Prospectus

Filed pursuant to Rule 424(b)(3) Registration No. 333-60642


                           Unigene Laboratories, Inc.
                                9,000,000 Shares
                                       of
                                  Common Stock

                                   ----------

     This  prospectus  relates to the offer and sale by Fusion  Capital Fund II,
LLC of up to 9,000,000 shares of common stock of Unigene  Laboratories,  Inc., a
Delaware corporation.

     Our  common  stock is traded on the OTC  Bulletin  Board  under the  symbol
"UGNE."

     Investing in the common stock involves risks. See "Risk Factors"  beginning
on page 4.

     Fusion is an  "underwriter"  within the  meaning of the  Securities  Act of
1933, as amended.

     Neither the  Securities and Exchange  Commission  nor any state  securities
commission has approved or  disapproved  of these  securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.


                The date of this prospectus is May 18, 2001.





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


                                TABLE OF CONTENTS

                                                                 Page

PROSPECTUS SUMMARY........................................         3
RISK FACTORS..............................................         4
FORWARD-LOOKING STATEMENTS................................        10
USE OF PROCEEDS...........................................        10
PRICE RANGE OF COMMON STOCK...............................        10
DIVIDEND POLICY...........................................        11
SELECTED FINANCIAL DATA...................................        11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
 FINANCIAL CONDITION AND RESULTS OF OPERATIONS............        14
BUSINESS..................................................        21
MANAGEMENT................................................        27
PRINCIPAL STOCKHOLDERS....................................        31
THE FINANCING TRANSACTION.................................        32
SELLING STOCKHOLDER.......................................        35
PLAN OF DISTRIBUTION......................................        36
LEGAL MATTERS.............................................        37
EXPERTS...................................................        37
ADDITIONAL INFORMATION....................................        38
INDEX TO FINANCIAL STATEMENTS.............................       F-1

                                       2




                               Prospectus Summary

     The following summary highlights  information  contained  elsewhere in this
prospectus.  It may not contain all of the information that is important to you.
You should  read the entire  prospectus  carefully,  especially  the  discussion
regarding the risks of investing in Unigene common stock under the heading "Risk
Factors,"  before investing in Unigene common stock.  "Unigene,"  "Forcaltonin,"
and "Fortical" are registered trademarks of Unigene Laboratories, Inc.

Business

     Unigene is a biopharmaceutical company engaged in the research,  production
and delivery of small proteins,  referred to as peptides, that have demonstrated
or may have potential medical use. We have a patented  manufacturing  technology
for producing many peptides  cost-effectively.  We also have patented technology
that has been  shown to  deliver  orally  medically  useful  amounts  of various
peptides into the bloodstream.  Our primary focus has been on the development of
Calcitonin products for the treatment of osteoporosis and other indications.

     o    Injectable  Calcitonin.  Our injectable Calcitonin product,  which has
          the trade name FORCALTONIN TM,  has been approved for the treatment of
          Paget's  disease,  a  genetic  bone  disorder,  and  hypercalcemia,  a
          disorder  associated with high calcium blood levels,  in the 15 member
          states of the European Union.  Sales to date of this product have been
          minimal.

     o    Nasal Calcitonin.  In December 2000, we successfully completed a human
          study  demonstrating  similar blood levels between our formulation and
          that of an existing  nasal  Calcitonin  product.  We have  initiated a
          second human study with final  results  expected in  mid-2001.  We are
          seeking to license our nasal Calcitonin  product in the U.S. and other
          countries for the treatment of osteoporosis.

     o    Oral Calcitonin.  In 1997, we entered into an agreement under which we
          granted to the Parke-Davis  division of Warner-Lambert  Company (which
          merged with Pfizer in June 2000), a worldwide license to make, use and
          sell our oral Calcitonin technology.  In December 1999, Warner Lambert
          filed an  Investigational  New Drug application with the U.S. Food and
          Drug  Administration  (FDA)  for the  conduct  of human  trials in the
          United  States  of our oral  Calcitonin  product  as a  treatment  for
          osteoporosis.  Pfizer began a Phase I/II human study in April 2000 and
          patient dosing for this study was completed in December  2000,  Pfizer
          analyzed the results,  of the study and informed us in March 2001 that
          the study did not achieve Pfizer's desired results.  Pfizer terminated
          the license  agreement  citing this  conclusion.  We believe that this
          study,  in which an FDA  approved  product also did not work and which
          produced results contrary to many published  studies,  was not capable
          of determining  the  performance of our oral  Calcitonin  product.  We
          believe  that if  patients  in the  study  had also  received  calcium
          supplements,  in addition to the  Calcitonin,  the results  would have
          been more favorable.  Therefore, we intend to continue the development
          of our oral  Calcitonin  product as a treatment of  osteoporosis,  and
          have begun discussions with potential  licensees in the U.S. and other
          countries.   In  addition,  due  to  the  termination  of  the  Pfizer
          agreement, we no longer have restrictions on selling bulk Calcitonin.

     Our business strategy is to develop proprietary products and processes with
applications  in human  health  care to generate  revenues  from  license  fees,
royalties on  third-party  sales and direct sales of bulk or finished  products.
Generally,  we fund our  internal  research  activities  and  intend  to rely on
licensees,  which are  likely to be  established  pharmaceutical  companies,  to
provide development funding. We also generally expect to rely on these licensees
to take responsibility for obtaining  appropriate  regulatory  approvals,  human
testing,  and  marketing  of  products  derived  from our  research  activities.
However,  we may, in some cases, retain the responsibility for human testing and
for obtaining the required regulatory approvals for a particular product.

                                       3



Corporate Information

     Unigene  is  incorporated  under  the laws of the  State of  Delaware.  Our
executive offices are located at 110 Little Falls, Fairfield,  New Jersey 07004,
and our telephone number at this location is (973) 882-0860.  The address of our
web  site is  www.unigene.com.  Information  on our web site is not part of this
prospectus.

Our Common Stock

     Our common stock trades on the OTC Bulletin Board under the symbol "UGNE."

The Offering

     On May 9, 2001,  we entered into a common  stock  purchase  agreement  with
Fusion under which  Fusion has  committed to purchase on each trading day during
the term of the  agreement  $43,750 of our common  stock up to an  aggregate  of
$21,000,000.  The May 9, 2001 agreement  replaces the agreement  entered into on
December 18, 2000 which was amended March 30, 2001. Fusion Capital Fund II, LLC,
the selling stockholder,  is offering for sale up to 9,000,000 shares of Unigene
common  stock.  The shares being  offered  consist of up to 6,000,000  shares of
common  stock that Fusion has agreed to  purchase  from  Unigene  and  2,000,000
shares of common stock and 1,000,000  shares of common stock,  issuable upon the
exercise of a five-year  warrant  exercisable at $.50 per share that Unigene has
issued to Fusion as compensation for its purchase commitment. As of May 15 2001,
there were 46,436,940 shares of Unigene common stock outstanding,  including the
2,000,000  shares  that  Unigene  has issued to Fusion as  compensation  for its
purchase  commitment  but not including  the 1,000,000  shares that are issuable
upon  the  exercise  of the  warrant.  The  number  of  shares  offered  by this
prospectus  represent  19.4% of the total  number  of  shares  of  common  stock
outstanding as of May 15, 2001.

     The number of shares  ultimately  offered  for sale by Fusion is  dependent
upon the number of shares  purchased  by Fusion.  This number may be affected by
other   factors  more  fully   described   under  the  heading  "The   Financing
Transaction."

                                  Risk Factors

     An investment in Unigene  common stock  involves a high degree of risk. You
should carefully  consider the following  factors and other  information in this
prospectus  before  deciding to invest in shares of Unigene common stock. If any
of the  following  risks  actually  occur,  our business,  financial  condition,
results of operations and prospects for growth would likely suffer. As a result,
the trading price of Unigene common stock could decline,  and you could lose all
or part of your investment.

     Prospective  investors should consider  carefully these factors  concerning
our business before  purchasing the securities  offered by this  prospectus.  We
make  various  statements  in this  section  which  constitute  "forward-looking
statements"   under   Section   27A  of  the   Securities   Act  of  1933.   See
"Forward-Looking Statements."

