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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 March 31, 2007

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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer  x                Non-accelerated filer ̈

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

Common Stock, $.01 Par Value
87,734,515 shares as of May 2, 2007



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##### Table of Contents

INDEX

UNIGENE LABORATORIES, INC.



|                                                                                              |  |     
|--------------------------------------------------------------------------------------------- |  | ----
|                                                                                              |  | PAGE
|PART I. FINANCIAL INFORMATION                                                                 |  |     
|                                                                                              | 
|Item 1. Financial Statements (Unaudited)                                                      |  |     
|                                                                                              | 
|Condensed Balance Sheets-March 31, 2007 and December 31, 2006                                 |  | 3   
|                                                                                              | 
|Condensed Statements of Operations-Three months ended March 31, 2007 and 2006                 |  | 4   
|                                                                                              | 
|Condensed Statement of Stockholders Deficit Three months ended March 31, 2007                |  | 5   
|                                                                                              | 
|Condensed Statements of Cash Flows-Three months ended March 31, 2007 and 2006                 |  | 6   
|                                                                                              | 
|Notes to Condensed Financial Statements                                                       |  | 7   
|                                                                                              | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 20  
|                                                                                              | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  | 29  
|                                                                                              | 
|Item 4. Controls and Procedures                                                               |  | 30  
|                                                                                              | 
|PART II. OTHER INFORMATION                                                                    |  |     
|                                                                                              | 
|Item 1 A. Risk Factors                                                                        |  | 31  
|                                                                                              | 
|Item 3. Defaults Upon Senior Securities                                                       |  | 32  
|                                                                                              | 
|Item 6. Exhibits                                                                              |  | 32  
|                                                                                              | 
|SIGNATURES                                                                                    |  | 33  
|                                                                                              | 
|INDEX OF EXHIBITS                                                                             |  | 34  



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

UNIGENE LABORATORIES, INC.

CONDENSED BALANCE SHEETS



|                                                                                                |  |                |              |   |                   |   |              |  
|----------------------------------------------------------------------------------------------- |  | -------------- | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                |  | March 31, 2007 |              |   | December 31, 2006 |  
|                                                                                                |  | (Unaudited)    |              |   |                   |  
|ASSETS                                                                                          |  |                |              |   |                   |   |              |  
|Current assets:                                                                                 |  |                |              |   |                   |   |              |  
|Cash and cash equivalents                                                                       |  | $              | 4,645,627    |   |                   | $ | 3,357,351    |  
|Accounts receivable                                                                             |  |                | 7,345,442    |   |                   |   | 1,240,114    |  
|Inventory                                                                                       |  |                | 4,554,028    |   |                   |   | 5,283,000    |  
|Prepaid expenses and other current assets                                                       |  |                | 281,303      |   |                   |   | 303,444      |  
|                                                                                                |  |                |              |   |                   |   |              |  
|Total current assets                                                                            |  |                | 16,826,400   |   |                   |   | 10,183,909   |  
|                                                                                                |  |               
|Property, plant and equipment, net                                                              |  |                | 2,403,297    |   |                   |   | 2,364,141    |  
|Investment in joint venture                                                                     |  |                | 30,656       |   |                   |   | 30,545       |  
|Patents and other intangibles, net                                                              |  |                | 1,483,009    |   |                   |   | 1,438,848    |  
|Other assets                                                                                    |  |                | 111,389      |   |                   |   | 33,879       |  
|                                                                                                |  |                |              |   |                   |   |              |  
|Total assets                                                                                    |  | $              | 20,854,751   |   |                   | $ | 14,051,322   |  
|                                                                                                |  |                |              |   |                   |   |              |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                           |  |                |              |   |                   |   |              |  
|Current liabilities:                                                                            |  |                |              |   |                   |   |              |  
|Accounts payable                                                                                |  | $              | 928,954      |   |                   | $ | 884,958      |  
|Accrued expenses - other                                                                        |  |                | 1,877,721    |   |                   |   | 1,806,707    |  
|Current portion - deferred licensing fees                                                       |  |                | 2,162,756    |   |                   |   | 762,752      |  
|Notes payable - stockholders                                                                    |  |                | 8,095,000    |   |                   |   | 8,105,000    |  
|Accrued interest - stockholders                                                                 |  |                | 8,467,004    |   |                   |   | 8,081,180    |  
|Current portion - capital lease obligations                                                     |  |                | 65,108       |   |                   |   | 70,780       |  
|                                                                                                |  |                |              |   |                   |   |              |  
|Total current liabilities                                                                       |  |                | 21,596,543   |   |                   |   | 19,711,377   |  
|                                                                                                |  |               
|Deferred licensing fees, excluding current portion                                              |  |                | 12,925,402   |   |                   |   | 8,156,262    |  
|Capital lease obligations, excluding current portion                                            |  |                | 28,202       |   |                   |   | 40,880       |  
|Deferred compensation                                                                           |  |                | 340,016      |   |                   |   | 330,643      |  
|                                                                                                |  |                |              |   |                   |   |              |  
|Total liabilities                                                                               |  |                | 34,890,163   |   |                   |   | 28,239,162   |  
|                                                                                                |  |                |              |   |                   |   |              |  
|Commitments and contingencies                                                                   |  |                |              |   |                   |   |              |  
|                                                                                                |  |               
|Stockholders deficit:                                                                          |  |                |              |   |                   |   |              |  
|Common Stock - par value $.01 per share, authorized 135,000,000 shares, issued and outstanding: |  |                |              |   |                   |   |              |  
|87,734,515 shares in 2007 and                                                                   |  |                |              |   |                   |   |              |  
|87,731,015 shares in 2006                                                                       |  |                | 877,345      |   |                   |   | 877,310      |  
|Additional paid-in capital                                                                      |  |                | 105,136,739  |   |                   |   | 104,740,178  |  
|Accumulated deficit                                                                             |  |                | (120,049,496 | ) |                   |   | (119,805,328 | )
|                                                                                                |  |                |              |   |                   |   |              |  
|Total stockholders deficit                                                                     |  |                | (14,035,412  | ) |                   |   | (14,187,840  | )
|                                                                                                |  |                |              |   |                   |   |              |  
|                                                                                                |  |                | $ 20,854,751 |   |                   | $ | 14,051,322   |  
|                                                                                                |  |                |              |   |                   |   |              |  

See notes to condensed financial statements.



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UNIGENE LABORATORIES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                  |  |                              |            |   |      |   |            |  
|----------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                  |  | Three months ended March 31, |           
|                                                                  |  | 2007                         |            |   | 2006 |  
|Revenue:                                                          |  |                              |            |   |      |   |            |  
|Product sales                                                     |  | $                            | 4,023,732  |   |      | $ |           |  
|Royalties                                                         |  |                              | 1,845,442  |   |      |   | 197,702    |  
|Licensing revenue                                                 |  |                              | 230,856    |   |      |   | 189,189    |  
|Development fees and other                                        |  |                              | 228,242    |   |      |   |           |  
|                                                                  |  |                              |            |   |      |   |            |  
|                                                                  |  |                              | 6,328,272  |   |      |   | 386,891    |  
|                                                                  |  |                              |            |   |      |   |            |  
|Operating expenses:                                               |  |                              |            |   |      |   |            |  
|Research, development and facility expenses                       |  |                              | 2,124,135  |   |      |   | 1,581,106  |  
|Cost of goods sold                                                |  |                              | 2,019,651  |   |      |   |           |  
|General and administrative                                        |  |                              | 2,060,235  |   |      |   | 1,661,877  |  
|                                                                  |  |                              |            |   |      |   |            |  
|                                                                  |  |                              | 6,204,021  |   |      |   | 3,242,983  |  
|                                                                  |  |                              |            |   |      |   |            |  
|Operating income (loss)                                           |  |                              | 124,251    |   |      |   | (2,856,092 | )
|                                                                  |  |                             
|Other income (expense):                                           |  |                              |            |   |      |   |            |  
|Interest income                                                   |  |                              | 31,723     |   |      |   | 27,024     |  
|Interest expense-principally to stockholders                      |  |                              | (400,142   | ) |      |   | (413,604   | )
|                                                                  |  |                              |            |   |      |   |            |  
|Loss before income taxes                                          |  |                              | (244,168   | ) |      |   | (3,242,672 | )
|                                                                  |  |                             
|Income tax expense                                                |  |                              |           |   |      |   |           |  
|                                                                  |  |                              |            |   |      |   |            |  
|Net loss                                                          |  | $                            | (244,168   | ) |      | $ | (3,242,672 | )
|                                                                  |  |                              |            |   |      |   |            |  
|Loss per share  basic and diluted:                               |  |                              |            |   |      |   |            |  
|Net loss per share                                                |  | $                            | (0.00      | ) |      | $ | (0.04      | )
|                                                                  |  |                              |            |   |      |   |            |  
|Weighted average number of shares outstanding - basic and diluted |  |                              | 87,731,376 |   |      |   | 84,084,903 |  
|                                                                  |  |                              |            |   |      |   |            |  

See notes to condensed financial statements.



