313 |      | 206,718 |      | 205,062 |            | 201,950 |  | 822,535
|Chinese joint ventures (SPG and Qingdao) |  |       | 907,500    |               | 397,500    |      | 15,000  |      | 495,000 |      |        |            |        |  |       
|Executive compensation                   |  |       | 378,750    |               | 378,750    |      |        |      |        |      |        |            |        |  |       
|Accrued interest  stockholders          |  |       | 6,560,194  |               | 6,560,194  |      |        |      |        |      |        |            |        |  |       
|                                         |  |       |            |               |            |      |         |      |         |      |         |            |         |  |        
|Total Contractual Obligations            |  | $     | 20,127,297 |               | 17,893,634 |      | 262,565 |      | 733,693 |      | 212,920 |            | 201,950 |  | 822,535
|                                         |  |       |            |               |            |      |         |      |         |      |         |            |         |  |        



At June 30, 2005, we had cash and cash
equivalents of $292,000, a decrease of $3,943,000 from December 31, 2004. Our primary source of cash has been (1) licensing fees for new agreements, (2) milestone payments from those or existing agreements, (3) product sales under licensing
agreements and (4) the sale of our common stock. None of these cash sources can be certain for 2005 or future years. Licensing fees from new collaborations are dependent upon the successful completion of complex and lengthy negotiations. Milestones
are based upon progress achieved in collaborations, which cannot be guaranteed, and are often subject to factors that are neither controlled by our licensees nor us. Product sales to our partners under these agreements are based upon our
licensees needs, which are sometimes difficult to determine. Sale of our common stock is dependent upon Unigenes ability to attract interested investors, its ability to negotiate favorable terms and the performance of the stock market in
general and biotechnology investments in particular.



We believe that we will
generate financial resources to apply toward funding our operations through sales of Fortical® to USL, royalties from USL sales of Fortical®, the achievement of milestones in the Novartis, GSK and USL agreements and/or through the sale of PTH to GSK. In addition, in April 2005, we completed a $3,000,000 private placement with
Fusion and terminated the 2003 financing agreement with Fusion. However, we expect to have sufficient cash for the next twelve months if USL successfully markets Fortical® or if we sign a new significant revenue-generating license agreement, and/or enter into a new financing agreement in
the near-term. Our financial position could be considerably improved by significant sales of our product to USL and royalties on USLs sales of Fortical®. We have incurred annual operating losses since our inception and, as a result, at June 30, 2005, had an accumulated deficit of approximately
$113,000,000 and a working capital deficiency of approximately $17,000,000. Our cash requirements to operate our research and peptide manufacturing facilities and develop our products are approximately $12,000,000 to $13,000,000 per year. In
addition, we have principal and interest obligations under the outstanding notes payable to the Levys, our executive officers, as well as obligations relating to our current and former joint venture agreements in China. As discussed in Note F to the
financial statements, we have stockholder demand notes in default at June 30, 2005. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The financial statements have been prepared on a going concern
basis and as such do not include any adjustments that might result from the outcome of this uncertainty.



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



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analog of PTH currently in clinical development for the treatment of osteoporosis, of which an aggregate of $8,000,000 in
up-front and milestone payments has been received through June 30, 2005. 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. We have also received an additional $5,000,000 from GSK for PTH sales and for support of our PTH development activities from inception through June 30, 2005. 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.



In November 2002, we signed
an exclusive U.S. licensing agreement with USL for a value before royalties of up to $10,000,000 to market our patented nasal formulation of calcitonin for the treatment of osteoporosis. Under the terms of the agreement, we received an up-front
payment of $3,000,000 in 2002 from USL and a $3,000,000 milestone payment in 2003. As a result of FDA approval of Fortical®, we will receive a milestone payment of $4,000,000, payable within 30 days, and royalty payments on product sales and will sell filled calcitonin
product to USL. We will be responsible for manufacturing the product and USL will package the product and will distribute it nationwide. During the second quarter of 2005, we shipped completed Fortical® product to USL with an invoice value of approximately $1,986,000. Revenue for this
transaction was not recognized in the second quarter of 2005, as all elements required to recognize such revenues had not yet been met. Accordingly, the $1,986,000 invoiced to USL is considered deferred revenue and the corresponding cost to produce
such product is included as deferred asset at June 30, 2005. We will receive an additional payment of $1,218,000 from USL for these shipments due to FDA approval of Fortical®, which amount has not been recognized as revenue or deferred revenue at June 30, 2005 as it is considered a contingent
payment. Fortical® was approved by the FDA on
August 12, 2005 and launched by USL on August 16, 2005. This approval triggers the final $4,000,000 milestone payment from USL, payable within 30 days, as well as anticipated sales and royalties if USL successfully markets the product. The
$1,986,000 invoiced to USL for second quarter shipments as well as the $1,218,000 in contingent payments for the shipments will both be recognized as revenue in the third quarter of 2005 as a result of FDA approval.