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

     We have incurred annual operating losses since our inception.  As a result,
at December 31, 2000, we had an accumulated  deficit of  $75,378,000.  Our gross
revenues for the years ended December 31, 2000,  1999 and 1998 were  $3,287,000,
$9,589,000 and  $5,050,000,  respectively.  However,  our revenues have not been
sufficient to sustain our operations.  These revenues  consisted  principally of
milestone  payments received in connection with our terminated license agreement
with Pfizer.  As of March 31, 2001, we have no  significant  revenue  generating
license  agreements.  As a result,  during the same  periods,  we have  incurred
losses from operations of $11,385,000  $1,997,000 and $6,060,000,  respectively.
Our net  losses  for the  years  ended  December  31,  2000,  1999 and 1998 were
$12,469,000  $1,577,000  and  $6,881,000,  respectively.  While  our  injectable
Calcitonin product has been approved for commercial sale in a number of European
countries for the treatment of two minor indications,  we do not anticipate that
sales for these

                                       4



indications will produce significant revenues. We believe that the profitability
of Unigene  will  require the  successful  commercialization  of our  Calcitonin
product or another  peptide  product in the United  States and  abroad.  Unigene
might never be profitable.

We will require additional financing to sustain our operations.

     At December 31, 2000, we had a working  capital  deficiency of $13,267,000.
The independent  auditors' report for the year ended December 31, 2000, includes
an explanatory  paragraph  stating that our recurring losses from operations and
working capital  deficiency  discussed above raise  substantial  doubt about our
ability to continue as a going concern. We had an operating cash flow deficit of
$4,864,000 in 1998, an operating cash flow deficit of $1,400,000 in 1999 and for
the year ended  December 31, 2000, an operating cash flow deficit of $3,382,000.
We do not have  sufficient  financial  resources to fund our  operations  at the
current level.  Therefore,  we need additional funds to continue our operations.
Our agreement  with Fusion could provide us with  sufficient  funding to sustain
our operations for up to two years, beginning in the second quarter of 2001. The
extent  to which we rely on Fusion as a source  of  financing  will  depend on a
number of factors, including the prevailing market price of our common stock and
the extent to which we are able to secure  working  capital from other  sources,
such as through the entry into  licensing  agreements or the sale of calcitonin,
both of which we are actively  exploring.  If obtaining  sufficient funding from
Fusion were to prove prohibitively  expensive and if we are unable to enter into
a significant  revenue generating license or other arrangement in the near term,
we will 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 the  company.  Should the  funding  we require to sustain  our
working capital needs be unavailable or prohibitively  expensive when we require
it,  the  consequences  would be a  material  adverse  effect  on our  business,
operating results, financial condition and prospects.

     Even if we are able to access  $21,000,000  under the common stock purchase
agreement with Fusion,  we may still need additional  capital to fully implement
our business,  operating and  development  plans.  In addition,  our issuance of
shares of common stock to Fusion under the common stock purchase  agreement will
result in dilution to existing  stockholders.  We only have the right to receive
$43,750 per trading day under the common  stock  purchase  agreement  unless our
stock price equals or exceeds $4.00 per share, in which event the daily purchase
amount may be increased.  In addition, the agreement may be terminated by Fusion
in  the  event  of  a  default   under  the   agreement.   See  "The   Financing
Transaction-Events  of Default."  Since we have initially  registered  6,000,000
shares for sale by Fusion, the selling price of our stock to Fusion will have to
average  at least  $3.50 per share for us to receive  the  maximum  proceeds  of
$21,000,000  without  registering and issuing any additional shares. We may need
to seek shareholder  approval to increase the total number of authorized  shares
of  our  common  stock.  We  believe  that  satisfying  our  long-term   capital
requirements will require the successful commercialization of one of our peptide
products.  At this  time,  we  cannot  predict  with  certainty  that any of our
products will be commercially successful.

We may not be successful in our efforts to develop a Calcitonin or other peptide
product  that  will  produce   revenues  that  are  sufficient  to  sustain  our
operations.

     We  have  obtained  regulatory  approval  in  Europe  for  the  sale of our
injectable Calcitonin product, but there is a limited market for the indications
for which it has been approved. None of our products have been approved for sale
in the U.S. The U.S. Food and Drug  Administration  must approve the  commercial
manufacture and sale of pharmaceutical  products in the U.S. Similar  regulatory
approvals are required for the sale of  pharmaceutical  products  outside of the
United States. We must conduct further human testing on our products before they
can be approved for commercial sale. We must show in these human trials that our
products  are  safe and  effective.  If any of our  products  are  approved  for
commercial  sale,  we  will  need  to  manufacture  the  product  in  commercial
quantities at a reasonable cost in order for it to be a successful  product that
will  generate  profits.  Because of our  limited  clinical,  manufacturing  and
regulatory experience and the lack of a marketing organization, we are likely to
rely on  licensees  or  other  parties  to  perform  one or more  tasks  for the
commercialization of pharmaceutical products.

                                       5



     We believe that expanded consumer  acceptance of Calcitonin  pharmaceutical
products  depends on the  development  of more desirable  formulations.  We have
initiated human trials to evaluate a nasal Calcitonin product with final results
expected  in  mid-2001.  Pfizer  recently  completed  a human trial for our oral
Calcitonin  product,  but after  analyzing the results it terminated our license
agreement citing scientific  and  technical  reasons.  We disagree with Pfizer's
conclusions  and plan to seek other licensees to continue the development of our
oral  Calcitonin  product.  We may not be successful in licensing our Calcitonin
products or any of our other peptide products.  In addition,  we may not be able
to demonstrate the safety or  effectiveness of our products in human trials and,
accordingly,  they may not receive  the U.S.  Food and Drug  Administration  and
foreign  governmental  approvals  that are  necessary to market these  products.
Other  companies may develop other products to compete with or surpass any nasal
or oral product that we develop.

We have made a substantial  investment in our production  facility which we will
need to upgrade or expand in order to  manufacture  our  products in  commercial
quantities.

     We have  constructed  and are  operating  a  facility  intended  to produce
Calcitonin  and other  peptides.  This  facility  has been  approved by European
regulatory  authorities for the manufacture of Calcitonin for human use, but has
not yet been inspected or approved by the U.S. Food and Drug Administration. The
risks  associated  with this  facility  include the failure to achieve  targeted
production  and  profitability  goals,  the  development  by others of  superior
processes and products, and the absence of a market for products produced by the
facility.  In addition,  the successful  commercialization of an oral Calcitonin
product may require us to make additional  expenditures to expand or upgrade our
manufacturing  operations.  Currently, we cannot determine the cost or timing of
these capital expenditures.

We are dependent on partners for the commercial development of our products.

     We do not  currently  have,  nor do we expect  to have in the near  future,
sufficient financial resources and personnel to develop our products on our own.
Accordingly,  we expect to continue to depend on large pharmaceutical  companies
for revenues from sales of products,  research  sponsorship and  distribution of
our  products.  With the  recent  termination  of our Pfizer  collaboration,  we
currently have no licenses for any of our products in the U.S.

     In June 2000, we entered into a joint venture with a pharmaceutical company
in the  People's  Republic  of China for the  manufacture  and  distribution  of
injectable  and nasal  Calcitonin  products  in China and  possibly  other Asian
markets,  for the  treatment  of  osteoporosis.  This joint  venture has not yet
commenced  operations  and it is uncertain  whether it will generate  meaningful
revenues  or  profits  for  Unigene.  We also  have  entered  into  distribution
agreements for our injectable  formulation of Calcitonin in the United  Kingdom,
Ireland and Israel.  To date, we have not received  material revenues from these
distribution agreements.

     We intend to pursue  additional  opportunities  to  license,  or enter into
distribution  arrangements  for,  our  oral,  nasal  and  injectable  Calcitonin
products as well as other possible peptide  products.  Due to the termination of
the Pfizer agreement, we no longer have restrictions on selling bulk Calcitonin.
However, we may not be successful in any of these efforts.