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UNIGENE LABORATORIES, INC.

CONDENSED STATEMENT OF STOCKHOLDERS DEFICIT

Three Months Ended March 31, 2007

(Unaudited)



|                                                                           |  |                 |  |                           |         |                    |   |             |       |   |              |   |  |   |             |  
|-------------------------------------------------------------------------- |  | --------------- |  | ------------------------- | ------- | ------------------ | - | ----------- | ----- | - | ------------ | - |  | - | ----------- | -
|                                                                           |  | Common Stock    |  | AdditionalPaid-in Capital |         | AccumulatedDeficit |   |             | Total |  
|                                                                           |  | Number ofShares |  | Par Value                 |         |                    |  
|Balance, January 1, 2007                                                   |  | 87,731,015      |  | $                         | 877,310 |                    | $ | 104,740,178 |       | $ | (119,805,328 | ) |  | $ | (14,187,840 | )
|                                                                           |  |                 |  |                           |        
|Exercise of stock options                                                  |  | 3,500           |  |                           | 35      |                    |   | 3,235       |       |   |             |   |  |   | 3,270       |  
|                                                                           |  |                 |  |                           |        
|Recognition of stock option compensation expense  employees and directors |  |                |  |                           |        |                    |   | 310,843     |       |   |             |   |  |   | 310,843     |  
|                                                                           |  |                 |  |                           |        
|Recognition of stock option compensation expense - consultants             |  |                |  |                           |        |                    |   | 82,483      |       |   |             |   |  |   | 82,483      |  
|                                                                           |  |                 |  |                           |        
|Net loss                                                                   |  |                |  |                           |        |                    |   |            |       |   | (244,168     | ) |  |   | (244,168    | )
|                                                                           |  |                 |  |                           |         |                    |   |             |       |   |              |   |  |   |             |  
|Balance, March 31, 2007                                                    |  | 87,734,515      |  | $                         | 877,345 |                    | $ | 105,136,739 |       | $ | (120,049,496 | ) |  | $ | (14,035,412 | )
|                                                                           |  |                 |  |                           |         |                    |   |             |       |   |              |   |  |   |             |  

See notes to condensed financial statements.



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UNIGENE LABORATORIES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                          |  |                              |            |   |      |   |            |  
|----------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                          |  | Three months ended March 31, |           
|                                                                                          |  | 2007                         |            |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                              |            |   |      |   |            |  
|                                                                                          |  |                             
|Net loss                                                                                  |  | $                            | (244,168   | ) |      | $ | (3,242,672 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                              |            |   |      |   |            |  
|Amortization of deferred revenue                                                          |  |                              | (189,189   | ) |      |   | (189,189   | )
|Non-cash stock option compensation                                                        |  |                              | 393,326    |   |      |   | 164,737    |  
|Depreciation, amortization and impairment of long-lived assets                            |  |                              | 150,330    |   |      |   | 132,288    |  
|Increase in accrued interest-stockholders                                                 |  |                              | 385,824    |   |      |   | 400,804    |  
|Inventory reserve provision                                                               |  |                              | 6,599      |   |      |   |           |  
|Increase in deferred compensation                                                         |  |                              | 9,373      |   |      |   | 303,692    |  
|                                                                                          |  |                             
|Changes in operating assets and liabilities:                                              |  |                              |            |   |      |   |            |  
|Increase in other assets                                                                  |  |                              | (56,835    | ) |      |   | (100,845   | )
|(Increase) decrease in accounts receivable                                                |  |                              | (6,105,328 | ) |      |   | 460,866    |  
|(Increase) decrease in inventory                                                          |  |                              | 722,373    |   |      |   | (1,217,267 | )
|Increase (decrease) in accounts payable and accrued expenses                              |  |                              | 115,011    |   |      |   | (511,037   | )
|Increase in deferred revenue                                                              |  |                              | 6,358,333  |   |      |   |           |  
|                                                                                          |  |                              |            |   |      |   |            |  
|Net cash provided by (used in) operating activities                                       |  | $                            | 1,545,649  |   |      | $ | (3,798,623 | )
|                                                                                          |  |                              |            |   |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                              |            |   |      |   |            |  
|                                                                                          |  |                             
|Purchase of equipment and furniture                                                       |  |                              | (163,040   | ) |      |   | (126,941   | )
|Increase in patents and other intangibles                                                 |  |                              | (70,607    | ) |      |   | (53,074    | )
|Decrease in other assets                                                                  |  |                              | 1,354      |   |      |   |           |  
|Construction of leasehold and building improvements                                       |  |                              |           |   |      |   | (29,453    | )
|                                                                                          |  |                              |            |   |      |   |            |  
|Net cash used in investing activities                                                     |  |                              | (232,293   | ) |      |   | (209,468   | )
|                                                                                          |  |                              |            |   |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                              |            |   |      |   |            |  
|                                                                                          |  |                             
|Repayment of stockholder notes                                                            |  |                              | (10,000    | ) |      |   | (2,000,000 | )
|Proceeds from sale of stock, net                                                          |  |                              |           |   |      |   | 12,913,483 |  
|Repayment of capital lease obligations                                                    |  |                              | (18,350    | ) |      |   | (19,660    | )
|Proceeds from exercise of stock options                                                   |  |                              | 3,270      |   |      |   | 174,898    |  
|                                                                                          |  |                              |            |   |      |   |            |  
|Net cash provided by (used in) financing activities                                       |  |                              | (25,080    | ) |      |   | 11,068,721 |  
|                                                                                          |  |                              |            |   |      |   |            |  
|Net increase in cash and cash equivalents                                                 |  |                              | 1,288,276  |   |      |   | 7,060,630  |  
|Cash and cash equivalents at beginning of period                                          |  |                              | 3,357,351  |   |      |   | 4,146,486  |  
|                                                                                          |  |                              |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                                |  | $                            | 4,645,627  |   |      | $ | 11,207,116 |  
|                                                                                          |  |                              |            |   |      |   |            |  
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                       |  |                              |            |   |      |   |            |  
|Cash payments:                                                                            |  |                              |            |   |      |   |            |  
|Cash paid for interest                                                                    |  | $                            | 7,400      |   |      | $ | 5,300      |  
|Cash paid for income taxes                                                                |  |                              |           |   |      |   |           |  

See notes to condensed financial statements.



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UNIGENE LABORATORIES, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

March 31, 2007

(Unaudited)

NOTE A - BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

The
accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation, which are of a normal and recurring nature only, have been included. Operating results for the three-month period ended March 31, 2007 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2007. 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, 2006.

New Accounting Pronouncements

In February 2007, the
Financial Accounting Standards Board (FASB) Issued Statement No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB No. 115. SFAS 159
permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective for the beginning of the first fiscal year that begins after November 15, 2007. Management is currently
evaluating the impact that the adoption of SFAS 159 will have on the Companys financial statements.

In December 2006, the FASB issued FASB Staff
Position (FSP) EITF 00-19-2, Accounting for Registration Payment Arrangements. FSP EITF 00-19-2 requires an issuer of financial instruments, such as debt, convertible debt, equity shares or warrants, to account for a contingent
obligation to transfer consideration under a registration payment arrangement in accordance with Statement 5, Accounting for Contingencies, and FASB Interpretation 14,Reasonable Estimation of the Amount of a Loss. That accounting
applies regardless of whether the registration payment arrangement is a provision in a financial instrument or a separate agreement. The FSP requires issuers to make certain disclosures for each registration payment arrangement or group of similar
arrangements. FSP EITF 00-19-2 is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that were entered into or modified after December 21, 2006. The FSP is effective for
fiscal years beginning after December 15, 2006, for registration payment arrangements and financial instruments subject to those arrangements that are entered into prior to December 21, 2006. The Company adopted FSP EITF 00-19-2 effective
January 1, 2007 and the adoption did not have a significant effect on its financial statements. However, it could have a significant impact on future financial statements depending on the terms of future arrangements.

In September 2006, the FASB issued FASB Statement 157, Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for
measuring fair value under GAAP and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, FAS 157 does not require any new fair value
measurements. However, for some entities, the application of FAS 157 will change current practice.



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The changes to current practice resulting from the application of FAS 157 relate to the definition of fair value, the methods used to measure fair value and
the expanded disclosures about fair value measurements. The provisions of FAS 157 are effective as of January 1, 2008, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We
are currently evaluating the impact that the adoption of FAS 157 will have on our financial condition or results of operations.

In July 2006, the FASB
issued FASB Interpretation 48, Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty involved in the recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 requires that we recognize in our financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical
merits of the position. The provisions of FIN 48 were effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The adoption of FIN
48 did not have a material impact on our financial condition or results of operations.