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. In August 2004, we received a $2,000,000 milestone payment from Novartis associated with the transfer of our patented manufacturing technology. In January 2005, we received
$600,000 from Novartis for the final payment on their calcitonin purchases. Initially, Novartis purchased calcitonin from us for use in their oral calcitonin development program. Currently, Novartis is implementing our patented manufacturing process
at Novartis facilities to fulfill some of their calcitonin product needs. We will receive royalties on sales of any existing or future Novartis products that contain calcitonin manufactured by Novartis using our process. 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. Novartis will be conducting all future product development and clinical trials for its oral calcitonin product in conjunction with its partner, a competitor of ours. Therefore, the anticipated completion date is outside our control and
unknown to us.



We have licensed distributors in Greece, where the product is
not yet approved, for our nasal calcitonin product and in the United Kingdom, Ireland and Israel for our injectable product. However, these agreements have not produced significant revenues. In June 2000, we entered into an agreement in China with
SPG to create a joint venture to manufacture and market our injectable and nasal calcitonin products. We are actively seeking additional licensing and/or supply agreements with



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pharmaceutical companies for oral, nasal and injectable forms of calcitonin as well as for other oral peptides. However,
we may not be successful in achieving milestones in our current agreements, obtaining regulatory approval for our products or in licensing any of our other products.



We are engaged in the research, production and delivery of peptide-related products. Our primary focus has been on the development of
various peptide products for the treatment of osteoporosis, including nasal and oral calcitonin and oral PTH. In general, we seek to develop the basic product and then license the product to an established pharmaceutical 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 to market. Each of these products is in various stages of completion.



| |  |  | For nasal calcitonin, we filed an Investigational New Drug application (IND) with the FDA in February 2000 and successfully completed human studies using our product. A
license agreement was signed in November 2002 with USL and an NDA was filed with the FDA in March 2003. The NDA was accepted for review by the FDA in May 2003. In January 2004 we announced the receipt of an approvable letter from the FDA. The letter
is an official communication from the FDA indicating that the agency is prepared to approve the NDA upon the finalization of the labeling and the resolution of specific remaining issues, including the submission of additional information and data,
which the Company subsequently provided to FDA. Fortical® was approved by the FDA on August 12, 2005 and launched by USL on August 16, 2005. This approval triggers the final $4,000,000 milestone payment from USL, payable within 30 days, as well as anticipated sales and
royalties if USL successfully markets the product.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For oral calcitonin, Pfizer terminated its license agreement with us in March 2001 and as a result we are seeking a new licensee to repeat a Phase I/II clinical trial and also to
conduct a Phase III clinical trial. We expect that the costs of these trials would be borne by our future licensee due to our limited financial resources. Because additional clinical trials are still necessary for our oral calcitonin product, any
product launch will take at least several years.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For oral PTH, a Phase I human trial, which commenced in June 2004, demonstrated positive preliminary results. However, PTH is in an early stage of development and it is too early to
speculate on the probability or timing of a marketable product using our PTH. A license agreement for this product was signed with GSK in April 2002.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Due to our limited financial resources, any delay in achieving milestones in our existing license agreements, or in signing new license or
distribution agreements for our products may have an adverse effect on our operations and our cash flow. Any delay in successfully marketing Fortical® would have an adverse effect on our operations and our cash flow.



We maintain our peptide production facility on leased premises in Boonton, New Jersey. We began production under cGMP guidelines at this
facility in 1996. Our lease expires in 2014. We have a ten-year renewal option under the lease, as well as an option to purchase the facility. During the first six months of 2005, we invested approximately $255,000 in fixed assets and leasehold
improvements. Currently, we have no material purchase commitments outstanding.



Under the terms of the joint venture agreement in China with SPG, we are obligated to contribute up to $405,000 in cash after approval of its Chinese NDA (which was filed in September 2003) and up to an additional $495,000 in cash within
two years thereafter. The approval of our NDA in China will require a review process of more than two years. These amounts may be reduced or offset by our share of the entitys profits, if any.



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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, from time to time have made loans to us. We have not made 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, interest on loans originated through March 4, 2001 increased an additional 5% per year and is calculated on both past due
principal and interest. This additional interest was approximately $405,000, and total interest expense on all Levy loans was approximately $710,000 for the six months ended June 30, 2005. As of June 30, 2005, total accrued interest on all Levy
loans was approximately $6,560,000 and the outstanding loans by these individuals to us, classified as short-term debt totaled $10,553,323. These loans are secured by security interests in our equipment, real property and/or certain of our patents.



On April 7, 2005, we completed the sale of a total of 2,123,142 shares of our
common stock and a common stock purchase warrant to purchase up to 1,061,571 shares of our common stock at an exercise price per share of $1.77 to Fusion in a private placement pursuant to a common stock purchase agreement for gross proceeds to us
of $3,000,000. In connection with the private placement, we elected to terminate our October 2003 financing agreement with Fusion.



If USL is unable 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 in the near term, we would need to secure another source of funding in order to satisfy our working capital needs or significantly curtail our operations. We also could consider a sale or merger of Unigene. 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 or another peptide product in the U.S. and abroad.
However, it is uncertain whether or not any of our products other than Fortical® will be approved, or if any of our products will be commercially successful.