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

     Our laboratory research,  development and production activities, as well as
those of our collaborators and licensees,  are subject to significant regulation
by federal,  state, local and foreign governmental  authorities.  In addition to
obtaining  U.S.  Food and Drug  Administration  approval  and  other  regulatory
approvals  of our  products,  we must  obtain  approvals  for our  manufacturing
facility to produce  Calcitonin and other peptides for human use. The regulatory
approval process for a pharmaceutical product requires substantial resources and
may take many years.  Our  inability to obtain  approvals or delays in obtaining

                                       6



approvals  would  adversely  affect our  ability  to  continue  our  development
program,  to  manufacture  and sell our  products,  and to receive  revenue from
milestone payments, product sales or royalties.

     The FDA or other regulatory  agencies may audit our production  facility at
any  time  to  ensure  compliance  with  current  Good  Manufacturing   Practice
guidelines,  referred to as cGMP. These  guidelines  require that we conduct our
production  operation  in  strict  compliance  with our  established  rules  for
manufacturing and quality controls. Any of these agencies can suspend production
operations and product sales if they find  significant or repeated  changes from
these  guidelines.  A suspension by any of these  agencies could have a material
adverse effect on our operations.

Our competitors include large pharmaceutical companies with superior resources.

     Unigene is engaged in a rapidly changing and highly  competitive  field. To
date,  Unigene has  concentrated its efforts on one product -- Calcitonin -- for
treating   osteoporosis  and  other   indications.   Like  the  market  for  any
pharmaceutical  product,  the market for treating  osteoporosis  and these other
indications  has  the  potential  for  rapid,   unpredictable   and  significant
technological  change.  Competition  is intense from  specialized  biotechnology
companies,  major  pharmaceutical  and chemical  companies and  universities and
research  institutions.  Most  of our  competitors  have  substantially  greater
financial  resources,  research  and  development  staffs  and  facilities,  and
regulatory experience than we do. Major competitors in the field of osteoporosis
treatment  include  Novartis,  American Home  Products,  Merck,  Eli Lilly,  and
Procter  and  Gamble.  Any one of these  entities  could,  at any time,  develop
products or a manufacturing process that could render our technology or products
noncompetitive or obsolete.

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

     We filed  applications  for U.S.  patents  relating to proprietary  peptide
manufacturing  technology  and oral  formulations  that we have  invented in the
course  of our  research.  To date,  six U.S.  patents  have  issued  and  other
applications  are  pending.  We have also made  patent  application  filings  in
selected foreign countries and numerous foreign patents have issued. We face the
risk  that any of our  pending  applications  will not  issue  as  patents.  Our
business also is subject to the risk that our issued patents will not provide us
with significant  competitive  advantages if, for example,  a competitor were to
independently  develop or obtain similar or superior  technologies.  Although we
believe our patents and patent  applications  are valid, the invalidation of our
key patents or the failure of our pending applications to issue as patents could
have a material adverse effect upon our business.

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

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

     Our business exposes us to the risk of product  liability claims that are a
part of human testing, manufacturing and sale of pharmaceutical products. We may
not have  sufficient  resources  to defend  against  or  satisfy  these  claims.
Although we maintain product liability insurance coverage,  product liability or
other  judgments  against  us, as well as the cost of  defending  such claims in
excess of  insurance  limits,  could have a  material  adverse  effect  upon our
business and financial condition.

The loss of our key executives could have a negative effect on our business.

                                       7


     Dr.  Warren  Levy and Dr.  Ronald  Levy have been the  principal  executive
officers since our inception.  We rely on them for their leadership and business
direction.  Each of them has entered into an agreement with us providing that he
shall not  engage in any other  employment  or  business  for the  period of his
employment  with us.  The loss of the  services  of either of these  individuals
could have a material adverse effect on our business.

The outcome of our arbitration proceeding with The Tail Wind Fund is uncertain.

     In July  2000,  the Tail Wind  Fund,  Ltd.,  the  holder of  $2,000,000  in
principal  amount  of our 5%  convertible  debentures  filed  with the  American
Arbitration  Association a demand for arbitration of its claim that it was owed,
as of June 30, 2000, approximately $3,400,000, consisting of principal, interest
and  penalties,  resulting  from our default  under  various  provisions  of the
debentures   and  related   agreements.   See  "Business  --   Litigation"   and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations  -- Capital  Resources and  Liquidity."  We have denied the amount of
Tail  Wind's  claim and have made  certain  counterclaims.  The  outcome  of the
arbitration proceeding is uncertain.  An extremely unfavorable ruling could have
a material adverse effect on Unigene.

The market price of our common stock may be highly unstable.

     The market  price of our common stock has been and we expect it to continue
to be highly  unstable.  Factors,  including our  announcement of  technological
improvements or announcements by other companies,  regulatory matters,  research
and development activities,  new or existing products or procedures,  signing or
termination  of licensing  agreements,  concerns  about our financial  position,
operating  results,  litigation,  resolution  of the  arbitration  involving our
outstanding  convertible  debentures,  government  regulation,  developments  or
disputes  relating to  agreements,  patents or  proprietary  rights,  and public
concern over the safety of activities or products may have a significant  impact
on the market price of our stock.  In addition,  potential  dilutive  effects of
future sales of shares of our common stock by Unigene and its  stockholders,
including  sales  by  Fusion  under  this  prospectus  and by the  exercise  and
subsequent  sale of our common  stock by the holders of  outstanding  and future
warrants and options could have an adverse effect on the price of our stock.

We do not anticipate paying cash dividends on our common stock.

     We have never  paid any cash  dividends  on our common  stock and we do not
anticipate paying cash dividends in the foreseeable future. Rather, we intend to
retain any cash flow we generate for  investment in our  business.  Accordingly,
our  common stock may not be suitable for investors who are seeking  current
income from dividends.

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

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

                                       8



affect the market liquidity of the shares,  which in turn may affect the ability
of holders of our common stock to resell the stock.

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

     The price at which  Fusion is  obligated  to purchase  shares of our common
stock under the common stock  purchase  agreement  will  fluctuate  based on the
market price of our common stock.  See "The Financing  Transaction--Purchase  of
shares under the common stock purchase agreement" for a detailed  description of
the purchase price.

     All of the shares  offered  for sale by Fusion  under this  prospectus  are
freely tradeable.  However, Fusion has agreed that it will not sell or otherwise
transfer the 2,000,000  commitment  shares or the 1,000,000 shares issuable upon
the  exercise of its  warrant  which we issued as of March 30, 2001 to Fusion as
part of its  commitment  fee until the earlier of the  termination of the common
stock purchase agreement, the occurrence of an event of default by us under this
agreement  or 480  trading  days  from  the  date  of  the  agreement  which  is
approximately two years from the date of this prospectus.  Fusion may sell none,
some or all of the shares of common stock purchased from Unigene at any time. We
have been advised by Fusion that the shares  registered in this offering will be
sold  over a  period  of up to 24  months  from  the  date of  this  prospectus.
Depending  upon  market  liquidity  at the time,  the resale by Fusion of shares
registered  in this  offering at any given time could cause the trading price of
our common stock to decline.  The sale by Fusion of a substantial number
of shares purchased from Unigene,  or the anticipation of such sales, could make
it more difficult for Unigene to sell equity or equity related securities in the
future at a time and at a price that it might otherwise wish to effect sales.

     If Fusion purchased the full amount of shares  purchasable under the common
stock  purchase  agreement on the date of this  prospectus,  at a price equal to
$.57,  the closing sale price of our common stock on May 15, 2001,  Fusion would
have been able to  purchase a total of  36,842,105  shares of our common  stock.
These shares, along with the 2,000,000 shares and the 1,000,000 shares of common
stock  issuable upon the exercise of the warrant which was issued to Fusion as a
commitment fee, would  represent 47% of our  outstanding  common stock as of the
date  of  this  prospectus.  The  issuance  of  these  shares  would  result  in
significant  dilution to the ownership  interests of other holders of our common
stock.  The amount of dilution would be higher if the market price of our common
stock is lower than the current market price at the time Fusion purchases shares
under the common stock purchase  agreement,  as a lower market price would cause
more shares of our common  stock to be issuable  to Fusion.  See "The  Financing
Transaction-Purchase  of shares under the common stock purchase agreement" for a
table that shows the number of shares  issuable and potential  dilution based on
varying market prices. Although we have the right to suspend Fusion purchases at
any time, our financial  condition at the time may require us to waive our right
to suspend  purchases  even if there is a decline in the  market  price.  If the
closing  sale  price  of our  common  stock  is at  least  $4.00  for  five  (5)
consecutive  trading  days,  we have the right to  increase  the daily  purchase
amount  above  $43,750,  provided  the  closing  sale price of our common  stock
remains at least $4.00.