NOTE B  LIQUIDITY

At March 31, 2007, we had cash and cash equivalents of $4,646,000, an increase of $1,288,000 from December 31, 2006. The increase was primarily a result of
Fortical® sales and royalties received under our
agreement with Upsher-Smith Laboratories, Inc., or USL, (See Note D), as well as a $2,500,000 upfront payment from Novartis related to a supply agreement signed in January 2007 (See Note E). In April 2007, we received an additional $5,500,000 from
Novartis for a milestone achieved in February 2007 (See Note E).

Our primary source of cash has historically been (1) licensing fees for new
agreements, (2) milestone payments under licensing or development agreements, (3) bulk peptide sales under licensing or supply agreements, (4) stockholder loans and (5) the sale of our common stock. Since August 2005, we have
also generated cash from sales and royalties on Fortical. We cannot be certain that any of these cash sources will continue to be available to us in future years. Licensing fees from new collaborations are dependent upon the successful completion of
complex and lengthy negotiations. Milestones are based upon progress achieved in collaborations, which cannot be guaranteed, and are often subject to factors that are controlled neither by our licensees nor us. Product sales to our partners under
these agreements are based upon our licensees needs, which are sometimes difficult to determine. Sale of our common stock is dependent upon our ability to attract interested investors, our ability to negotiate favorable terms and the
performance of the stock market in general and biotechnology investments in particular. Future Fortical sales and royalties will be affected by competition and acceptance in the marketplace and could be impacted by any manufacturing, distribution or
regulatory issues.

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



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

In November 2002, we signed an
exclusive U.S. licensing agreement with USL for a value before royalties of $10,000,000 to market Fortical, our patented nasal formulation of calcitonin for the treatment of osteoporosis. During the first quarter of 2007, Fortical sales were
$2,616,000 and Fortical royalties were $1,845,000. We expect Fortical sales and royalties to continue in 2007 and future years, but we cannot predict the levels of activity (see Note D).

In April 2004, we signed a worldwide licensing agreement with Novartis for a value before royalties of up to $18,700,000 to allow Novartis to manufacture calcitonin using our patented peptide production process. We
will receive royalties on sales of any existing or future Novartis products that contain calcitonin manufactured by Novartis using our process. We 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. In the first quarter of 2007, under this agreement, we earned
a $5,500,000 milestone payment from Novartis, which was received in April 2007, for the initiation of their oral calcitonin Phase III clinical study for osteoporosis. (See Note E.)

In January 2007, we signed a supply agreement with Novartis. Under this agreement, in March 2007, we received a $2.5 million payment to supply Novartis with specified quantities of bulk peptide necessary to support
Novartis development program for a novel osteoporosis treatment. (See Note E.)

We are engaged in the research, production and delivery of
peptide-related products. Our primary focus has been on the development of various peptide products for the treatment of osteoporosis, including nasal and oral calcitonin and oral PTH. We are also developing potential products in the area of
site-directed bone growth, or SDBG. 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, a license agreement was signed in November 2002 with USL. Fortical was approved by the U.S. Food and Drug Administration, or FDA, and launched
by USL in August 2005, generating sales and royalties.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For oral calcitonin, we are seeking a licensee to participate in the products development. The costs of future clinical trials may be borne by a future
licensee depending upon our future financial resources. Because additional clinical trials are still necessary for our oral calcitonin product, any product launch will take at least several years. We will incur certain additional development costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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 oral PTH product. We signed a license agreement for this product with GSK in April 2002. We will incur certain additional development costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Under the terms of the joint venture agreement in China with Shijiazhuang Pharmaceutical Group, or SPG, we are obligated to contribute up to $405,000 in cash after
approval of its New Drug Application or NDA (which was filed in China in September 2003) and up to an additional $495,000 in cash within two years thereafter. These amounts may be reduced or offset by our share of the entitys profits, if any.
The timing of the approval of our NDA in China is uncertain.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

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 of these 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 $231,000 for the three months ended March 31, 2007. Total interest expense on all Levy loans was approximately $390,000 for the three months ended
March 31, 2007. As of March 31, 2007, total accrued interest on all Levy loans was approximately $8,467,000 and the outstanding loans by these individuals to us, classified as short-term debt, totaled $8,095,000. We repaid $10,000 and
$2,000,000 in principal on certain of these loans in 2007 and 2006, respectively. These loans are secured by security interests in our equipment, real property and/or certain of our patents.

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, our SDBG program 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.



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We have incurred annual operating losses since our inception and, as a result, at March 31, 2007, had an accumulated
deficit of approximately $120,000,000 and a working capital deficiency of approximately $5,000,000. Our 2007 cash requirements to operate our research and peptide manufacturing facilities and develop our products should increase due to anticipated
spending on internal research projects, including oral calcitonin and oral PTH, as well as patent infringement litigation costs. We need additional cash from sales, milestones or upfront payments or from financings in order to meet our obligations
for the next twelve months. 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.

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 reimburse us for certain development activities during the program, including our activities in the production of raw material for development and
clinical supplies, and will pay us a royalty on its worldwide sales of the product, if commercialized. The royalty rate will be increased if certain sales milestones are achieved. Revenue recognition of the up-front licensing fee and first milestone
payment has been deferred over the estimated 15-year performance period of the license agreement. 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 March 31, 2007. 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
March 31, 2007. For the first three months of 2007, we recognized $50,000 in licensing revenue. There were no PTH sales to GSK during 2007. Bulk product sales to licensees, prior to product approval, are typically inconsistent and subject to
the needs of the licensee. GSK could make additional milestone payments in the aggregate amount of up to $142,000,000 subject to the progress of the compound through clinical development and through to the market. This agreement is subject to
certain termination provisions. Either party may terminate the license agreement if the other party (i) materially breaches the license agreement, which breach is not cured within 60 days (or 30 days for a payment default),
(ii) voluntarily files, or has served against it involuntarily, a petition in bankruptcy or insolvency, which, in the case of involuntary proceedings, remains undismissed for 60 days, or (iii) makes an assignment for the benefit of
creditors. Additionally, GSK may terminate the license agreement at any time for various reasons including safety or efficacy concerns of the PTH product, significant increases in development timelines or costs, or significant changes in the
osteoporosis market or in government regulations.

NOTE D  UPSHER-SMITH AGREEMENT

In November 2002, we signed an exclusive U.S. licensing agreement with USL for a value before royalties of $10,000,000 to market Fortical, our patented nasal formulation of calcitonin for the treatment of
osteoporosis. We are responsible for manufacturing the product and USL packages the product and distributes it nationwide. Under the terms of the agreement, we received an up-front payment of $3,000,000 from USL in 2002. Revenue recognition of the
up-front licensing fee has been deferred over the estimated 19-year performance period of the license agreement. During 2003, we received a $3,000,000 milestone payment from USL for the



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FDAs acceptance for review of our nasal calcitonin NDA. During 2005, we received the final $4,000,000 milestone payment for the FDAs approval of
Fortical. Fortical was approved by the FDA and launched by USL in August 2005. Revenue for the first three months of 2007, consisted of $2,616,000 in Fortical sales, $1,845,000 in royalties and $39,000 in licensing revenue. From August 2005 through
March 2007, we have recognized an aggregate of $11,916,000 in Fortical sales and $6,909,000 in Fortical royalties. We recognize USL royalty revenue based upon the quarterly USL royalty report. This provides for a reliable measure as well as
reasonable assurances of collectibility. Royalty revenue is earned on sales of Fortical by USL and is recognized in the period Fortical is sold by USL. USLs royalty reports are based on their manufacturing quarters which differ from calendar
quarters by one month. Therefore, our previous quarterly reporting periods did not include royalty revenue for the last month of that period as such information was not available and could not be reliably estimated at that time. Beginning in the
first quarter of 2007, USL is providing royalty information for the last month of the calendar quarter. Therefore, our March 31, 2007 quarter (and only this quarter) includes royalty revenue for 4 months, from December 2006 through March 2007.
Future quarters will report three months of royalty revenue, corresponding to our calendar quarters. The effect of the inclusion of the 4thmonth of revenue in the quarter ended March 31, 2007 is an additional $536,000 of revenue. This agreement may be terminated by either party by mutual agreement or due to breach of any material provision of the
agreement not cured within 60 days. We may terminate the agreement in the event of a net sales shortfall. In addition, USL may terminate the agreement under certain circumstances where USL assigns the agreement and we do not approve the assignment.

NOTE E  NOVARTIS AGREEMENTS

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.

During 2004, Novartis purchased calcitonin from us for use in their oral calcitonin development program and implemented our patented
manufacturing process at Novartis facilities. Sandoz, a Novartis affiliate, concluded a manufacturing campaign in 2005 based on our process and produced multiple kilograms of calcitonin at a scale that represents a ten-fold increase above our
current production capacity. Calcitonin produced by Sandoz is projected to be used by Novartis in future studies including clinical trials. We will receive royalties on sales of any existing or future Novartis products that contain calcitonin
manufactured by Novartis using our technology. In the first three months of 2007, under our 2004 agreement, we earned a $5,500,000 milestone payment from Novartis, which was received in April 2007, for the initiation of their oral calcitonin Phase
III clinical study. This milestone will be recognized over the estimated remaining 11-year performance period of the license agreement, beginning March 2007. For the first three months of 2007, we recognized an aggregate of $140,000 in licensing
revenue. 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. 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.