As of December 31, 2004, we had available for federal income tax reporting purposes net operating loss carryforwards in the approximate amount of $85,000,000, expiring from 2005 through 2023, which are available to
reduce future earnings, which would otherwise be subject to federal income taxes. Our ability to use such net operating losses may be limited by change in control provisions under Section 382 of the Internal Revenue Code of 1986, as amended. A
portion of these net operating losses are related to gains on exercises of employee stock options. In addition, as of December 31, 2004, we have research and development credits in the approximate amount of $3,500,000, which are available to reduce
the amount of future federal income taxes. These credits expire from 2005 through 2024. We have New Jersey operating loss carryforwards in the approximate amount of $26,000,000, expiring from 2007 through 2010, which are available to reduce future
earnings, otherwise subject to state income tax. Changes in New Jersey tax law in 2004 allow the use of a companys own New Jersey net operating losses to offset 50% of its current taxable income. All of these New Jersey loss carryforwards have
been approved for future sale under a program of the New Jersey Economic Development Authority (NJEDA). In order to realize these benefits, we must apply to the NJEDA each year and must meet various requirements for continuing
eligibility. In addition, the program must continue to be funded by the State of New Jersey, and there are limitations based on the level of participation by other companies. As a result, future tax benefits will be recognized in the financial
statements as specific sales are approved.



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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, 2004. In many cases, the accounting treatment of a particular transaction is
specifically dictated by generally accepted accounting principles, with no need for managements judgment in their application. There are also areas in which the selection of an available policy would not produce a materially different result.



Revenue Recognition: We recognize revenue from the sale of products, 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 in deferred assets. Revenue from research services are 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. Such revenues generally do not involve difficult, subjective or complex judgments.



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 licensor. 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.



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In addition, EITF No. 00-21 requires companies 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 financial statements due to our Novartis agreement. Accordingly, up-front and development stage milestone payments will be deferred and recognized as
revenue over the performance period of such license agreement.



Accounting for
Stock Options: We currently account for stock options granted to employees and directors in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such,
compensation expense is recorded on fixed stock option grants only if the current fair value of the underlying stock exceeds the exercise price of the option at the date of grant and it is recognized on a straight-line basis over the vesting period.
Under SFAS No. 123 (revised 2004) Share-Based Payment, effective for our first quarter of 2006, we will recognize compensation cost for all awards granted after the effective date based on the grant date fair value (with limited
exceptions). We account for stock options granted to non-employees on a fair value basis in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, 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. As a result, the non-cash charge to operations for non-employee options with vesting or other performance criteria is
affected each reporting period by changes in the fair value of our common stock. Had compensation cost for options granted to employees and directors been determined consistent with SFAS No. 123, our net loss would have increased for the quarter
ended June 30, 2005 by approximately $122,000.



Inventory: Inventories are
stated at the lower of cost (using the first-in, first-out method) or market. Finished goods and work in process inventory are generally 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 inventory increased by $887,000 at June 30, 2005 from December 31, 2004. This increase negatively impacted both inventory on our balance sheet and our
statement of operations by that amount. The determination of saleability of inventory can, at times, be subjective. Management determined that the calcitonin inventory produced in the first quarter of 2005 did not meet all technical specifications.
While the possible future use of this inventory may be discussed with regulatory authorities, this additional uncertainty contributed to managements decision to fully reserve production during the first quarter of 2005. For second quarter 2005
production, Unigene resolved the production issues and recent batches have met all specifications. Based on this, management believes that production for the second quarter of 2005 will likely be saleable, and no additional reserve was deemed
necessary for the second quarter.



Use of Estimates: The preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America 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.



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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. 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. As of January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, which eliminated the amortization
of purchased goodwill. Adoption of this standard had no effect on our financial statements. As of January 1, 2002 we also adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, which superseded SFAS No.
121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of. The adoption of SFAS No. 144 had no effect on our financial statements. 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.



CERTAIN RISKS RELATED TO OUR BUSINESS



We make various statements in this section which constitute forward-looking statements under Section 27A of the Securities Act of 1933, as amended. See
Forward-Looking Statements.



As further described herein, our
performance and financial results are subject to risks and uncertainties including, but not limited to, the following specific risks:



USL may not successfully market Fortical®.



Unigenes operations for 2005 are highly dependent on the successful marketing of Fortical®. Fortical® was approved on August 12, 2005 and launched by USL on August 16, 2005. Any factors that adversely impact the marketing of Fortical®, including, but not limited to, delays related to production, distribution or
regulatory issues, would have a severe negative impact on our cash flow and operating results.