The  existence  of the  agreement  with Fusion to purchase  shares of our common
stock could cause downward pressure on the market price of our common stock.

     Both the actual  dilution and the  potential  for dilution  resulting  from
sales of our common stock to Fusion  could cause  holders to elect to sell their
shares of our common  stock,  which could cause the trading  price of our common
stock to decrease. In addition,  prospective investors anticipating the downward
pressure on the price of our common stock due to the shares  available  for sale
by  Fusion  could  refrain  from  purchases  or cause  sales  or short  sales in
anticipation of a decline of the market price.

                                       9



                           Forward-Looking Statements

     Various  statements  that we make in this  prospectus  under  the  captions
"Prospectus Summary," "Risk Factors,"  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere in this
prospectus are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933. These  forward-looking  statements involve known and
unknown  risks,  uncertainties  and other  factors  that may  cause  the  actual
results,  performance or activities of our business,  or industry results, to be
materially  different  from  any  future  results,   performance  or  activities
expressed or implied by the forward-looking  statements.  These factors include:
general economic and business conditions, 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  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 failure to obtain  regulatory  approvals  for our products and other factors
discussed in this prospectus.

                                 Use of Proceeds

     We will not receive any of the proceeds  from the sale of the shares of our
common stock offered for sale by Fusion under this prospectus.  However,  we may
receive up to $21,000,000  from the sale of our common stock to Fusion under the
agreement with Fusion.

                           Price Range of Common Stock

     Our common stock has been quoted on the OTC Bulletin Board under the symbol
UGNE since October 1999, when it was delisted from the Nasdaq  National  Market.
The following table presents, for the periods indicated,  the high and low sales
prices per share of our common stock as reported on the Nasdaq  National  Market
from  January 1, 1999 to October 4,  1999,  and on the OTC  Bulletin  Board from
October 5, 1999 through the date of this prospectus.


Fiscal Year Ended December 31, 1999                    High         Low
                                                       ----         ---

First Quarter                                          $1.47        $0.94
Second Quarter                                         $1.13        $0.63
Third Quarter                                          $1.06        $0.63
Fourth Quarter                                         $0.84        $0.23

Fiscal Year Ended December 31, 2000                    High         Low
                                                       ----         ---

First Quarter                                          $5.38        $0.54
Second Quarter                                         $3.66        $1.44
Third Quarter                                          $3.03        $2.00
Fourth Quarter                                         $3.00        $0.97

Fiscal Year Ended December 31, 2001                    High         Low
                                                       ----         ---

First Quarter                                         $1.875      $0.375
Second Quarter (through May 15, 2001)                  $0.65       $0.33

                                       10




On May 15,  2001,  the last  reported  sale price of our common stock on the OTC
Bulletin Board was $.57. As of May 15, 2001, there were 483 holders of record of
our common stock.

                                 Dividend Policy

     We have  never paid a cash  dividend  on our  common  stock,  and we do not
anticipate  paying  cash  dividends  in  the  foreseeable  future.  Instead,  we
currently  plan to retain all earnings,  if any, for use in the operation of our
business and to fund future growth.

                             Selected Financial Data

     The selected  financial  data as of December 31, 2000 and 1999, and for the
years ended December 31, 2000,  1999 and 1998, that is set forth below have been
derived from Unigene's financial  statements included in this prospectus,  which
have been audited by KPMG LLP,  independent  certified public  accountants.  The
report of KPMG LLP covering these financial  statements  contains an explanatory
paragraph that states that the Company's  recurring  losses from  operations and
working capital deficiency raise substantial doubt about the entity's ability to
continue  as a going  concern.  The  financial  statements  do not  include  any
adjustments that might result from the outcome of that uncertainty. The selected
financial  data below as of December 31, 1998,  1997 and 1996, and for the years
ended  December 31, 1997 and 1996 have been  derived from our audited  financial
statements that are not included in this prospectus.  Historical results are not
necessarily  indicative  of results to be expected  for any future  period.  You
should read the data below together with  "Management's  Discussion and Analysis
of Financial  Condition and Results of Operations" and the financial  statements
and related notes included in this prospectus.

STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)



                                                               Year Ended December 31,
                                          -------------------------------------------------------------
                                               2000        1999        1998        1997        1996
                                            --------    --------    --------    --------    --------
 Revenue:
                                                                             
   Licensing & other revenue                $  3,287    $  9,589    $  5,050    $  3,003    $    308

 Costs and expenses:
   Research & development expenses            11,484       9,375       9,042       9,416       8,298
   General and administrative                  3,187       2,212       2,068       2,016       2,115
   Loss before extraordinary item
   and cumulative effect of
   accounting change                         (11,469)     (1,577)     (6,737)    (10,128)    (10,597)
   Extraordinary item                             --          --        (144)         --          --
   Cumulative effect of accounting change     (1,000)         --          --          --          --

 Net loss                                    (12,469)     (1,577)     (6,881)    (10,128)    (10,597)

 Basic and diluted loss per share:
 Loss before
   extraordinary item and cumulative
   effect of accounting change                  (.26)       (.04)       (.17)       (.27)       (.38)
 Extraordinary item                               --          --        (.01)         --          --
 Cumulative effect of accounting change         (.02)         --          --          --          --
 Net loss                                       (.28)       (.04)       (.18)       (.27)       (.38)
 Weighted average number of shares
 outstanding                                  44,008      40,719      38,701      37,397      27,943


                                       11





BALANCE SHEET DATA
(In thousands)                                                                  December 31,
                                                  -----------------------------------------------------------------------
                                                     2000            1999            1998          1997           1996
                                                   ---------      ----------      ----------    ---------      ---------
                                                                                                
 Cash and cash equivalents                         $      17      $     683       $     403     $   2,126      $  4,491
 Working capital (deficiency)                        (13,267)        (2,759)         (1,805)          310         2,954
 Total assets                                          9,047         13,778          11,564        13,692        17,169
 Long-term debt                                          546          1,003           3,931         1,608         2,788
 Total liabilities                                    14,540          9,049           7,344         4,258         5,309
 Total stockholders' equity (deficit)                 (5,493)         4,729           4,220         9,433        11,860


                                       12




SELECTED QUARTERLY FINANCIAL DATA (Unaudited)




2000                           1st Quarter        2nd Quarter        3rd Quarter       4th Quarter
- ----                           -----------        -----------        -----------       -----------
                                                                              
Revenue                        $1,201,250            $200,776         $1,559,164          $325,771

Operating loss                ($1,396,831)        ($3,748,686)       ($2,146,838)      ($4,092,528)

Loss before cumulative
  effect of accounting
  change                      ($1,639,288)        ($4,016,917)       ($2,454,532)      ($3,358,668)

  Net loss                    ($2,639,288)        ($4,016,917)       ($2,454,532)      ($3,358,668)

  Loss per share, before
   cumulative effect
   of accounting change            ($0.04)             ($0.09)            ($0.06)           ($0.07)

  Net loss per share,
    basic and diluted              ($0.06)             ($0.09)            ($0.06)           ($0.07)



1999                       1st Quarter       2nd Quarter      3rd Quarter       4th Quarter
- ----                       -----------       -----------      -----------       -----------
                                                                    
Revenue                    $2,500,172       $    26,670       $ 7,000,733       $    61,838

Operating income (loss)    $ (349,707)      $(2,825,543)      $ 3,787,338       $(2,608,981)

Net income (loss)          $ (563,755)      $(2,977,610)      $ 3,692,594       $(1,728,569)

Net income (loss)
per share, basic
and diluted                $     (.01)      $      (.07)      $       .09       $      (.05)


The quarterly financial data for the first three quarters of 2000 reported above
differ from the data for those periods previously reported by us on Form 10-Q as
described below:



                           First Quarter                  Second Quarter                   Third Quarter
                           -------------                  --------------                   -------------
                       Previously         As           Previously           As          Previously         As
                        Reported       Adjusted         Reported         Adjusted        Reported       Adjusted
                       ----------      --------        ----------        --------       ----------      --------
                                                                                    