In January 2007, we signed a supply agreement with Novartis. In March 2007, we received a $2,500,000 payment from Novartis to



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supply them with specified quantities of a bulk peptide necessary to support Novartis development program for a novel osteoporosis treatment and to
provide certain product development services. Unigene is using its patented manufacturing technology to develop an FDA-compliant process for the peptide and Novartis will have the opportunity to purchase additional quantities as necessary. Some of
this material may be used in clinical studies. In the first quarter of 2007, based upon production and development expenditures incurred through March 31, 2007, we recognized $1,600,000 in revenue from this agreement consisting of $1,408,000 in
product sales revenue and $192,000 in development services revenue. The $1,600,000 in first quarter revenue was allocated between sales revenue and development services revenue based upon the proportion of costs incurred for the two revenue
categories. The balance of the $2,500,000 payment is expected to be recognized as revenue in the second quarter of 2007.

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 (collectively, the Levys), 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 $231,000 and $218,000, respectively, for the three months ended March 31, 2007 and 2006, and total interest expense on all Levy loans was
approximately $390,000 and $401,000, respectively, for the three months ended March 31, 2007 and 2006. As of March 31, 2007, total accrued interest on all Levy loans was approximately $8,467,000 and the outstanding loans by these
individuals to us, classified as short-term debt, totaled $8,095,000. In the first quarter of 2007 and 2006, we repaid an aggregate of $10,000 and $2,000,000, respectively, in principal on certain of these loans. 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 March 31, 2007 and
December 31, 2006 (in thousands):



|                                             |  |      |        |      |   |       
|-------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                             |  | 2007 |        | 2006
|Jay Levy term loans (1)                      |  | $    | 1,870  |      | $ | 1,870 
|Jay Levy demand loans (2)                    |  |      | 525    |      |   | 525   
|Levy Partnership loans (3)                   |  |      | 5,700  |      |   | 5,700 
|Warren Levy demand loans (4)                 |  |      |       |      |   | 5     
|Ronald Levy demand loans (5)                 |  |      |       |      |   | 5     
|                                             |  |      |        |      |   |       
|                                             |  |      | 8,095  |      |   | 8,105 
|Accrued interest                             |  |      | 8,467  |      |   | 8,081 
|                                             |  |      |        |      |   |       
|Total loans and interest due to stockholders |  | $    | 16,562 |      | $ | 16,186
|                                             |  |      |        |      |   |       

---

|(1) | Loans from Jay Levy in the aggregate principal amount of $1,870,000 evidenced by term notes that matured January 2002 and bear interest at the fixed rate of 11% per year. These
loans were originally at 6% per year. 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 March 31, 2007 was approximately $2,161,000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Loans from Jay Levy in the aggregate principal amount of $525,000, which are evidenced by demand notes bearing a floating interest rate equal to the Merrill Lynch Margin Loan Rate
plus 5.25% (14.2% at March 31, 2007). 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
March 31, 2007 was approximately $4,240,000.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | 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%, (8.5% at March 31, 2007) and which are secured by a security interest in certain of our patents. Accrued interest on these loans at March 31, 2007 was approximately $2,066,000. In 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Loan from Warren Levy in the amount of $5,000 bore interest at the Merrill Lynch Loan Rate plus .25% (8.5% at December 31, 2006). This loan was secured by a secondary security
interest in our equipment and real property. Accrued interest on this loan at December 31, 2006 was approximately $1,900. This loan was repaid in full in January 2007.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Loan from Ronald Levy in the amount of $5,000 bore interest at the Merrill Lynch Margin Loan Rate plus .25% (8.5% at December 31, 2006). This loan was secured by a secondary
security interest in our equipment and real property. Accrued interest on this loan at December 31, 2006 was approximately $1,900. This loan was repaid in full in January 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE G  INVENTORY

Inventories consist of the following:



|                                                                          |  |                |           |                  |   |          
|------------------------------------------------------------------------- |  | -------------- | --------- | ---------------- | - | ---------
|                                                                          |  | March 31, 2007 |           | December 31,2006
|Finished goods  net of allowances of $808,000 and $801,000, respectively |  | $              | 2,568,567 |                  | $ | 3,531,147
|Work in process                                                           |  |                | 202,269   |                  |   |         
|Raw materials                                                             |  |                | 1,783,192 |                  |   | 1,751,853
|                                                                          |  |                |           |                  |   |          
|Total                                                                     |  | $              | 4,554,028 |                  | $ | 5,283,000
|                                                                          |  |                |           |                  |   |          

Production inventories, at our Boonton, NJ location, are stated at the lower of cost or market, valued at actual
cost which approximates the first-in, first out method (FIFO). Research inventories, at our Fairfield, NJ location, are stated at the lower of cost (using the FIFO method) or market. Typically, finished goods and work in process inventory are fully
reserved except for the amounts deemed saleable by management based upon current or anticipated orders, primarily under contractual arrangements. Our reserves for finished goods and work in process production were $808,000 at March 31, 2007, an
increase of $7,000 from December 31, 2006.

NOTE H  FINANCING

Magnetar

In March 2006, we completed the sale of a total of 4,000,000 shares of our common stock and a common stock
warrant to purchase up to 1,000,000 shares of our common stock to Magnetar Capital Master Fund, Ltd. (Magnetar) pursuant to a common stock purchase agreement. The shares are freely tradable. T he five-year warrant is exercisable
immediately at an exercise



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price per share of $4.25 and was outstanding at March 31, 2007. We received gross proceeds of $13,000,000 before expenses of approximately $250,000.
Pursuant to the registration rights agreement executed in connection with the private placement, we agreed to file and keep a registration statement effective at all times until the earlier of (i) the date as of which all the registrable
securities may be sold without restriction pursuant to Rule 144(k), (ii) the date 24 months after the closing of the private placement or (iii) the date on which all of the registrable securities covered by such registration statement have
been sold. A registration statement was declared effective in September 2006. If, on any day after the date on which the registration statement is declared effective, sales of all the registrable securities cannot be made (other than during a
specified grace period), then we shall pay to each holder of registrable securities an amount in cash equal to 2% of the aggregate purchase price on the date sales cannot be made, after the applicable grace period, and 2% of the aggregate purchase
price for each 30 day period (pro-rated for periods totaling less than 30 days). We do not believe that this penalty provision will have a material impact on our financial condition.

NOTE I  CHINA JOINT VENTURE

In June 2000, we entered into a joint venture agreement with SPG, a pharmaceutical
company in the Peoples Republic of China, formally creating a contractual joint venture between the two entities. We own 45% of the contractual joint venture and will have a 45% interest in the entitys profits and losses. In the first
phase of the collaboration, SPG contributed its existing injectable calcitonin license to the joint venture, which allowed the entity to sell its injectable calcitonin product in China. An NDA for injectable and nasal calcitonin products was filed
in China in the third quarter of 2003. The timing of the approval of our NDA in China is uncertain. Upon approval of an official business license from the Chinese authorities, which we anticipate will follow the approval of the Chinese 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. Brief local human trials
were initiated in 2006. 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 the joint venture may manufacture bulk
calcitonin in China at a new facility that would be constructed by it. This would require the joint venture to obtain local financing. The existing joint venture began operations and sales of its injectable calcitonin product in 2002 under the
aforementioned SPG license. Sales by the joint venture have been used to offset its costs. 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 the issuance of the business license 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.

NOTE J  STOCK OPTION COMPENSATION

We have shareholder-approved stock
option plans for employees and directors under which we have granted non-qualified and incentive stock options. Options granted under these plans must be at a price per share not less than the fair market value per share of common stock on the date
the option is granted. The options generally vest over a one to four year period and typically expire ten years from the date of grant. Shares for option exercises are issued from authorized and unissued shares. At March 31, 2007, we had
reserved approximately 3,198,000 shares for future stock option grants.



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We account for stock options and warrants issued to consultants on a fair value basis in accordance with SFAS
No. 123 (R) and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Compensation expense
is calculated each quarter for consultants using the Black-Scholes option pricing model, until the option is fully vested. Based upon options issued to consultants, we recognized $82,000 in compensation expense in the first quarter of 2007 and we
recognized a compensation benefit of $13,000 in the first quarter of 2006. These amounts are included in research, development and facility expenses.