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 June 30, 2005, we had an accumulated deficit of approximately $113,000,000. Our gross revenues for the
6 months ended June 30, 2005 and the years ended December 31, 2004, 2003 and 2002 were $803,000, $8,400,000, $6,024,000, and $2,658,000, respectively. However, our revenues have not been sufficient to sustain



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our operations. Revenue for 2005 consists primarily of PTH sales and licensing revenue from previously deferred up-front
and milestone payments. Revenue for 2004 consisted primarily of milestone revenue from GSK and calcitonin sales to Novartis. Revenue for 2003 consisted primarily of milestone payments from USL and GSK and PTH sales to GSK. As of August 1, 2005, we
have three material revenue generating license agreements. Our injectable calcitonin product has been approved for commercial sale in a number of European countries, but we do not anticipate that these sales will produce significant revenues in the
near-term. We believe that to achieve profitability we will require at least the successful commercialization of our nasal calcitonin or oral PTH products or another oral peptide product in the U.S. and abroad. On August 12, 2005, we received FDA
approval of our nasal calcitonin product and the product was launched by USL on August 16, 2005.



During the years ended December 31, 2004, 2003 and 2002, we have incurred losses from operations of $5,344,000, $6,224,000 and $8,496,000, respectively. Our net losses for the years ended December 31, 2004, 2003 and
2002 were $5,941,000, $7,398,000 and $6,337,000, respectively. Our operating loss and net loss for the six months ended June 30, 2005 were $5,015,000 and $5,740,000, respectively. We might never be profitable.



Our independent registered public accounting firm has added an explanatory paragraph to their
audit opinions issued in connection with the financial statements for each of the years ended December 31, 2004, 2003 and 2002 relative to the substantial doubt about our ability to continue as a going concern. Our ability to obtain additional
funding will determine our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.



We may require additional funding to sustain our operations, and our ability to secure additional financing is uncertain.



We may be unable to raise on acceptable terms, if at all, the substantial capital
resources necessary to conduct our operations. If we are unable to raise the required capital, we may be forced to limit some or all of our research and development programs and related operations, curtail commercialization of our product candidates
and, ultimately, cease operations. Our future capital requirements will depend on many factors, including:



| |  | USLs ability to successfully market Fortical®;
|- |  | -----------------------------------------------



| |  | the achievement of milestones in our Novartis and GSK agreements;
|- |  | -----------------------------------------------------------------



| |  | continued scientific progress in our discovery and research programs;
|- |  | ---------------------------------------------------------------------



| |  | progress with preclinical studies and clinical trials;
|- |  | ------------------------------------------------------



| |  | the magnitude and scope of our discovery, research and development programs;
|- |  | ----------------------------------------------------------------------------



| |  | our ability to maintain existing, and establish additional, corporate partnerships and licensing arrangements;
|- |  | --------------------------------------------------------------------------------------------------------------



| |  | our partners ability to sell and market our products;
|- |  | ------------------------------------------------------



| |  | the time and costs involved in obtaining regulatory approvals;
|- |  | --------------------------------------------------------------



| |  | the time and costs involved in expanding and maintaining our production facility;
|- |  | ---------------------------------------------------------------------------------



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| |  | the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims;
|- |  | ---------------------------------------------------------------------------------------------------------



| |  | the potential need to develop, acquire or license new technologies and products;
|- |  | --------------------------------------------------------------------------------



| |  | the continued ability to refinance demand loans from Jay Levy, Ronald Levy and Warren Levy; and
|- |  | -----------------------------------------------------------------------------------------------



| |  | other factors beyond our control.
|- |  | ---------------------------------



We had cash flow deficits from operations of $1,220,000, $4,632,000 and $1,315,000 for the years ended December 31, 2004, 2003 and 2002, respectively. We had a cash flow
deficit from operations of $5,564,000 for the six months ended June 30, 2005. We believe that we will generate financial resources to apply toward funding our operations through sales of Fortical® to USL, royalties from USL sales of Fortical®, the achievement of milestones in the Novartis, GSK and USL agreements and/or through
the sale of PTH to GSK. However, if USL is unable to successfully market Fortical® or if we are unable to achieve the milestones and sales on a timely basis, we would need additional funds to continue our operations.



We may need additional funds from financing or other sources to fully implement our business, operating and development plans. We sold
2,123,142 shares of our common and a five-year common stock purchase warrant to purchase up to 1,061,571 shares of our common stock at an exercise price of $1.77 per share to Fusion for gross proceeds of $3,000,000 in April 2005. The sale of our
common stock by Fusion could cause the price of our common stock to decline. If our stock price declines, we may be unable to raise additional funds through the sale of our common stock to others. If we are able to sell shares of our common stock,
the sales could result in significant dilution to our stockholders.



We believe
that satisfying our long-term capital requirements will require at least the successful commercialization of one of our peptide products. However, our products may never become commercially successful.



Some of our officers have made loans to us, some of which are in default, and are entitled
to remedies available to a secured creditor, which gives them a priority over the holders of our common stock.



Some of our officers have made loans to us under promissory notes in the aggregate principal amount of $10,553,323, of which a total of $4,843,323, plus accrued interest,
is in default. Our obligations under these promissory notes are secured by, among other things, mortgages upon all of the real property we own and pledges of substantially all of our assets. If we become insolvent or are liquidated, or if payment
under the promissory notes is accelerated, the holders of the promissory notes will be entitled to exercise the remedies available to a secured lender under applicable law which would entitle them to full repayment before any funds could be paid to
our shareholders.