Revenue               $ 1,001,250     $ 1,201,250     $       776      $   200,776     $ 1,359,164    $ 1,559,164

Operating loss        $(1,596,831)    $(1,396,831)    $(3,948,686)     $(3,748,686)    $(2,346,838)   $(2,146,838)

Net loss              $(1,839,288)    $(2,639,288)    $(4,216,917)     $(4,016,917)    $(2,654,532)   $(2,454,532)

Net loss per share,
basic and diluted     $      (.04)    $      (.06)    $      (.10)     $      (.09)    $      (.06)   $      (.06)


In December  1999, the  Securities  and Exchange  Commission  staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101").  Prior to the  implementation  of SAB 101,  non-refundable  license  fees
received  upon  execution  of  license  agreements  were  recognized  as revenue
immediately.  SAB 101  summarizes  certain  of the  staff's  views  in  applying
generally  accepted  accounting  principles to revenue  recognition in financial
statements and specifically  addresses revenue

                                       13




recognition in the biotechnology  industry for non-refundable  technology access
fees and other  non-refundable  fees.  We were  required  to adopt  SAB 101,  as
amended,  in the  fourth  quarter of 2000 with an  effective  date of January 1,
2000, and the  recognition of a cumulative  effect  adjustment  calculated as of
January 1, 2000.

We adopted SAB 101 in 2000, changing our revenue recognition policy for up-front
licensing  fees  that  require  services  to be  performed  in the  future  from
immediate  revenue  recognition  to deferral of revenue  with the  up-front  fee
recognized over the life of the agreement.  In 1997, we recognized $3,000,000 in
revenue from an up-front  licensing  fee from  Pfizer.  With the adoption of SAB
101, we are now recognizing  this revenue over a 45 month period,  equivalent to
the term of our oral  Calcitonin  agreement  with Pfizer which was terminated in
March 2001. We therefore  recognized a non-cash  cumulative effect adjustment of
$1,000,000  as of  January  1, 2000  representing  a revenue  deferral  over the
remaining 15 months of the agreement.  We recognized $800,000 in revenue in 2000
and will recognize $200,000 of revenue in 2001 as a result of this deferral.

The  quarterly  financial  data above has been  adjusted to reflect  retroactive
application of SAB 101.  Therefore,  in each of the first three quarters of 2000
we recognized  $200,000 in additional  revenue related to the cumulative  effect
adjustment.

                                       14



                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations

     You  should  read the  following  discussion  together  with our  financial
statements and the notes appearing  elsewhere in this prospectus.  The following
discussion contains  forward-looking  statements.  Our actual results may differ
materially from those projected in the forward-looking statements.  Factors that
might cause  future  results to differ  materially  from those  projected in the
forward-looking  statements  include  those  discussed  in  "Risk  Factors"  and
elsewhere in this prospectus.

Years ended December 31, 2000, 1999 and 1998

     Revenue.  Revenue  decreased 66% to $3,287,000  for the year ended December
31, 2000 as compared to $9,589,000 for the year ended December 31, 1999. Revenue
increased 90% to $9,589,000  for the year ended December 31, 1999 as compared to
$5,050,000  for the year ended  December 31, 1998.  In all three years,  revenue
consists   primarily  of  milestone  revenue  from  Pfizer  resulting  from  the
achievement of milestones in the development of an oral  Calcitonin  product for
treating  osteoporosis.  Yearly  revenue  was  affected  by  the  timing  of the
completion of the various  milestones.  In addition,  revenue for the year ended
December 31, 2000 included  $800,000 from the  amortization of deferred  revenue
related to the initial  licensing  fee paid by Pfizer in 1997 and  $345,000  for
analytical testing services provided to Pfizer. In March 2001, Pfizer terminated
its license agreement with the Company.

     Research and Development Expenses. Research and development,  the Company's
largest  expense,  increased 22% in 2000 to $11,484,000  from $9,375,000 in 1999
and  increased  4% in 1999  from  $9,042,000  in  1998.  The 2000  increase  was
primarily attributable to the Company's clinical trials for its nasal Calcitonin
product  and an increase in  expenditures  related to an increase in  Calcitonin
production  and the write-off of inventory in the fourth  quarter as a result of
Pfizer's  termination  of our  agreement,  partially  offset by a  reduction  in
consulting  fees  related to the Pfizer  collaboration.  The 1999  increase  was
primarily  attributable to development  expenses  related to the Company's nasal
Calcitonin  product,  consulting and analytical  testing expenses related to the
Company's  Type  II  variation  for  its  injectable   Calcitonin  product,  and
consulting  fees related to the Company's  collaboration  with Pfizer  partially
offset by a reduction in production  supplies.  Expenditures for the sponsorship
of collaborative research programs were $411,000, $250,000 and $280,000 in 2000,
1999 and 1998,  respectively,  which are  included as research  and  development
expenses.  A portion of these  expenditures was reimbursed by Pfizer in 1999 and
1998.

     General and Administrative  Expenses.  General and administrative  expenses
increased 44% in 2000 to $3,187,000  from $2,212,000 in 1999 and increased 7% in
1999  from  $2,068,000  in 1998.  The 2000  increase  was  primarily  due to the
recognition of non-cash  expenses of $220,000 due to the issuance of warrants to
a consultant  and stock  option  compensation  of  $399,000,  in addition to the
recognition  of a $350,000  expense to  terminate  the  Company's  former  joint
venture in China.  The 1999 increase was  primarily  due to increased  personnel
costs and  professional  fees partially offset by reductions in public relations
and travel expenses.

     Interest  Income.  Interest  income  increased  $12,000 or 31% in 2000 from
1999, after  decreasing  $70,000 or 65% in 1999 from 1998. The 2000 increase was
due to higher interest rates on investments.  The 1999 decrease was due to lower
interest income resulting from reduced funds available for investment.

     Interest  Expense.  Interest  expense  increased  $27,000  or 2% in 2000 to
$1,199,000 from $1,171,000 in 1999 after increasing $386,000 or 49% in 1999 from
$785,000 in 1998.  Interest  expense  increased in 2000 due to  increased  notes
payable  to  stockholders  and  to  higher  interest  rates  in  2000  on the 5%
convertible  debentures,  offset  by a  reduction  in  the  amortization  of the
beneficial  conversion  feature  and

                                       15



related  warrants on the 5%  convertible  debentures  as  compared to 1999.  The
annual interest rate on the $2,000,000 in outstanding principal amount of the 5%
Debentures increased in 2000 to 20% resulting from the failure of the Company to
make a semi-annual  interest  payment that was due in January 2000. In addition,
since October 1999, the Company has been accruing  additional  interest  expense
monthly in an amount equal to 2% of the outstanding  principal  amount of the 5%
Debentures as a result of the removal of the Company's Common Stock from trading
on the Nasdaq Stock Market in October 1999. The expenses  incurred in connection
with the 5%  Debentures in 2000 were  partially  offset by a 50% decrease in the
principal balance  outstanding as a result of conversions to Common Stock during
1999.  Included in 1999 interest  expense is $197,000 of the amortization of the
value of the beneficial conversion feature and related warrants of the Company's
5% convertible  debentures.  Excluding the change in the amortization charged to
interest,  interest expense increased in 1999 as compared to 1998 as a result of
an increase in notes payable to stockholders,  redemption premium resulting from
the Company exceeding the Share Limit on the 5% Debentures, and the 2% delisting
penalty on the 5%  Debentures,  partially  offset by a decrease  in the  balance
outstanding under the Company's 5% Debentures as a result of partial conversions
to Common Stock.

     Income Tax Benefit. Income tax benefit in 2000 of $1,065,000 and in 1999 of
$1,553,000  consisted  of  proceeds  received  for the sale of a portion  of the
Company's state tax net operating loss carryforwards under a New Jersey Economic
Development  Authority  ("NJEDA")  program,  which  allows  certain  New  Jersey
taxpayers to sell their state tax benefits to third parties.  The purpose of the
New  Jersey  program  is  to  provide  financial  assistance  to  high-tech  and
biotechnology companies in order to facilitate future growth and job creation.