Under SFAS 123(R), compensation cost for the three months ended March 31, 2007 and 2006 includes 1) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date
fair value estimated in accordance with the original provisions of SFAS 123; and 2) compensation cost for all share-based payments granted on or after January 1, 2006, based on the grant-date fair value estimated in accordance with SFAS 123(R).
For the three months ended March 31, 2007, we recognized share-based compensation cost of $311,000, which consisted of $208,000 in general and administrative expenses and $103,000 in research, development and facility expenses. For the three
months ended March 31, 2006, we recognized share-based compensation cost of $178,000, which consisted of $82,000 in general and administrative expenses and $96,000 in research and development expenses. We did not capitalize any share-based
compensation cost.

As of March 31, 2007, there was $697,000 of total unrecognized compensation cost related to nonvested share-based compensation
arrangements granted under the stock option plans. That cost is expected to be recognized over a weighted-average period of less than 1 year.

The
following table shows the weighted average assumptions we used to develop the fair value estimates:



|                         |  |                              |   |  |      |  
|------------------------ |  | ---------------------------- | - |  | ---- | -
|                         |  | Three Months Ended March 31, |  
|                         |  | 2007                         |   |  | 2006 |  
|Expected volatility      |  | 69.3                         | % |  | 89.8 | %
|Expected dividends       |  |                             |   |  |     |  
|Expected term (in years) |  | 5.3                          |   |  | 5.0  |  
|Risk-free rate           |  | 4.5                          | % |  | 4.6  | %
|Forfeiture rate          |  | 20                           | % |  | 20   | %

We utilized the risk-free interest rate for periods equal to the expected term of the option based upon U.S.
Treasury securities in effect at the time of the grant. The Company has no present intention of declaring any dividends. For the three months ended March 31, 2007 and March 31, 2006, we estimated the fair value of each option award on the
date of grant using the Black-Scholes model. We based expected volatility on historical volatility. We estimated the expected term of stock options using historical exercise experience.



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A summary of option activity as of March 31, 2007 and changes during the three months then ended is presented below:



|                               |  |           |   |  |                               |      |                                          |     |                         |   |          
|------------------------------ |  | --------- | - |  | ----------------------------- | ---- | ---------------------------------------- | --- | ----------------------- | - | ---------
|Options                        |  | Shares    |   |  | Weighted-AverageExercisePrice |      | Weighted-AverageRemainingContractualTerm |     | AggregateIntrinsicValue
|Outstanding at January 1, 2007 |  | 3,783,415 |   |  | $                             | 1.38 |                                          |     |                         |   |          
|Granted                        |  | 3,000     |   |  |                               | 2.53 |                                          |     |                         |   |          
|Exercised                      |  | (3,500    | ) |  |                               | 0.93 |                                          |     |                         |   |          
|Forfeited or expired           |  | (52,500   | ) |  |                               | 1.83 |                                          |     |                         |   |          
|                               |  |           |   |  |                               |      |                                          |     |                         |   |          
|Outstanding at March 31, 2007  |  | 3,730,415 |   |  | $                             | 1.38 |                                          | 5.7 |                         | $ | 3,990,000
|                               |  |           |   |  |                               |      |                                          |     |                         |   |          
|Exercisable at March 31, 2007  |  | 3,191,002 |   |  | $                             | 1.15 |                                          | 5.2 |                         | $ | 3,869,000
|                               |  |           |   |  |                               |      |                                          |     |                         |   |          

The weighted-average grant-date fair value of options granted during the three months ended March 31, 2007
and 2006 was $1.59 and $2.86, respectively. The total intrinsic value, which represents the difference between the underlying stocks market price and the options exercise price, of options exercised during the three months ended
March 31, 2007 and 2006 was $5,000 and $1,062,000, respectively.

Cash received from option exercises under all share-based payment arrangements for
the three months ended March 31, 2007 and 2006 was $3,000 and $175,000, respectively. No tax benefit was realized from option exercises of the share-based payment arrangements for the three months ended March 31, 2007 and 2006.

NOTE K  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 the 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-month periods ended March 31, 2007 and 2006 because
inclusion of our stock options and warrants (approximately 6,133,000 and 5,700,000 shares of common stock, if exercised, for the three-month periods ended March 31, 2007 and March 31, 2006, respectively), would be antidilutive.

NOTE L  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.



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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. 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. As of March 31, 2007, nine of our patents had issued in the U.S., seventy-seven had issued in various foreign countries and various other
applications were pending.

Details of intangible assets are summarized as follows:



|                    |  |                |           |                         |   |           |  |      |           |                         |   |           |  |   |           |  |   |          
|------------------- |  | -------------- | --------- | ----------------------- | - | --------- |  | ---- | --------- | ----------------------- | - | --------- |  | - | --------- |  | - | ---------
|                    |  | March 31, 2007 |           | December 31, 2006      
|                    |  | Cost           |           | AccumulatedAmortization |   | Net       |  | Cost |           | AccumulatedAmortization |   | Net      
|Trademarks          |  | $              | 144,000   |                         | $ | 137,000   |  | $    | 7,000     |                         | $ | 144,000   |  | $ | 136,000   |  | $ | 8,000    
|Patents             |  |                | 1,388,000 |                         |   | 896,000   |  |      | 492,000   |                         |   | 1,388,000 |  |   | 870,000   |  |   | 518,000  
|Deferred Patents    |  |                | 969,000   |                         |   |          |  |      | 969,000   |                         |   | 898,000   |  |   |          |  |   | 898,000  
|Deferred Trademarks |  |                | 15,000    |                         |   |          |  |      | 15,000    |                         |   | 15,000    |  |   |          |  |   | 15,000   
|                    |  |                |           |                         |   |           |  |      |           |                         |   |           |  |   |           |  |   |          
|                    |  | $              | 2,516,000 |                         | $ | 1,033,000 |  | $    | 1,483,000 |                         | $ | 2,445,000 |  | $ | 1,006,000 |  | $ | 1,439,000
|                    |  |                |           |                         |   |           |  |      |           |                         |   |           |  |   |           |  |   |          

NOTE M  DEFERRED COMPENSATION PLAN

In December 2005, our Board of Directors approved the adoption of a deferred compensation plan for Dr. Ronald
Levy, Executive Vice President and Director of the Company, and Dr. Warren Levy, President, Chief Executive Officer and Director of the Company. Previously, Drs. Levy were the beneficiaries of split-dollar life insurance policies owned by the
Company with a face value of $1,000,000 each that were originally purchased in 1988. These policies were terminated without any consideration paid to them in 2005 due to changes in the tax law as well as Sarbanes-Oxley regulations, and we received
the entire cash proceeds. In recognition of the services of Drs. Levy and the cancellation of the split-dollar life insurance policies, the Board recommended the adoption of a deferred compensation plan. The major features of the plan are as
follows: The Company agrees to credit a book account with $25,000 per year on January 1stof such year
beginning on January 1, 2006 and ending on January 1, 2014 for each participant; the credits to the accounts would be 100% vested; upon the death of a participant, any remaining contributions would be made to his account; and in the event
of a change in control of Unigene, all remaining contributions shall be made to each participants account. The related contracts were finalized and executed in February 2006. Therefore, we recognized this liability in the first
quarter of 2006 in the amount of $304,000 which represented the net present value of the future payments. As of March 31, 2007, this liability was approximately $340,000. As of March 31, 2007, both of these accounts had been funded to date
in the aggregate amount of $107,000 ($100,000 plus $7,000 in interest and gains) and these accounts are included on the Balance Sheet in other assets.



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

NOTE N  LEGAL PROCEEDINGS

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

NOTE O  RIGHTS PLAN

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

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

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

Generally, if the rights become exercisable, then each stockholder, other than the stockholder whose acquisition has
caused the rights to become exercisable, is entitled to purchase, for the exercise price, that number of shares of common stock that, at the time of the transaction, will have a market value of two times the exercise price of the rights. In
addition, if, after the rights become exercisable,



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we are acquired in a merger or other business combination, or fifty percent or more of our assets, cash flow or earning power are sold, each right will
entitle the holder to purchase, at the exercise price of the rights, that number of shares of common stock of the acquiring company that, at the time of the transaction, will have a market value of two times the exercise price of the rights.

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

NOTE P  SUBSEQUENT EVENT

In May 2007, the Levys agreed to restructure and consolidate the outstanding principal and interest on our notes payable to them. In conjunction with this restructuring,
we repaid $1,000,000 to the Levys as a partial principal repayment. We therefore canceled existing demand notes aggregating approximately $15,700,000 of principal and interest, of which approximately $8,900,000 in principal and interest is currently
in default, with interest rates ranging from 8.5% to 14.2%. We issued new long-term notes aggregating approximately $15,700,000 in principal, none of which are in default, with a fixed interest rate of 9%. Payments are required to be made over a
five-year period, beginning in May 2010, but payments may be made earlier without penalty.