Most of our products are in early stages of development
and we may not be successful in our efforts to develop a calcitonin, PTH or other peptide product that will produce revenues sufficient to sustain our operations.



Our success depends on our ability to commercialize a calcitonin, PTH or other peptide product that will produce revenues sufficient to
sustain our operations. Except for our Fortical®
product, most of our products are in early stages of development and we may never develop a calcitonin, PTH or other peptide product that makes us profitable. We have a contractual joint venture with SPG which may



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never generate significant profits. Our ability to achieve profitability is dependent on a number of factors, including
our ability to complete development efforts, obtain regulatory approval for our product candidates, and commercialize successfully those product candidates or our technologies. We believe that the development of more desirable formulations is
essential to expand consumer acceptance of peptide pharmaceutical products. However, we may not be successful in our development efforts, or other companies may develop such products, or superior products, before we do.



We may not be successful in our efforts to gain regulatory approval for our products other
than Fortical® and, if approved, the approval may
not be on a timely basis.



Even if we are successful in our development
efforts, we may not be able to obtain the necessary regulatory approval for our products other than Fortical®. The FDA must approve the commercial manufacture and sale of pharmaceutical products in the United States. Similar regulatory approvals are required for the sale of pharmaceutical
products outside of the United States. We entered into a contractual joint venture agreement in China with SPG. The contractual joint venture may not be able to obtain regulatory approval in China. Although we have received regulatory approval in
the European Union and Switzerland for the sale of our injectable calcitonin product, none of our products other than Fortical® has been approved for sale in the United States, and our other products may never receive the approvals necessary for commercialization. We must
conduct further human testing on certain of our products before they can be approved for commercial sale. Any delay in receiving, or failure to receive, these approvals would adversely affect our ability to generate product revenues.



We may not be successful in efficiently manufacturing or commercializing our products.



If any of our products are approved for commercial sale, we will need to
manufacture the product in commercial quantities at a reasonable cost in order for it to be a successful product that will generate profits. Because of our limited clinical, manufacturing and regulatory experience and the lack of a marketing
organization, we are likely to rely on licensees or other parties to perform one or more tasks for the commercialization of pharmaceutical products. We may incur additional costs and delays while working with these parties, and these parties may
ultimately be unsuccessful in the commercialization of a product.



We have
made a substantial investment in our production facility which we may need to upgrade or expand in order to manufacture some of our products in commercial quantities required by our corporate partners.



We have constructed and are operating a facility intended to produce Fortical®, calcitonin, PTH and other peptides. This facility has
been inspected by European regulatory authorities who have determined that we were in compliance with the then-current European good manufacturing practice guidelines for the manufacture of calcitonin for human use, and we have also passed a
pre-approval inspection conducted by the FDA for Fortical®. The risks associated with this facility include the failure to achieve targeted production and profitability goals, the development by others of superior processes and products, and the absence of a market for
products produced by the facility. We have upgraded our manufacturing facility in order to expand our fill line in anticipation of the launch of our nasal calcitonin product. However, the successful commercialization of any of our other products may
require us to make additional expenditures to expand or upgrade our manufacturing operations. We may be unable to make these capital expenditures when required.



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We are dependent on partners for the commercial development of our products and currently have only three significant
license agreements.



We do not currently have, nor do we expect to have in
the near future, sufficient financial resources and personnel to develop and market our products on our own. Accordingly, we expect to continue to depend on large pharmaceutical companies for revenues from sales of products, research sponsorship and
distribution of our products.



The process of establishing partnerships is
difficult and time-consuming. Our discussions with potential partners may not lead to the establishment of new partnerships on favorable terms, if at all. If we successfully establish new partnerships, the partnerships may never result in the
successful development of our product candidates or the generation of significant revenue. Management of our relationships with these partners would require:



| |  | significant time and effort from our management team;
|- |  | -----------------------------------------------------



| |  | coordination of our research with the research priorities of our corporate partners;
|- |  | ------------------------------------------------------------------------------------



| |  | effective allocation of our resources to multiple projects; and
|- |  | ---------------------------------------------------------------



| |  | an ability to attract and retain key management, scientific, production and other personnel.
|- |  | --------------------------------------------------------------------------------------------



We may not be able to manage these relationships successfully.



We currently have significant license agreements with Novartis worldwide for the production of calcitonin, with GSK worldwide for oral PTH
and with USL in the United States for nasal calcitonin. We are pursuing additional opportunities to license, or enter into distribution arrangements for, our oral and injectable calcitonin products, our nasal calcitonin product outside of the United
States, China and Greece as well as other possible peptide products. However, we may not be successful in any of these efforts.