     Extraordinary  Item.  Extraordinary  item, loss on early  extinguishment of
debt,  was $144,000 for 1998.  The loss was due to  redemption at a premium of a
portion of our 10% convertible debentures in September 1998.

     Cumulative  Effect of Accounting  Change.  In December 1999, the Securities
and Exchange Commission staff issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). Prior to the implementation of
SAB  101,  non-refundable  license  fees  received  upon  execution  of  license
agreements were recognized as revenue immediately. SAB 101 summarizes certain of
the staff's  views in  applying  generally  accepted  accounting  principles  to
revenue recognition in financial  statements and specifically  addresses revenue
recognition in the biotechnology  industry for non-refundable  technology access
fees and other  non-refundable  fees. The Company was required to adopt SAB 101,
as amended,  in the fourth  quarter of 2000 with an effective date of January 1,
2000, and the  recognition of a cumulative  effect  adjustment  calculated as of
January 1, 2000.  The  Company  adopted  SAB 101 in 2000,  changing  its revenue
recognition  policy for  up-front  licensing  fees that  require  services to be
performed  in the future  from  immediate  revenue  recognition  to  deferral of
revenue with the  up-front fee  recognized  over the life of the  agreement.  In
1997, the Company  recognized  $3,000,000 in revenue from an up-front  licensing
fee from Pfizer.  With the  adoption of SAB 101, the Company is now  recognizing
this  revenue  over a 45  month  period,  equivalent  to the  term  of its  oral
Calcitonin agreement with Pfizer which was terminated in March 2001. The Company
therefore recognized a non-cash cumulative effect adjustment of $1,000,000 as of
January 1, 2000  representing a revenue deferral over the remaining 15 months of
the  agreement.  The  Company  recognized  $800,000  in revenue in 2000 and will
recognize $200,000 of revenue in 2001 as a result of this deferral.

     Net  Loss.  During  2000,   revenue  decreased   approximately   $6,300,000
principally  due to the timing of the  achievement of various  milestones in the
Pfizer  agreement.  In addition,  operating  expenses were higher as the Company
increased its product  commercialization  efforts including its nasal Calcitonin
clinical  trials.  Also,  the Company  recognized  a  cumulative  charge from an
accounting change offset by a realized income tax benefit.  Therefore,  net loss
increased  $10,892,000 for the year ended December 31, 2000 from the prior year.
During 1999,  revenue  increased  $4,540,000 from 1998 due to the achievement of
various  milestones in the Pfizer agreement.  In addition,  the Company received
$1,553,000 in 1999 from the partial sale of its state tax  benefits.  These were
partially offset by an increase in operating and

                                       16



interest expenses.  As a result, the Company's net loss decreased  $5,304,000 or
77% for the year ended December 31, 1999, from the prior year.

Liquidity and Capital Resources

     Unigene  maintains its peptide  production  facility on leased  premises in
Boonton,  New Jersey.  We began  production  under  current  Good  Manufacturing
Practice guidelines at this facility in 1996. The current lease expires in 2004.
Unigene has two consecutive ten-year renewal options under the lease, as well as
an option to purchase the facility.  During 2000, Unigene invested approximately
$519,000  in fixed  assets and  leasehold  improvements.  The  majority of these
expenditures  were  to  increase  Unigene's  analytical  testing   capabilities.
Currently,  we have no material commitments outstanding for capital expenditures
relating to either the Boonton facility or our office and laboratory facility in
Fairfield, New Jersey.

     At December 31, 2000,  Unigene had cash and cash equivalents of $17,000,  a
decrease of $666,000 from December 31, 1999.

     We do not have  sufficient  financial  resources  to  continue  to fund our
operations at the current level.  Unigene has incurred annual  operating  losses
since its inception  and, as a result,  at December 31, 2000, had an accumulated
deficit  of  approximately  $75,378,000  and a  working  capital  deficiency  of
approximately  $13,267,000.  The independent auditors' report covering Unigene's
2000 financial  statements  includes an explanatory  paragraph  stating that our
recurring   losses  from  operations  and  working  capital   deficiency   raise
substantial doubt about our ability to continue as a going concern. However, the
financial  statements have been prepared on a going concern basis and as such do
not  include  any  adjustments  that  might  result  from  the  outcome  of this
uncertainty.  In October  1999,  the Nasdaq  Stock  Market  delisted the Unigene
common stock.  The  delisting of the common stock may have an adverse  effect on
our ability to raise capital.

     We had an operating  cash flow deficit of  $4,864,000 in 1998, an operating
cash flow  deficit of  $1,400,000  in 1999 and for the year ended  December  31,
2000, an operating cash flow deficit of $3,382,000.  Unigene's future ability to
generate cash from  operations  will depend  primarily upon signing  research or
licensing  agreements,  achieving  defined  benchmarks in such  agreements  that
entitle Unigene to receive milestone payments, receiving regulatory approval for
its licensed products, and the sale of these products.

     In July 1997,  Unigene  entered into an agreement under which it granted to
Warner-Lambert   Company  a  worldwide   license  to  use  our  oral  Calcitonin
technology.  In June 2000, Pfizer Inc acquired Warner-Lambert.  Through December
31, 2000, Unigene had received $3 million for an equity  investment,  $3 million
for a licensing  fee and  recognized  an aggregate of $16.5 million in milestone
revenue under the agreement. Pfizer conducted a Phase I/II human study which was
completed in December 2000.  Pfizer  analyzed the results the study and informed
us in March 2001 that the study did not achieve Pfizer's desired results. Pfizer
terminated the license  agreement citing this  conclusion.  We believe that this
study,  in which an FDA approved  product  also did not work and which  produced
results contrary to many published  studies,  was not capable of determining the
performance of our oral Calcitonin  product.  We believe that if patients in the
study had also received calcium supplements,  in addition to the Calcitonin, the
results  would have been more  favorable.  Therefore,  we intend to continue the
development of our oral Calcitonin  product as a treatment of osteoporosis,  and
have begun discussions with potential licensees in the U.S. and other countries.
In addition,  due to the termination of the Pfizer agreement,  we no longer have
restrictions on selling bulk  Calcitonin.  Unigene also has the right to license
the use of its technologies for injectable and nasal  formulations of Calcitonin
on a worldwide basis.  Unigene has licensed  distributors in the United Kingdom,
Ireland and in Israel for its injectable  product.  However,  these distribution
agreements have not produced significant revenues. In June 2000, Unigene entered
into a joint venture agreement in China with Shijiazhuang  Pharmaceutical  Group
("SPG") to  manufacture  and  market  our  injectable  and nasal  products.  See
"Business -- Strategy -- China Joint  Venture." We are  actively  seeking  other
licensing  and/or  supply  agreements  with  pharmaceutical

                                       17



companies  for our  injectable  and  nasal  Calcitonin  products  and for  other
pharmaceutical  products that can be  manufactured  and/or  delivered  using our
patented technologies. However, we may not be successful in our efforts to enter
into any additional revenue-generating agreements.

     Under the terms of the joint  venture  with SPG,  Unigene is  obligated  to
contribute up to $405,000 in cash during 2001 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.  However, as of December 31, 2000,
we had not made any contributions to the joint venture. In addition,  Unigene is
obligated to pay to the Qingdao General  Pharmaceutical  Company an aggregate of
$350,000 in 14 monthly installment payments of $25,000 in order to terminate its
former joint venture in China, of which $75,000 had been paid as of December 31,
2000. We recognized the entire $350,000 obligation as an expense in 2000.

     In June 1998,  Unigene  completed  a private  placement  of  $4,000,000  in
principal  amount  of 5%  convertible  debentures  from  which we  realized  net
proceeds of  approximately  $3,750,000.  The 5% debentures were convertible into
shares of Unigene  common stock.  The interest on the  debentures,  at Unigene's
option,  was payable in shares of Unigene  common stock.  Upon  conversion,  the
holder of a 5% debenture  was entitled to receive  warrants to purchase a number
of shares of Unigene  common stock equal to 4% of the number of shares issued as
a result of the  conversion.  However,  the number of shares of  Unigene  common
stock that we are obligated to issue, in the aggregate,  upon  conversion,  when
combined  with the shares issued in payment of interest and upon the exercise of
the warrants, is limited to 3,852,500 shares. After this share limit is reached,
Unigene is obligated to redeem all 5%  debentures  tendered for  conversion at a
redemption price equal to 120% of the principal  amount,  plus accrued interest.
In December 1999,  Unigene was unable to convert $200,000 in principal of the 5%
debentures  tendered for conversion  because the conversion  would have exceeded
the share limit.  As a result,  we accrued,  as of December 31, 1999,  an amount
equal to $400,000 representing the 20% premium on the outstanding  $2,000,000 in
principal  amount of 5% debentures that had not been  converted.  As of December
31, 2000,  all of the  $2,000,000  in  principal  amount of 5%  debentures  were
tendered for conversion  and therefore are classified as a current  liability in
the amount of $2,400,000.