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, 2006, including the financial
statements and notes contained therein.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements regarding us and our business, financial condition, results of operations and prospects. Such forward-looking
statements include those which express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. We have based these forward-looking statements on our current expectations
and projections about future events and they are subject to risks and uncertainties known and unknown which could cause actual results and developments to differ materially from those expressed or implied in such statements. Words such as
expects, anticipates, intends, plans, believes, seeks, estimates, and similar expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying forward-looking statements. These forward-looking statements include statements about the following: our financial condition, competition, our dependence on other companies to commercialize, manufacture and sell
products using our technologies, the uncertainty of results of animal and human testing, the risk of product liability and liability for human clinical trials, our dependence on patents and other proprietary rights, dependence on key management
officials, the availability and cost of capital, the availability of qualified personnel, changes in, or the failure to comply with, governmental regulations, the delay in obtaining or the failure to obtain regulatory approvals for our products and
litigation. Factors that could cause or contribute to differences in results and outcomes include, without limitation, those discussed in Risk Factors below and in our Annual Report on Form 10-K for the year ended December 31, 2006,
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, 2006.



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RESULTS OF OPERATIONS

Introduction

We are a biopharmaceutical company engaged in the research, production
and delivery of small proteins, referred to as peptides, for medical use. We have a patented manufacturing technology for producing many peptides cost-effectively. We also have patented oral and nasal delivery technologies that have been shown to
deliver medically useful amounts of various peptides into the bloodstream. We have two locations: a laboratory research facility with administrative offices in Fairfield, New Jersey and a pharmaceutical production facility in Boonton, New Jersey.
Our primary focus has been on the development of calcitonin and other peptide products for the treatment of osteoporosis and other indications. Our revenue for the past three years has primarily been derived from domestic sources. We have licensed
worldwide rights to our manufacturing and delivery technologies for oral PTH to GSK. We have also licensed in the U.S. our nasal calcitonin product, which we have trademarked as Fortical, to USL. Fortical was approved by the FDA in August 2005. This
is our first product approval in the United States. Both of these products are for the treatment of osteoporosis. We have also licensed worldwide rights to our patented manufacturing technology for the production of calcitonin to Novartis. We have
an injectable calcitonin product, Forcaltonin®that is approved for sale in the European
Union for osteoporosis indications. This product has not generated significant revenue. Our peptide products other than Fortical in the United States will require clinical trials and/or approvals from regulatory agencies and all of our products will
require acceptance in the marketplace. There are risks that these clinical trials will not be successful and that we will not receive regulatory approval or significant revenue for these products. We compete with specialized biotechnology companies,
major pharmaceutical and chemical companies and universities and research institutions. Most of these competitors have substantially greater resources than we do.

We generate revenue through licensing and supply agreements with pharmaceutical companies and by achieving milestones in those agreements. Those agreements, to date, have not been sufficient to generate all of the cash necessary to meet our
needs. In addition, there are risks that current 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 additional revenue from sales of Fortical, 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. In March 2006, we completed the
sale of a total of 4,000,000 shares of our common stock and a common stock warrant to purchase up to 1,000,000 shares of our common stock to Magnetar pursuant to a common stock purchase agreement. The five-year warrant is exercisable immediately at
an exercise price per share of $4.25. We received gross proceeds of $13,000,000 before expenses of approximately $250,000.

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



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Revenue

Revenue is
summarized as follows for the three-month periods ended March 31, 2007 and 2006:



|                           |  |                              |           |      |   |        
|-------------------------- |  | ---------------------------- | --------- | ---- | - | -------
|                           |  | Three Months Ended March 31,
|                           |  | 2007                         |           | 2006
|Product Sales              |  | $                            | 4,023,732 |      | $ |       
|Royalties                  |  |                              | 1,845,442 |      |   | 197,702
|Licensing Revenue          |  |                              | 230,856   |      |   | 189,189
|Development Fees and Other |  |                              | 228,242   |      |   |       
|                           |  |                              |           |      |   |        
|                           |  | $                            | 6,328,272 |      | $ | 386,891
|                           |  |                              |           |      |   |        

Revenue for the three months ended March 31, 2007 increased $5,941,000, or 1,535%, to $6,328,000 from
$387,000 in the comparable period in 2006. This was primarily due to an increase in market share for Fortical resulting in an increase of Fortical sales of $2,616,000 as well as an increase in Fortical royalties of $1,648,000. In addition, in the
first quarter of 2006, because distributors inventories were sufficient to meet demand, we did not have any sales of Fortical to USL. Royalty revenue is earned on sales of Fortical by USL and is recognized in the period Fortical is sold by
USL. USLs royalty reports are based on their manufacturing quarters which differ from calendar quarters by one month. Beginning in the first quarter of 2007, USL is providing royalty information for the last month of the calendar quarter.
Therefore, our March 31, 2007 quarter (and only this quarter) includes royalty revenue for four months, from December 2006 through March 2007. Future quarters will report three months of royalty revenue, corresponding to our calendar quarters.
The effect of the inclusion of the fourth month of revenue in the quarter ended March 31, 2007 is an additional $536,000 of royalty revenue.

In
addition, we recognized $1,408,000 in product sales and $192,000 in development service fees from the $2,500,000 supply agreement signed with Novartis in January 2007. The $5,500,000 milestone from Novartis, pursuant to our April 2004 licensing
agreement, was achieved in February 2007 and received in April 2007. This milestone has been deferred and is being recognized over an 11-year period. Therefore, only $42,000 of this milestone was recognized in the first quarter of 2007.

In the first quarter of 2006, because distributors inventories were sufficient to meet demand, we did not have any sales of Fortical to USL. Revenue for the
three months ended March 31, 2006 consisted of royalty revenue from USL in addition to licensing revenue.

Licensing revenue represents the partial
recognition of milestones and up-front payments received in prior years. Milestone revenue is based upon one-time events and is generally correlated with the development strategy of our licensees and is therefore subject to uncertain timing and not
predictive of future revenue. Bulk peptide sales to our partners under license or supply agreements prior to product approval are typically of limited quantity and duration and also not necessarily predictive of future revenue. Additional peptide
sales to GSK or Novartis are dependent upon their future needs, which we cannot currently estimate. We expect that sales revenue and royalty revenue could increase in future years if USL is able to continue to increase market share for Fortical.
Sales revenue from Fortical in 2007 and future years will depend on Forticals acceptance in the marketplace, competition and other factors. It is uncertain whether or not Fortical will generate significant enough revenue for us to achieve
profitability.



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Costs and Expenses

Research, development and facility expenses primarily consist of personnel costs, supplies, outside testing and consultants primarily related to our development efforts or activities related to our license agreements, as well as
depreciation and amortization expense. All of our production and a portion of our research, development and facility costs are associated with our facility in Boonton, New Jersey, where costs are relatively fixed month-to-month. We allocate such
costs to the manufacture of production batches for inventory purposes, to cost of goods sold or to research, development and facility activities, based upon the activities undertaken by the personnel in Boonton each period. Research, development and
facilities expense increased 34% to $2,124,000 from $1,581,000 for the three months ended March 31, 2007 as compared to the same period in 2006. Cost of materials and supplies increased $409,000, primarily due to the higher calcitonin
production for inventory in the first quarter of 2006 which reduced 2006 material expense. In addition, consulting fees increased $138,000, primarily due an increase of $100,000 in non-cash compensation. Expenses for our oral calcitonin development
program increased $104,000. Research and development expenses should increase in 2007, as compared to 2006, due to our continuing expenditures to further develop our oral calcitonin and oral PTH products, possibly including clinical trials;
sponsorship of clinical trials in China; and support for our site-directed bone growth program.

Cost of goods sold varies by product and consists
primarily of material costs, personnel costs, manufacturing supplies and overhead costs, such as depreciation and maintenance. Cost of goods sold for the first quarter of 2007 of $2,020,000 represented our costs associated with our Fortical
production for USL and our peptide production for Novartis. Cost of goods sold were $0 for the three months ended March 31, 2006 due to the absence of sales in that quarter. Production related expenses should continue to increase in 2007 and
future years to support expected increases in Fortical sales, as well as possible increased peptide production to meet our partners needs.

General
and administrative expenses increased 24% to $2,060,000 from $1,662,000 for the three months ended March 31, 2007 as compared to the same period in 2006. The increase was primarily attributed to an increase of $354,000 in legal and accounting
fees, mainly due to patent infringement litigation fees; an increase of $164,000 in officers compensation, mainly due to an increase in non-cash stock option compensation; and an increase of $127,000 in director/consultant fees mainly due to
increases in USL consultant fees and directors non-cash stock option compensation. These were partially offset by a decrease in deferred compensation expense of $294,000, due to the one-time charge associated with the adoption of a deferred
compensation plan in the first quarter of 2006. We expect general and administrative expenses to continue to increase in 2007, as compared to 2006, due to additional non-cash stock option compensation expense and to anticipated escalation of legal,
personnel, insurance and other costs.

