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, 2008, including the financial statements and notes contained therein.

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 our 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, 2008, 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").

RESULTS OF OPERATIONS

Introduction

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

Our primary focus has been on the development of calcitonin and other peptide products for the treatment of osteoporosis and other indications. Our revenue for the past three years has primarily been derived from domestic sources. We have licensed worldwide rights to our manufacturing and

delivery technologies for oral PTH for the treatment of osteoporosis to GSK. We have also licensed in the U.S. our nasal calcitonin product for the treatment of osteoporosis, which we have trademarked as Fortical, to USL. Fortical was approved by the FDA in 2005. This is our first product approval in the United States. We have also licensed worldwide rights to our patented manufacturing technology for the production of calcitonin to Novartis. We have licensed to our Chinese joint venture certain proprietary technologies and know-how to support the research, development and manufacturing of recombinant salmon calcitonin and non-oral PTH, as well as other possible products, in the People's Republic of China.

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

We compete with specialized biotechnology and biopharmaceutical companies, major pharmaceutical and chemical companies and universities and research institutions. Most of these competitors have substantially greater resources than we do. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis' nasal calcitonin product, but not to Fortical. We do not yet know the effect on Fortical sales and royalties of the launch of these competing products. For the first quarter of 2009, compared to the first quarter of 2008, Fortical sales to USL decreased 51% while Fortical royalties increased 17%. It is reasonable to assume that certain providers will substitute these products for Fortical and, in that event, Fortical sales and royalties would decrease. In addition, Apotex has a pending ANDA for a nasal calcitonin product that we claim infringes on our Fortical patent. If we do not prevail in that litigation, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval.

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

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

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

Revenue

Revenue is summarized as follows for the three-month periods ended March 31,
2009 and 2008:



                                                2009          2008
                Product Sales                $ 1,309,453   $ 2,652,454
                Royalties                      1,326,155     1,138,363
                Licensing Revenue                314,190       314,190
                Development Fees and Other       241,618       209,091

                                             $ 3,191,416   $ 4,314,098

Revenue for the three months ended March 31, 2009 decreased $1,123,000, or 26%, to $3,191,000 from $4,314,000 in the comparable period in 2008. This was primarily due to a decrease in sales to USL. Fortical sales to USL decreased 51% to $1,309,000 for the three months ended March 31, 2009 as compared to $2,652,000 for the three months ended March 31, 2008. Fortical sales fluctuate each quarter based upon USL's ordering schedule. Fortical royalties for the quarter ended March 31, 2009 increased $188,000, or 17%, to $1,326,000 from $1,138,000 in the comparable period of 2008. Fortical royalties fluctuate each quarter based upon the timing and pricing of USL's shipment to its customers.

Licensing revenue represents the partial recognition of milestones and up-front payments received in prior years. Licensing revenue was constant from the first quarter of 2008 to the first quarter of 2009.

Development fees and other revenue increased 16% to $242,000 in the first quarter of 2009 from $209,000 in the first quarter of 2008 primarily due to the timing of development work and feasibility studies for various pharmaceutical and biotechnology companies.

Future sales and royalties are contingent upon many factors including competition, pricing, marketing and acceptance in the marketplace and, therefore, are difficult to predict. Milestone revenue is based upon one-time events and is generally correlated with the development strategy of our licensees. It is therefore subject to uncertain timing and not predictive of future revenue. Bulk peptide sales to our partners under license or supply agreements prior to product approval are typically of limited quantity and duration and also not necessarily predictive of future revenue. Additional peptide sales are dependent upon the future needs of our partners, which we cannot currently estimate. Sales revenue from Fortical in 2009 and future years will depend on Fortical's continued acceptance in the marketplace, as well as competition and other factors. In December 2008, Apotex and Sandoz launched nasal calcitonin products which are generic to Novartis' nasal calcitonin product, but not to Fortical. We do not yet know the effect on Fortical sales and royalties of the launch of these competing products. It is reasonable to assume that certain providers will substitute these products for Fortical and, in that event, Fortical sales and royalties would decrease. Therefore, it is unlikely that Fortical alone will generate sufficient revenue for us to achieve profitability. In addition, Apotex has a pending ANDA for a nasal calcitonin product that we claim infringes on our Fortical patent. If we do not prevail in that litigation, then Apotex could be in a position to market its nasal calcitonin product if and when its pending ANDA receives FDA approval.