In June 2000, we entered into a joint venture agreement with SPG for the manufacture and distribution of injectable and nasal calcitonin products in China and possibly,
with our approval, other selected Asian markets, for the treatment of osteoporosis. The contractual joint venture began operations in March 2002; sales of its injectable calcitonin product began in April 2002, using SPGs existing license.
Initial sales will be used by the contractual joint venture to offset startup costs. Therefore, we expect that the contractual joint ventures initial net income or loss will be immaterial to our overall results of operations. We have entered
into distribution agreements for our injectable formulation of calcitonin in the United Kingdom, Ireland and Israel. We also have entered into a license agreement in Greece for nasal calcitonin. To date, we have not received material revenues from
these agreements and may never do so.



Because we are a biopharmaceutical
company, our operations are subject to extensive government regulation.



Our laboratory research, development and production activities, as well as those of our collaborators and licensees, are subject to significant regulation by federal, state, local and foreign governmental authorities. In addition to
obtaining FDA approval and other regulatory approvals for our products, we must obtain approvals for our manufacturing facility to produce calcitonin, PTH and other peptides for human use. The regulatory approval process for a pharmaceutical product
requires substantial resources and may take many years. In addition, in China, where we have signed a joint venture agreement, we are required to receive government approval in order to obtain a business license and



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obtain our official status as a Chinese joint venture. Our inability to obtain approvals or delays in obtaining approvals
would adversely affect our ability to continue our development program, to manufacture and sell our products, and to receive revenue from milestone payments, product sales or royalties.



The FDA or other regulatory agencies may audit our production facility at any time to ensure compliance with cGMP guidelines. These
guidelines require that we conduct our production operation in strict compliance with our established rules for manufacturing and quality controls. Any of these agencies can suspend production operations and product sales if they find significant or
repeated changes from these guidelines. A suspension would likely cause us to incur additional costs or delays in product development.



If USL successfully markets Fortical®, or if our other products receive regulatory approval, our competitors would include large pharmaceutical companies with superior resources.



We are engaged in developing pharmaceutical products, which is a rapidly
changing and highly competitive field. To date, we have concentrated our efforts primarily on products to treat one indication  osteoporosis. Like the market for any pharmaceutical product, the market for treating osteoporosis has the
potential for rapid, unpredictable and significant technological change. Competition is intense from specialized biotechnology companies, major pharmaceutical and chemical companies and universities and research institutions. If USL is successful in
marketing Fortical® or we are successful in
obtaining approval for one of our other products, our future competitors will have substantially greater financial resources, research and development staffs and facilities, and regulatory experience than we do. Major companies in the field of
osteoporosis treatment include Novartis, Wyeth, Merck, Eli Lilly, Aventis and Procter and Gamble. We believe that we may be able to compete with these companies due both to our partnerships with GSK and USL and to our patented technologies. Any one
of these potential competitors could, at any time, develop products or a manufacturing process that could render our technology or products noncompetitive or obsolete.



Our success depends upon our ability to protect our intellectual property rights.



We filed applications for U.S. patents relating to proprietary peptide manufacturing
technology and oral and nasal formulations that we have invented in the course of our research. Our most important U.S. manufacturing and delivery patents expire from 2016 to 2021. To date, nine U.S. patents have been issued and other applications
are pending. We have also made patent application filings in selected foreign countries and forty foreign patents have been issued with other applications pending. We face the risk that any of our pending applications will not be issued as patents.
In addition, our patents may be found to be invalid or unenforceable. Our business also is subject to the risk that our issued patents will not provide us with significant competitive advantages if, for example, a competitor were to independently
develop or obtain similar or superior technologies. To the extent we are unable to protect our patents and patent applications, our investment in those technologies may not yield the benefits that we expect.



We also rely on trade secrets to protect our inventions. Our policy is to include
confidentiality obligations in all research contracts, joint development agreements and consulting relationships that provide access to our trade secrets and other know-how. However, parties with confidentiality obligations could breach their
agreements causing us harm. If a secrecy obligation were to be breached, we may not have the financial resources necessary for a legal challenge. If licensees, consultants or other third parties use technological information independently developed
by them or by others in the development of our products, disputes may arise from the use of this information and as to the ownership rights to products developed using this information. These disputes may not be resolved in our favor and could
materially impact our business.



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Our technology or products could give rise to product liability claims.



Our business exposes us to the risk of product liability claims from human testing,
manufacturing and sale of pharmaceutical products. The administration of drugs to humans, whether in clinical trials or commercially, can result in product liability claims even if our products are not actually at fault for causing an injury.
Furthermore, our products may cause, or may appear to cause, adverse side effects or potentially dangerous drug interactions that we may not learn about or understand fully until the drug is actually manufactured and sold. Product liability claims
can be expensive to defend and may result in large judgments against us. Even if a product liability claim is not successful, the adverse publicity, time, and expense involved in defending such a claim may interfere with our business. We may not
have sufficient resources to defend against or satisfy these claims. We currently maintain $10,000,000 in product liability insurance coverage. However, this amount may not be sufficient to protect us against losses or may be unavailable in the
future on acceptable terms, if at all.