Other Income/Expense

Interest expense decreased $14,000, or 3%, in the first quarter of 2007 to $400,000 from $414,000 in the first quarter of 2006. Interest expense for the first quarter of 2007 decreased due to our repayment of $2,000,000 in principal on
certain of Jay Levys default loans on March 31, 2006. Both periods were 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-month periods was approximately $231,000 for 2007 and $218,000 for 2006. We expect interest expense to
eventually decline as we anticipate making additional repayments on this debt.



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Net Loss

Net loss
for the three months ended March 31, 2007 decreased approximately $2,999,000, or 92%, to $244,000 from $3,243,000 for the corresponding period in 2006. This was due to increased revenue of $5,900,000, primarily from Fortical and Novartis,
partially offset by an increase in operating expenses of $3,000,000, mainly from an increase in cost of goods sold of $2,000,000 due to the sales of Fortical to USL and peptide to Novartis. Net losses may continue unless we achieve milestones in our
GSK and Novartis agreements, sign new revenue generating research, licensing or distribution agreements or generate sufficient sales and royalties from Fortical.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2007, we had cash and cash equivalents of $4,646,000, an increase of $1,288,000 from
December 31, 2006. The increase was primarily a result of Fortical sales and royalties (see Note D), as well as a $2,500,000 upfront payment from Novartis received in March 2007 related to a supply agreement signed in January 2007 (see Note E).
In April 2007, we received an additional $5,500,000 from Novartis for a milestone achieved in February 2007 (see Note E).

Our primary source of cash has
historically been (1) licensing fees for new agreements, (2) milestone payments, (3) bulk peptide sales under licensing or supply agreements, (4) stockholder loans and (5) the sale of our common stock. Since August 2005, we
have also generated cash from sales and royalties on Fortical. We cannot be certain that any of these cash sources will continue to be available to us in future years. Licensing fees from new collaborations are dependent upon the successful
completion of complex and lengthy negotiations. Milestones are based upon progress achieved in collaborations, which cannot be guaranteed, and are often subject to factors that are controlled neither by our licensees nor us. Product sales to our
partners under these agreements are based upon our licensees needs, which are sometimes difficult to determine. Sale of our common stock is dependent upon our ability to attract interested investors, our ability to negotiate favorable terms
and the performance of the stock market in general and biotechnology investments in particular. Future Fortical sales and royalties will be affected by competition and acceptance in the marketplace and could be impacted by any manufacturing,
distribution or regulatory issues.

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

In April 2002, we signed a licensing agreement with GSK for a value before royalties, 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. PTH is in an early stage of development and it is too early to speculate on the probability or timing of a
marketable PTH product (see Note C).

In November 2002, we signed an exclusive U.S. licensing agreement with USL for a value before royalties of
$10,000,000 to market Fortical, our patented nasal formulation of calcitonin for the treatment of osteoporosis. During the first quarter of 2007, Fortical sales were $2,616,000 and Fortical royalties were $1,845,000. We expect Fortical sales and
royalties to continue in 2007 and future years, but we cannot predict the levels of activity (see Note D).



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In April 2004, we signed a worldwide licensing agreement with Novartis for a value before royalties of up to $18,700,000
to allow Novartis to manufacture calcitonin using our patented peptide production process. We will receive royalties on sales of any existing or future Novartis products that contain calcitonin manufactured by Novartis using our process. We 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. In the first quarter of 2007, under this agreement, we earned a $5,500,000 milestone payment from Novartis, which was received in April 2007, for the initiation of their oral calcitonin Phase III clinical study. (See Note
E.)

In January 2007, we signed a supply agreement with Novartis. Under this agreement, in March 2007, we received a $2.5 million payment to supply
Novartis with specified quantities of bulk peptide necessary to support Novartis development program for a novel osteoporosis treatment and to provide certain product development services. (See Note E.)

We are engaged in the research, production and delivery of peptide-related products. Our primary focus has been on the development of various peptide products for the
treatment of osteoporosis, including nasal and oral calcitonin and oral PTH. We are also developing potential products in the area of SDBG. In general, we seek to develop the basic product 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, a license agreement was signed in November 2002 with USL. Fortical was approved by the FDA and launched by USL in August 2005, generating
sales and royalties.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For oral calcitonin, we are seeking a licensee to repeat a Phase I/II clinical trial and also to conduct a Phase III clinical trial. The costs of these trials may
be borne by a future licensee depending upon our future financial resources. Because additional clinical trials are still necessary for our oral calcitonin product, any product launch will take at least several years. We will incur certain
additional development costs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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. We signed a license agreement for this product with GSK in April 2002. We will incur certain additional development costs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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. These amounts may be reduced or offset by our share of the entitys profits, if any. The timing of the approval of our NDA in China is uncertain.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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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, or loss of patent protection, may have an adverse effect on our cash flow and operations. In July 2006, we and USL jointly filed a patent infringement lawsuit against Apotex for
infringement of our nasal calcitonin patent. If we are unsuccessful in our lawsuit, and if Apotex receives FDA approval and is able to launch its product, the launch of this generic product could have an adverse effect on our cash flow and
operations. In addition, any material interruption or failure in manufacturing, marketing or distribution of Fortical will have an adverse effect on our cash flow and operations.

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 of these 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 $231,000 for the three months ended March 31, 2007. Total interest expense on all Levy loans was approximately $390,000 for the three months ended March 31, 2007. As of March 31, 2007, total accrued interest on all Levy
loans was approximately $8,467,000 and the outstanding loans by these individuals to us, classified as short-term debt, totaled $8,095,000. We repaid $10,000 and $2,000,000 in principal on certain of these loans in 2007 and 2006, respectively. These
loans are secured by security interests in our equipment, real property and/or certain of our patents.

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, our SDBG program 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.

We have incurred annual operating losses since our inception and, as a result, at
March 31, 2007, had an accumulated deficit of approximately $120,000,000 and a working capital deficiency of approximately $5,000,000. Our 2007 cash requirements to operate our research and peptide manufacturing facilities and develop our
products should increase due to anticipated spending on internal research projects, including oral calcitonin and oral PTH, as well as patent infringement litigation costs. We need additional cash from sales, milestones or upfront payments or from
financings in order to meet our obligations for the next twelve months. 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.

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.



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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, 2006. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP,
with no need for managements judgment in their application.

Revenue Recognition: We recognize revenue from the sale of products and from
royalties, licensing agreements, research services and grants. Revenue from the sale of product is recognized when title to product and risk of loss are transferred, collection is reasonably assured and we have no further obligations. If there are
elements of the revenue recognition requirements that are not met at the time of shipment, the revenue is deferred and the corresponding cost of the product is included on our balance sheet as a deferred asset. Revenue from research services 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. Sales and grant revenues generally do not
involve difficult, subjective or complex judgments. We recognize royalty revenue on an accrual basis in accordance with the terms of individual agreements. If the receipt of royalty revenue is contingent on a future event, revenue would be
recognized when that event has occurred. Typically, royalties are recognized when third party results can be reliably measured and collectibility is reasonably assured. In the case of USL, we recognize royalty revenue based upon the quarterly USL
royalty report. This enables a reliable measure, as well as reasonable assurances of collectibility. Royalty revenue is earned on sales of Fortical by USL and is recognized in the period Fortical is sold by USL. USLs royalty reports are based
on their manufacturing quarters which differ from calendar quarters by one month. Beginning in the first quarter of 2007, USL is providing royalty information for the last month of the calendar quarter. Therefore, our March 31, 2007 quarter
(and only this quarter) includes royalty revenue for four months, from December 2006 through March 2007. Future quarters will report three months of royalty revenue, corresponding to our calendar quarters. The effect of the inclusion of the fourth
month of revenue in the quarter ended March 31, 2007 is an additional $536,000 of revenue.

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



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once delivery has occurred or services have been rendered. Royalties and/or milestones relating to sales of products by our licensees, and the delivery of
products and research services, will be recognized as such events occur as they represent the completion of a separate earnings process.

In addition, EITF
No. 00-21 requires a company to evaluate its arrangements under which it will perform multiple revenue-generating activities. For example, a license agreement with a pharmaceutical company may involve a license, research and development activities
and/or contract manufacturing. Management is required to determine if the separate components of the agreement have value on a standalone basis and qualify as separate units of accounting, whereby consideration is allocated based upon their relative
fair values or, if not, the consideration should be allocated based upon the residual method. The adoption of EITF No. 00-21 had a significant impact on our 2004 and 2007 financial statements due to our 2004 Novartis license
agreement. Accordingly, up-front and development stage milestone payments will be deferred and recognized as revenue over the performance period of such license agreement. As of March 31, 2007, approximately $2,750,000 of an up-front payment
and approximately $7,077,000 of milestone payments from Novartis are being deferred over the estimated performance period through 2018.

Under our 2007
supply agreement with Novartis, we received an upfront payment of $2,500,000 in March 2007. Based upon production and development expenditures incurred through March 31, 2007, we recognized $1,600,000 in revenue in the first quarter of 2007
($1,408,000 in sales revenue and $192,000 in development fees). The $1,600,000 in first quarter revenue was allocated between sales revenue and development services revenue based upon the proportion of costs incurred for the two revenue categories.
We expect to recognize as revenue the balance of the $2,500,000 payment in the second quarter of 2007.