     Through December 31, 2000, we issued a total of 3,703,362 shares of Unigene
common  stock  upon  conversion  of  $2,000,000  in  principal  amount of the 5%
debentures and in payment of interest on the 5%  debentures.  Also, we issued an
additional  103,032 shares of Unigene common stock upon the cashless exercise of
all of the 141,123 warrants issued upon conversion of the 5% debentures.

     On  January  5,  2000,  Unigene  failed  to make the  required  semi-annual
interest  payment on the  outstanding 5% debentures.  As a result,  the interest
rate on the  outstanding  5%  debentures  has  increased  to 20% per  year.  The
semi-annual  interest  payments due July 5, 2000 and January 5, 2001,  also have
not been made. As of December 31, 2000,  the accrued and unpaid  interest on the
5% debentures totaled approximately  $467,000. In addition, due to the delisting
of the Unigene  common stock from the Nasdaq  National  Market in October  1999,
Unigene became obligated under a separate  agreement to pay the holder of the 5%
debentures  an amount  equal to 2% of the  outstanding  principal  amount of the
debentures  per month.  Unigene has not made any of these  payments to date, but
has accrued the amounts as additional interest expense. As of December 31, 2000,
the accrued and unpaid amount of this penalty totaled approximately $617,000.

     The holder of the 5% debentures has commenced an arbitration  proceeding in
which the holder claims that it is entitled, as of June 30, 2000, to payments in
respect of the 5%  debentures  in the amount of  approximately  $3,400,000.  See
"Business -- Litigation."

     To satisfy Unigene's  short-term liquidity needs, Jay Levy, the Chairman of
the Board and an officer of Unigene,  and Warren Levy and Ronald Levy, directors
and officers of Unigene,  and another Levy family  member from time to time have
made loans to Unigene.  During February 2000, Jay Levy loaned us $300,000.  This
loan was repaid in April 2000. During the third and fourth quarters of 2000, Jay
Levy and another  family  member  loaned  Unigene an aggregate of  $1,655,000 in
demand  loans and Warren  Levy and Ronald Levy loaned  Unigene an  aggregate  of
$78,323 in demand  loans.  As of December 31,

                                       18



2000,  total  accrued  interest on these loans was $922,000 and the  outstanding
loans by these  individuals to Unigene,  classified as short-term debt,  totaled
$4,743,323 and consisted of:

     o    loans from the Levys in the aggregate  principal amount of $2,873,323,
          which are evidenced by demand notes  bearing a floating  interest rate
          equal to the  Merrill  Lynch  Margin  Loan Rate plus .25%  (9.875%  at
          December 31, 2000) that are classified as short-term debt. These loans
          are secured by a security interest in Unigene's  equipment and/or real
          property.

     o    loans from Jay Levy in the  aggregate  principal  amount of $1,870,000
          evidenced by term notes maturing January 2002, and bearing interest at
          the fixed rate of 6% per year.  These  loans are secured by a security
          interest in all of  Unigene's  equipment  and a mortgage on  Unigene's
          real  property.  The  terms  of the  notes  require  Unigene  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

     Interest and principal  payments  required  under these loans have not been
made by  Unigene,  but the Levys have waived all  default  provisions  including
additional interest penalties due under these loans through December 31, 2000.

     From January 1, 2001  through  March 30,  2001,  Jay Levy,  Warren Levy and
Ronald Levy loaned to us an  additional  $1,610,000  at the Merrill Lynch Margin
Loan Rate plus .25%,  of which  $500,000  is secured by a security  interest  in
certain of our patents. No interest on these loans has been paid.

     Unigene's   cash   requirements   to  operate  its   research  and  peptide
manufacturing  facilities and develop its products are  approximately  $10 to 11
million  per  year.  In  addition  to its  obligations  with  respect  to the 5%
Debentures, Unigene has principal and interest obligations over the next several
years under its  outstanding  notes  payable to  stockholders,  which consist of
loans made by the Levys, as described above, as well as obligations  relating to
its current and former joint ventures in China.

     We  are  actively   seeking   licensing   and/or  supply   agreements  with
pharmaceutical  companies for oral,  nasal and injectable forms of Calcitonin as
well as for other oral peptides.  However, we may not be successful in licensing
any of our products.

     Under the  agreement  with  Fusion,  Fusion will be required to purchase on
each  trading day during the term of the  agreement  $43,750 of our common stock
over a period of 24 months,  subject to our right to  suspend or  terminate  the
agreement.  The Board of Directors  has  authorized  the sale to Fusion of up to
6,000,000 shares of Unigene common stock.  Assuming that all sales were to occur
at the  closing  price  on May 15,  2001,  of  $.57,  we  would be able to raise
approximately  $3,400,000 through the sale of the 6,000,000 shares to Fusion. We
anticipate that, in order to sell significantly in excess of 6,000,000 shares to
Fusion,  it may be necessary to obtain  stockholder  approval of an amendment to
our  Certificate  of  Incorporation  to increase the number of shares of Unigene
common  stock that we are  authorized  to issue.  Assuming  we have an  adequate
number  of  shares  of  common  stock to sell,  we stay in  compliance  with the
agreement,  and  depending on the price at which  shares are sold,  Fusion could
provide Unigene with sufficient  funding to sustain its operations for up to two
years, beginning in the second quarter of 2001. See "The Financing Transaction."
However, we cannot predict if the stockholders will approve the amendment to our
certificate  of  incorporation  or if we will be  able  to meet  the  continuing
requirements of the Fusion agreement.

     If we do not  receive  sufficient  funding  from  Fusion,  or if  obtaining
sufficient funding from Fusion were to prove  prohibitively  expensive and if we
are  unable to enter  into a  significant  revenue  generating  license or other
arrangement  in the near term, we will need to secure  another source of funding
in order to satisfy our working  capital needs or consider  alternative  uses of
our technology and manufacturing  capability  including the supply of Calcitonin
to other  companies,  or  significantly  curtail our  operations.  We also could
consider a sale or merger of the company. Assuming we are

                                       19



able to raise  additional  capital  through our agreement with Fusion,  we still
anticipate that we may need  additional  capital to implement fully our business
plans.  We believe that satisfying our capital  requirements  over the long term
will  require the  successful  commercialization  of our  Calcitonin  product or
another  peptide  product  in the  United  States  and  abroad.  However,  it is
uncertain  whether  or not  any of our  products  will  be  approved  or will be
commercially  successful.   In  addition,  the  commercialization  of  our  oral
Calcitonin  product may require us to incur additional  capital  expenditures to
expand or upgrade our  manufacturing  operations.  However,  we cannot determine
either the cost or the timing of such capital expenditures at this time.

     As of December 31, 2000,  the Company had available for federal  income tax
reporting purposes net operating loss carryforwards in the approximate amount of
$68,000,000,  expiring  from 2001 through  2020,  which are  available to reduce
future  earnings which would  otherwise be subject to federal  income taxes.  In
addition,  the Company has research and  development  credits in the approximate
amount of $2,500,000, which are available to reduce the amount of future federal
income taxes.  These credits  expire from 2001 through 2020. The Company has New
Jersey operating loss  carryforwards  in the approximate  amount of $23,300,000,
expiring from 2003 through 2007,  which are available to reduce future earnings,
which would  otherwise  be subject to state income tax. As of December 31, 2000,
approximately  $11,400,000  of these New  Jersey  loss  carryforwards  has  been
approved for future sale under a program of the New Jersey Economic  Development
Authority (the "NJEDA").  In order to realize these  benefits,  the Company must
apply to the NJEDA each year and must meet various  requirements  for continuing
eligibility. In addition, the program must continue to be funded by the State of
New Jersey,  and there are limitations  based on the level of  participation  by
other  companies.  As a result,  future tax benefits  will be  recognized in the
financial  statements as specific sales are approved.  In the fourth quarters of
2000 and 1999, the Company realized $1,065,000 and $1,553,000,  respectively, of
tax benefits  arising from the sale of a portion of the Company's New Jersey net
operating  loss  carryforwards  that  had  previously  been  subject  to a  full
valuation allowance.