We have financial obligations under
our current and former joint venture agreements in China.



An NDA for
injectable and nasal calcitonin products was filed in China in the third quarter of 2003. Approval of our NDA in China will require a review of more than two years. Under the terms of the joint venture agreement in China with SPG, we are obligated
to contribute up to $405,000 in cash after approval of its Chinese NDA and up to an additional $495,000 in cash within two years thereafter. However, these amounts may be reduced or offset by our share of the entitys profits, if any. As of
June 30, 2005, we contributed $37,500 to the existing contractual joint venture.



In addition, we are obligated to pay to the Qingdao General Pharmaceutical Company, our former joint venture partner in China, an aggregate of $350,000 in monthly installment payments of $5,000 in order to terminate this joint venture, of
which $45,000 is remaining as of June 30, 2005.



We may be unable to retain
key employees or recruit additional qualified personnel.



Because of the
specialized scientific nature of our business, we are highly dependent upon qualified scientific, technical, production and managerial personnel. There is intense competition for qualified personnel in our business. Therefore, we may not be able to
attract and retain the qualified personnel necessary for the development of our business. The loss of the services of existing personnel, as well as the failure to recruit additional key scientific, technical, production and managerial personnel in
a timely manner would harm our research and development programs and our business.



Dr. Warren Levy and Dr. Ronald Levy have been our principal executive officers since our inception. We rely on them for their leadership and business direction. Each of them has entered into an agreement with us providing that he shall not
engage in any other employment or business for the period of his employment with us and will not engage in a competing business for one year following termination. However, each of them is only bound by his respective employment agreement to provide
services for a one-year term. The loss of the services of either of these individuals could significantly delay or prevent the achievement of our scientific and business objectives.



The market price of our common stock is volatile.



The market price of our common stock has been, and we expect it to continue to be, highly unstable. Factors, including our announcement of
technological improvements or announcements by other companies, regulatory matters, research and development activities, new or existing products or



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procedures, signing or termination of licensing agreements, concerns about our financial condition, operating results,
litigation, government regulation, developments or disputes relating to agreements, patents or proprietary rights, and public concern over the safety of activities or products have had a significant impact on the market price of our stock. We expect
such factors to continue to impact our market price for the foreseeable future. In addition, potential dilutive effects of future sales of shares of Unigene common stock by us or our stockholders, including sales by Fusion and by the exercise and
subsequent sale of Unigene common stock by the holders of outstanding and future warrants and options, could have an adverse effect on the price of our stock.



Our common stock is classified as a penny stock under SEC rules, which may make it more difficult for our stockholders to resell our common stock.



Our common stock is traded on the OTC Bulletin Board. As a result, the
holders of our common stock may find it more difficult to obtain accurate quotations concerning the market value of the stock. Stockholders also may experience greater difficulties in attempting to sell the stock than if it was listed on a stock
exchange or quoted on the Nasdaq National Market or the Nasdaq Small-Cap Market. Because Unigene common stock is not traded on a stock exchange or on Nasdaq, and the market price of the common stock is less than $5.00 per share, the common stock is
classified as a penny stock. Rule 15g-9 of the Securities Exchange Act of 1934, as amended, imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those
who qualify as an established customer or an accredited investor. These include the requirement that a broker-dealer must make a determination that investments in penny stocks are suitable for the customer and must make
special disclosures to the customer concerning the risks of penny stocks. Application of the penny stock rules to our common stock could adversely affect the market liquidity of the shares, which in turn may affect the ability of holders of our
common stock to resell the stock.



The sale of our common stock to Fusion
will cause dilution and the sale of the shares of common stock acquired by Fusion could cause the price of our common stock to decline.



The 2,123,142 shares of common stock sold to Fusion are freely tradeable and the 1,061,571 warrant shares are also freely tradeable once the warrant is exercised by
Fusion. All other shares sold under the previous common stock purchase agreements with Fusion are freely tradable. Fusion may sell none, some, or all of the shares of common stock purchased from us at any time.



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



As of June 30, 2005, there were outstanding warrants
to purchase 1,976,073 shares of our common stock, all of which are currently exercisable at an average exercise price of $1.51 per share. The exercise of warrants 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 other financing efforts.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk



In the normal course of business, we are exposed to fluctuations in interest rates due to the use of debt as a component of the funding of our operations. We do 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 has been affected by our failure to make principal and interest payments
when due. Our exposure to interest rate fluctuations over the near-term will continue to be affected by these events.



The information below summarizes our market risks associated with debt obligations as of June 30, 2005. The table below presents principal cash flows and related interest
rates by year of maturity based on the terms of the debt.