Costs and Expenses

Cost of goods sold varies by product and consists primarily of material costs, personnel costs, manufacturing supplies and overhead costs, such as depreciation and maintenance. Cost of goods sold decreased 70% to $478,000 from $1,590,000 for the three months ended March 31, 2009 as compared to the same period in 2008, primarily due to reduced Fortical sales to USL. Cost of goods sold for the first quarter of 2009 and 2008 represented our costs associated with Fortical production for USL, whose purchases from us fluctuates each quarter. Cost of goods sold as a percentage of sales was 37% and 60%, respectively, for the first quarter of 2009 and 2008. The improvement in 2009 was due to the utilization of calcitonin produced by our more efficient manufacturing process. Future production related expenses for 2009 and later years are dependent upon the level of future Fortical sales, as well as possible peptide production to meet our partners' needs.

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

Research, development and facilities expense increased $562,000 to $2,687,000 from $2,125,000 for the three months ended March 31, 2009 as compared to the same period in 2008. The most significant increase was due to expenditures related to our oral PTH program which increased $349,000 in the first quarter of 2009 as compared to the first quarter of 2008. The increase was due to a Phase I clinical trial for PTH that was successfully completed in the first quarter of 2009. In addition, personnel expenses increased $84,000 including higher non-cash equity compensation. Research and development expenses may continue to increase in 2009, as compared to 2008, due to our continuing expenditures to further develop our oral calcitonin and oral PTH products (possibly including clinical trials) and support for our SDBG program.

General and administrative expenses increased $133,000, or 6%, to $2,279,000 from $2,146,000 for the three months ended March 31, 2009 as compared to the same period in 2008. The increase was primarily attributed to an increase of $136,000 in professional fees, including legal expenses related to the Apotex litigation as well as corporate licensing activities. We expect general and administrative expenses to continue to increase in 2009, as compared to 2008, due to anticipated escalation of legal costs primarily related to Apotex.

Other Income/Expense

Interest income increased $23,000 in the first quarter of 2009 to $42,000 from $19,000 in the first quarter of 2008. This increase was due to additional funds available for investment during the first three months of 2009.

Interest Expense

Interest expense increased 228% in the first quarter of 2009 to $1,065,000 from $325,000 in the first quarter of 2008. The increase was primarily due to the $15,000,000 note issued to Victory Park on September 30, 2008. This note bears interest at the prime rate plus 7%, subject to a floor of 14% per annum and a cap of 18% per annum. During the first quarter of 2009 we recognized $700,000 in

cash and non-cash interest expense under this note. Interest expense for the remainder of 2009 will therefore be higher than the interest expense incurred during 2008. In addition, interest expense on the Levy loans increased to $341,000 in the first quarter of 2009 from $316,000 in the first quarter of 2008.

Loss from Investment in Joint Venture

This expense represents our 45% ownership percentage of our China joint venture's profits and losses. Our share of the first quarter of 2009 loss of the joint venture was $65,000, an increase of $64,000 from the first quarter of 2008. Joint venture activities accelerated in the second half of 2008 due to the joint venture hiring additional personnel, beginning construction and other activities for its future manufacturing and research facilities. Losses will continue until the joint venture generates sufficient revenue.

Gain on Technology Transfer to Joint Venture

This gain represents the difference between the fair value of the technology and licenses transferred to the joint venture and the book value of these assets. The joint venture valued these assets at $4,500,000; their book value was $0 representing a gain of $4,500,000. This gain is being recognized over 17 years, the estimated life of the transferred assets, at approximately $265,000 per year. We began recognizing this gain during the fourth quarter of 2008 due to the significant transfer of know-how and technology.

Net Loss

Net loss for the three months ended March 31, 2009 increased approximately $1,422,000, or 77%, to $3,275,000 from $1,853,000 for the corresponding period in 2008. This was due to a reduction in sales to USL of $1,343,000, as well as an increase in interest expense of $740,000 and an increase in research, development and facility expense of $562,000. These were partially offset by a decrease in cost of goods sold of $1,111,000 due to reduced Fortical sales to USL, as well as our more efficient manufacturing process. Net losses will continue unless we achieve sufficient non-deferred revenue from milestones under our GSK and Novartis agreements or sign new revenue generating research, licensing or distribution agreements.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2009, we had cash and cash equivalents of $4,424,000, a decrease of $4,159,000 from December 31, 2008, and we had working capital of approximately $10,129,000. On September 30, 2008 we entered into a financing agreement with Victory Park pursuant to which we borrowed $15,000,000 from Victory Park and, in connection therewith, we issued to Victory Park a three-year senior secured non-convertible term note and 1,125,000 shares of our common stock. We received net proceeds of $14,372,000 after fees and closing expenses. We have the ability to issue an additional $5,000,000 of term notes to Victory Park, under the same terms as the issued notes, by September 30, 2010 (see Note H). Cash received during 2009 was primarily from Fortical sales and royalties received under our agreement with USL. Our primary sources of cash have historically been
(1) licensing fees for new agreements, (2) milestone payments under licensing or development agreements, (3) bulk peptide sales under licensing or supply agreements, (4) stockholder loans, (5) the sale of our common stock and
(6) since August 2005, Fortical sales and royalties. We cannot be certain that any of these cash sources will continue to be available to us in future years. Licensing fees from new collaborations are dependent upon the successful completion of complex and lengthy negotiations. Milestone payments are based upon progress achieved in collaborations, which cannot be guaranteed, and are often subject to factors that are controlled neither by our licensees nor us.