Accounting for Stock Options: For stock
options granted to employees and directors, we recognize compensation expense based on the grant-date fair value estimated in accordance with SFAS 123(R). We estimate the fair value of each option award on the date of grant using the Black-Scholes
option pricing model. For the three months ended March 31, 2007, we recognized share-based compensation cost of $311,000, which consisted of $208,000 in general, and administrative expenses and $103,000 in research, development and facility
expenses. Stock options and warrants issued to consultants are accounted for in accordance with SFAS 123(R) and EITF No. 96-18. Compensation expense is calculated each quarter for consultants using the Black-Scholes option pricing model, until the
option is fully vested. Based upon options issued to consultants, we recognized $82,000 in compensation expense in the first quarter of 2007. This amount is included in research, development and facility expenses.

Inventory: Production inventories, at our Boonton, NJ location are stated at the lower of cost or market, valued at actual cost which approximates FIFO. Research
inventories, at our Fairfield, NJ location, are stated at the lower of cost (using the FIFO method) or market. Typically, finished goods and work in process inventory are fully reserved except for the amounts deemed saleable by management based upon
current or anticipated orders, primarily under contractual arrangements. Our reserves for finished goods and work in process production were $808,000 at March 31, 2007, an increase of $7,000 from December 31, 2006.

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



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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. Unsuccessful patent costs
are expensed when determined worthless or when patent applications will no longer be pursued. Other intangibles are recorded at cost and are amortized over their estimated useful lives.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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. For a further discussion, please see Managements Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources, as well as Note F to the financial statements. Our exposure to interest rate fluctuations over the near-term and long-term will continue to be affected
by these events until these notes are repaid in full. In addition, increases in general interest rates over the past few years have increased the interest expense on our variable rate debt. We estimate that, due to the short-term nature of our cash
and investments, a change of 100 basis points in interest rates would not have materially affected their fair value.

The information below summarizes our
market risks associated with interest bearing debt obligations as of March 31, 2007. 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 March 31, 2007. Given our financial condition described in Liquidity and Capital Resources it
is not practicable to estimate the fair value of our debt instruments.



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|                              |  |                |            |                  |            |      |        |      |       |      |   |      |  
|----------------------------- |  | -------------- | ---------- | ---------------- | ---------- | ---- | ------ | ---- | ----- | ---- | - | ---- | -
|                              |  |                |            | Year of Maturity
|                              |  | CarryingAmount |            | 2007             |            | 2008 |        | 2009 |       | 2010 |   | 2011
|Notes payable - stockholders  |  | $              | 525,000    |                  | 525,000    |      |       |      |      |      |  |      | 
|Variable interest rate (1)    |  |                | 14.2%      |                  |            |      |        |      |       |      |   |      |  
|Notes payable - stockholders  |  |                | 5,700,000  |                  | 5,700,000  |      |       |      |      |      |  |      | 
|Variable interest rate        |  |                | 8.5%       |                  |            |      |        |      |       |      |   |      |  
|Notes payable - stockholders  |  |                | 1,870,000  |                  | 1,870,000  |      |       |      |      |      |  |      | 
|Fixed interest rate (2)       |  |                | 11%        |                  |            |      |        |      |       |      |   |      |  
|Interest payable stockholders |  |                | 4,240,231  |                  | 4,240,231  |      |       |      |      |      |  |      | 
|Variable interest rate        |  |                | 14.2%      |                  |            |      |        |      |       |      |   |      |  
|Interest payable stockholders |  |                | 2,160,546  |                  | 2,160,546  |      |       |      |      |      |  |      | 
|Fixed interest rate           |  |                | 11%        |                  |            |      |        |      |       |      |   |      |  
|Capital leases                |  |                | 93,310     |                  | 52,802     |      | 38,643 |      | 1,865 |      |  |      | 
|Fixed interest rate           |  |                | 9% - 13%   |                  |            |      |        |      |       |      |   |      |  
|                              |  |                |            |                  |            |      |        |      |       |      |   |      |  
|Total                         |  | $              | 14,589,087 |                  | 14,548,579 |      | 38,643 |      | 1,865 |      |  |      | 
|                              |  |                |            |                  |            |      |        |      |       |      |   |      |  

---

|(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 March 31, 2007 we carried out an evaluation, under the
supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, or the Exchange Act, as of the end of the period covered by this report. Based upon this evaluation, our principal executive officer and our principal financial officer
concluded that as of March 31, 2007, our disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by us in reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Furthermore, our principal executive officer and our principal financial officer concluded that
there were no significant changes in our disclosure controls and procedures or in other factors that could significantly affect our disclosure controls and procedures during the quarterly period ended March 31, 2007.

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

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 March 31, 2007, that have materially affected, or are reasonably



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likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

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

Our performance and
financial results are subject to risks and uncertainties including, but not limited to, the specific risks disclosed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2006. Except as noted
below, no material changes to the risk factors disclosed in the 10-K has been identified during the three months ended March 31, 2007:

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
March 31, 2007, we had an accumulated deficit of approximately $120,000,000. Our gross revenues for the quarter ended March 31, 2007, and the years ended December 31, 2006, 2005 and 2004 were $6,328,000, $6,059,000, $14,276,000 and
$8,400,000, respectively. Our revenues have not been sufficient to sustain our operations. Revenue for the quarter ended March 31, 2007 consisted of Fortical sales and royalties as well as Novartis sales and development fees. As of
March 31, 2007, we had three material revenue generating license agreements. We believe that to achieve profitability we will require at least the successful commercialization of our nasal calcitonin or oral PTH products, another oral peptide
product in the U.S. or abroad or our SDBG technology.

For the quarter ended March 31, 2007 we had operating income of $124,000. For 2006 we had a
loss from operations of $10,980,000. For 2005, we had operating income of $594,000 and for 2004 we had a loss from operations of $5,344,000. Our net loss for the three months ended March 31, 2007 was $244,000. Our net losses for the years ended
December 31, 2006, 2005 and 2004 were $11,784,000, $496,000 and $5,941,000, respectively. We might never be profitable.

Our independent registered
public accounting firm has added an explanatory paragraph to their audit opinion issued in connection with the financial statements for each of the years ended December 31, 2006, 2005 and 2004 relative to the substantial doubt about our ability
to continue as a going concern. Our ability to generate additional revenue or 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.

We had cash flow deficits from operations of $10,962,000, $2,318,000 and $1,220,000 for the years ended December 31, 2006, 2005 and 2004, respectively. We had cash
flow provided by operations of $1,546,000 for the three months ended March 31, 2007. We believe that we will generate



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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 and GSK agreements and/or through the sale of peptides to GSK and Novartis. However, if USL is unable to further increase the market share for 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 4,000,000 shares of our common stock and a five-year common stock purchase warrant to purchase up to 1,000,000 shares of our common stock at an exercise price of $4.25 per share to Magnetar for
gross proceeds of $13,000,000 in March 2006. The sale of our common stock by Magnetar 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.

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

As of March 31, 2007, there were outstanding warrants to purchase 2,371,571 shares of our common stock, all but 20,000 of which are currently
exercisable, at an average exercise price of $2.73 per share. There were also outstanding stock options to purchase an aggregate of 3,730,415 shares of common stock, at an average exercise price of $1.38, of which 3,191,002 are currently
exercisable. The exercise of warrants or options at prices below the market price of our common stock could adversely affect the price of our common stock. Additional dilution may result from the issuance of shares of our common stock in connection
with collaborations or licensing agreements or in connection with other financing efforts.

Item 3. Defaults 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 6. Exhibits



|       |  |                                                                                                                 
|------ |  | ----------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                     
|       | 
|10.1   |  | Supply Agreement, dated as of January 22, 2007, between Unigene Laboratories, Inc. and Novartis Pharma AG(1)
(2)
|       | 
|31.1   |  | Certification by Warren P. Levy pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                      
|       | 
|31.2   |  | Certification by William Steinhauer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                  
|       | 
|32.1   |  | Certification by Warren P. Levy pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                      
|       | 
|32.2   |  | Certification by William Steinhauer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                  

---

|(1) | Filed herewith.
|--- | ---------------

|(2) | Confidential treatment requested.
|--- | ---------------------------------



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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)                                
|             |  |    
|             |  | By: |  | /s/ Warren P. Levy                          
|May 10, 2007 |  |     |  | Warren P. Levy,President                    
|             |  |     |  | (Chief Executive Officer)                   
|             |  |    
|             |  | By: |  | /s/ William Steinhauer                      
|May 10, 2007 |  |     |  | 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                                                     
|     | 
|10.1 |  | Supply Agreement between Unigene and Novartis               
|     | 
|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



34