Variable interest
rates disclosed represent the rates at June 30, 2005. Given our financial condition described in Liquidity and Capital Resources it is not practicable to estimate the fair value of our debt instruments.



|                             |  |                |      |                  |      |        |      |        |      |       |      |  
|---------------------------- |  | -------------- | ---- | ---------------- | ---- | ------ | ---- | ------ | ---- | ----- | ---- | -
|                             |  | CarryingAmount |      | Year of Maturity
|                             |  |                | 2005 |                  | 2006 |        | 2007 |        | 2008 |       | 2009
|Notes payable - stockholders |  | $2,973,323     |      | 2,973,323        |      |       |      |       |      |      |      | 
|Variable interest rate (1)   |  | 11.55%         |      |                  |      |        |      |        |      |       |      |  
|Notes payable - stockholders |  | $5,710,000     |      | 5,710,000        |      |       |      |       |      |      |      | 
|Variable interest rate       |  | 6%             |      |                  |      |        |      |        |      |       |      |  
|Notes payable - stockholders |  | $1,870,000     |      | 1,870,000        |      |       |      |       |      |      |      | 
|Fixed interest rate (2)      |  | 11%            |      |                  |      |        |      |        |      |       |      |  
|Capital leases               |  | $242,068       |      | 168,954          |      | 34,252 |      | 30,923 |      | 7,939 |      | 
|Fixed interest rate          |  | 11% - 16%      |      |                  |      |        |      |        |      |       |      |  

---

|(1) | Due to the fact that we did not make principal and interest payments on our notes payable to stockholders when due, the variable interest rate on these notes has increased from the
Merrill Lynch Margin Loan Rate plus .25% to the Merrill Lynch Margin Loan Rate plus 5.25%.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Due to the fact that we did not make principal and interest payments on our notes payable to stockholders when due, the fixed interest rate on these notes has increased from 6% to
11%.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 4. Controls and Procedures



For the quarterly
period ending June 30, 2005 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 and 15d-15 under the Securities Exchange Act of 1934, or the Exchange Act, as of the end of the period covered by this report. Based upon this evaluation as of June 30,
2005, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective for the reasons more fully described below related to the material weakness in our internal controls over
financial reporting. We, along with Grant Thornton LLP (Grant Thornton), our independent registered public accounting firm, advised the Audit Committee of an internal control matter that was identified with respect to the valuation of
inventory at June 30, 2005. Both management and Grant Thornton determined that there were certain errors in the calculation of certain inventory items that were detected prior to the completion and filing of the 10Q. Senior financial personnel have
reviewed the inventory calculations and corrected these errors. No prior periods were affected. In response to the identified deficiency, we will implement the following modification to our internal controls and procedures, which we believe will
address this matter: consistent with the requirements under Section 404 of the Sarbanes-Oxley Act of 2002, we will document the procedures normally undertaken by the principal financial officer to review the calculations of inventory costs to be
recorded in our financial statements. This will allow other personnel, in the absence of the principal financial officer to review the inventory costing process. 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. During the second quarter of 2005, we
finalized the implementation of an IT disaster recovery plan and off-site storage of IT system backups.



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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 June 30, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



Item 3. Defalts Upon Senior Securities



| | (a) | See description of notes payable to stockholders in Part I, Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations  Liquidity
and Capital Resources.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



On June 16, 2005, we held our Annual meeting of Stockholders in Parsippany, New Jersey. The following describes the matters voted upon at the Annual Meeting and sets forth the number of votes cast for and against or
withheld and, as applicable, the number of abstentions as to each such matter.



Our stockholders voted to elect the following members of our Board of Directors for terms of one year each:



|                      |  |            |  |         
|--------------------- |  | ---------- |  | --------
|Nominee               |  | For        |  | Withheld
|Jay Levy              |  | 68,849,017 |  | 885,576 
|Ronald S. Levy        |  | 68,825,917 |  | 908,676 
|Warren P. Levy        |  | 68,845,217 |  | 889,376 
|Allen Bloom           |  | 69,091,013 |  | 643,580 
|J. Thomas August      |  | 68,892,408 |  | 842,185 
|Robert F. Hendrickson |  | 69,089,513 |  | 645,080 
|Marvin L. Miller      |  | 69,089,913 |  | 644,680 



Our stockholders voted
as follows to ratify the appointment of Grant Thornton LLP as our independent auditors for the fiscal year ending December 31, 2005:



|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|69,331,605 |  | 352,884 |  | 50,104 



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Item 6. Exhibits



|       |  |                                                                                                                                                                 
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                     
|31.1   |  | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|       | 
|31.2   |  | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|       | 
|32.1   |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                         
|       | 
|32.2   |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.                                         



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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)              
|                |  |                           
|August 26, 2005 |  | By:                        |  | /s/ Warren P. Levy                                            
|                |  |                            |  | Warren P. Levy, President                                     
|                |  |                            |  | (Chief Executive Officer)                                     
|                |  |                           
|August 26, 2005 |  | By:                        |  | /s/ William Steinhauer                                        
|                |  |                            |  | William Steinhauer, Vice President of Finance                 
|                |  |                            |  | (Principal Financial Officer and Principal Accounting
Officer)



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UNIGENE LABORATORIES, INC.



INDEX TO EXHIBITS



|     |  |                                                             
|---- |  | ------------------------------------------------------------
|No.  |  | EXHIBIT                                                     
|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



41