Product sales to our partners under these agreements are based upon our licensees' needs, which are sometimes difficult to predict. Sale of our common stock is dependent upon our ability to attract interested investors, our ability to negotiate favorable terms and the performance of the stock market in general and biotechnology investments in particular. Future Fortical sales and royalties will be affected by competition and continued acceptance in the marketplace and could be impacted by 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 USL, royalties on USL's sales of Fortical and the achievement of milestones under our existing license agreements and, in the long-term, on sales and royalties from the sale of Fortical and other licensed products and technologies. We are actively seeking additional licensing and/or supply agreements with pharmaceutical companies for oral and nasal forms of calcitonin, as well as for other peptides, for our peptide manufacturing technology and for our SDBG technology. However, we may not be successful in achieving milestones under our current agreements, in obtaining regulatory approval for our other products or in licensing any of our other products or technologies.

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

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

• For oral calcitonin, we have interests in two ongoing programs. An external program for which we have licensed our calcitonin manufacturing technology to Novartis is currently in Phase III. We would receive royalties on any calcitonin product commercialized by Novartis that utilizes our calcitonin manufacturing technology. The anticipated completion date is outside our control. For our internal program, we are seeking a licensee to participate in our product's development. A small, short-term Phase I human study was initiated and successfully concluded in 2007. In 2008, we initiated and successfully concluded a Phase I/II clinical study for oral calcitonin. The costs of future clinical trials will most likely be borne by a future licensee. Because additional clinical trials are still necessary for our oral calcitonin product, and we have not yet licensed the product, it is too early to speculate on the probability or timing of a marketable oral calcitonin product. We have incurred expenses in both 2008 and 2009 related to our upcoming Phase III trial and we need a partner to fund the remaining costs of the trial.

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

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

Due to our limited financial resources, any decline in Fortical sales and/or royalties, or delay in achieving milestones under our existing license agreements, or in signing new license or distribution agreements for our products, or loss of patent protection, may have an adverse effect on our cash flow and operations. In July 2006, we and USL jointly filed a patent infringement lawsuit against Apotex for infringement of our nasal calcitonin patent. In December 2008, the United States District Court for the Southern District of New York entered a preliminary injunction, consented to by defendant Apotex, preliminarily enjoining Apotex from engaging in the commercial manufacture, use, marketing, distribution, selling, transportation or importation of any Fortical generic equivalent product in the United States. In obtaining the preliminary injunction, Unigene and USL were required to post a bond and, if we do not prevail in the lawsuit, Unigene would be responsible for paying $1,662,500 to Apotex under the injunction agreement. If we are unsuccessful in our lawsuit, and if Apotex receives FDA approval and is able to launch its generic version of our product, the launch could have an adverse effect on our cash flow and operations. In December 2008, Apotex and Sandoz launched nasal calcitonin products that are generic to Novartis' nasal calcitonin product, but not to Fortical. We do not yet know the effect on Fortical sales and royalties of the launch of these competing products. It is reasonable to assume that certain providers will substitute these products for Fortical and, in that event, Fortical sales and royalties would decrease. 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. Any event that has a material adverse effect on our cash flow and operations could trigger a default under our note payable to Victory Park (see Note H).

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

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

We have incurred annual operating losses since our inception and, as a result, at March 31, 2009, had an accumulated deficit of approximately $133,000,000. Our cash requirements to operate our research and peptide manufacturing facilities and develop our products have increased due to higher spending on internal research projects, including oral calcitonin, oral PTH and SDBG, as well as patent infringement litigation costs.

We need additional cash from sales, royalties, 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 . . .