     Unigene follows Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting  for Income  Taxes."  Given our past history of incurring  operating
losses,  any deferred tax assets that are  recognizable  under SFAS No. 109 were
fully  reserved.  As of December  31, 2000 and 1999,  under SFAS No. 109, we had
deferred tax assets of approximately $29,000,000 and $26,000,000,  respectively,
subject to valuation  allowances of $29,000,000 and  $26,000,000,  respectively.
The deferred tax assets are primarily a result of our net  operating  losses and
tax credits.

Other

     The Unigene common stock has been delisted from the Nasdaq  National Market
System effective  October 5, 1999, and is now trading on the OTC Bulletin Board.
In order to be relisted  on the Nasdaq  National  Market or the Nasdaq  SmallCap
Market, we must meet the initial listing requirements.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative  Instruments and Hedging  Activities." This statement
establishes  accounting  and  reporting  standards for  derivative  instruments,
including certain derivative  instruments  embedded in other contracts,  and for
hedging activities.  SFAS No. 133, as amended,  will be effective for our fiscal
year  beginning  January 1, 2001. We do not expect that the adoption of SFAS No.
133 will  have a  material  effect  on our  financial  position  or  results  of
operations.

Market Risk

     In the normal  course of business,  Unigene is exposed to  fluctuations  in
interest  rates  due to the use of debt as a  component  of the  funding  of its
operations. We do not employ specific strategies,  such as the use of derivative
instruments or hedging, to manage our interest rate exposure. Unigene's interest
rate exposure on the 5%  convertible  debentures  has been affected by Unigene's
delisting from the Nasdaq  National  Market and failure to make the  semi-annual
interest  payment in January 2000.  Our exposure to interest  rate  fluctuations
over the near-term will continue to be affected by these events.

                                       20




     The information  below  summarizes  Unigene's  market risks associated with
debt  obligations as of December 31, 2000.  The table below  presents  principal
cash flows and related  interest rates by year of maturity based on the terms of
the debt.

     Under the terms of the 5% convertible debentures,  no additional shares may
be issued to convert the remaining principal balance. Therefore, the information
presented  as to  the  debentures  is  without  consideration  as to  conversion
features.  Variable interest rates disclosed represent the rates at December 31,
2000.  Given  our  financial  condition  described  in  "Liquidity  and  Capital
Resources"  it is not  practicable  to  estimate  the  fair  value  of our  debt
instruments at December 31, 2000.



                                                                                  Year of Maturity
                                                                      ----------------------------------------
                                     Carrying
                                      Amount             2001           2002       2003       2004      2005
                                    ----------       ------------     --------   --------   --------  --------
                                                                                     
Notes payable - stockholders        $2,873,323        2,873,323          --         --         --        --
Variable interest rate                                    9.875%         --         --         --        --

Notes payable - stockholders        $1,870,000        1,870,000          --         --         --        --
Fixed interest rate                                           6%         --         --         --        --

5% convertible debentures           $2,400,000        2,400,000          --         --         --        --
Fixed interest rate (1)                                      20%



(1) As a result of Unigene's  failure to make the semi-annual  interest  payment
that was due January 5, 2000, the interest rate on the 5% convertible debentures
has increased from 7% at December 31, 1999, to 20% beginning January 5, 2000. In
addition,  due to the  delisting  of Unigene  common  stock from Nasdaq in 1999,
Unigene became  obligated to pay the holder of the 5% debentures an amount equal
to 2% of the outstanding principal amount of the debentures per month.

                                       21



                                    Business

Overview

     Unigene is a biopharmaceutical company engaged in the research,  production
and delivery of small proteins,  referred to as peptides, that have demonstrated
or may have potential medical use. We have a patented  manufacturing  technology
for producing many peptides  cost-effectively.  We also have patented technology
that has been  shown to  deliver  orally  medically  useful  amounts  of various
peptides, into the bloodstream. Our primary focus has been on the development of
Calcitonin products for the treatment of osteoporosis and other indications.  We
have  the  facilities  and  the  technology  for  manufacturing   Calcitonin  in
accordance with cGMP and have an injectable  Calcitonin product that is approved
for sale in the European Union for two minor indications. We are also engaged in
the development of oral and nasal Calcitonin products.

Our Accomplishments

     Among our major accomplishments are:

     o  Development  of a Proprietary  Peptide  Production  Process.  One of our
principal  scientific  accomplishments  is our  success in  developing  a highly
efficient   biotechnology-based  peptide  production  process.  Several  patents
relating  to this  process  have  issued.  We  believe  that  these  proprietary
processes  are  key  steps  in the  more  efficient  and  economical  commercial
production of peptides with various medical applications. Many of these peptides
cannot be produced  at a  reasonable  cost in  sufficient  quantities  for human
testing or commercial use by currently available production processes. Using our
proprietary  process,  we have produced  laboratory-scale  quantities of various
peptides.  We  have  constructed  and are  operating  a  manufacturing  facility
employing this process to produce Calcitonin.

     o Development  of Proprietary  Technology  for Oral Delivery.  We have also
developed  and patented a formulation  that has  successfully  delivered  orally
Calcitonin into the bloodstream of human subjects. We and our collaborators have
shown in  repeated  human  studies  that  this  formulation  regularly  delivers
measurable quantities of the peptide into the human bloodstream. We believe that
this  formulation  may accelerate the  regulatory  approval  process for an oral
Calcitonin  product  because it should be easier to establish its performance as
compared to a  formulation  that does not produce  measurable  Calcitonin  blood
levels.  We believe that the  components  of our patented  oral product also can
enable  the  delivery  of  other  peptides  and we  have  initiated  studies  to
investigate this possibility internally and in collaboration with others.

Strategy

     Our business strategy is to develop proprietary products and processes with
applications  in human  health  care to generate  revenues  from  license  fees,
royalties on  third-party  sales and direct sales of bulk or finished  products.
Generally, we fund our internal research activities and rely on licensees, which
are likely to be established  pharmaceutical  companies,  to provide development
funding.   We  also  generally  expect  to  rely  on  these  licensees  to  take
responsibility for obtaining appropriate  regulatory  approvals,  human testing,
and marketing of products derived from our research activities. However, we may,
in some cases, retain the responsibility for human testing and for obtaining the
required regulatory approvals for a particular product.

     o Pfizer  License  Agreement.  In July 1997,  we entered  into an agreement
under which we granted to the  Parke-Davis  division of  Warner-Lambert  Company
(which  merged with Pfizer in June  2000),  a worldwide  license to use our oral
Calcitonin technology.  Upon signing the agreement,  we received $6.0 million in
payments from  Warner-Lambert,  consisting of a $3.0 million licensing fee and a
$3.0 million equity investment by Warner-Lambert.  Through December 31, 2000, we
recognized  an aggregate of $16.5 million in revenue due to the  achievement  of
specified milestones,  including $2.0 million in 2000. Pfizer began a Phase I/II
human study in April 2000 and patient  dosing was  completed  in December  2000.

                                       22



Pfizer  analyzed the results of the study and informed us in March 2001 that the
study did not achieve Pfizer's desired  results.  Pfizer  terminated the license
agreement  citing this  conclusion.  We believe that this study, in which an FDA
approved  product also did not work and which produced  results contrary to many
published  studies,  was not capable of determining  the performance of our oral
Calcitonin  product.  We believe that if patients in the study had also received
calcium supplements,  in addition to the Calcitonin, the results would have been
more  favorable.  Therefore,  we intend to continue the  development of our oral
Calcitonin  product as a treatment of osteoporosis,  and have begun  discussions
with potential  licensees in the U.S. and other countries.  In addition,  due to
the  termination  of the Pfizer  agreement,  we no longer have  restrictions  on
selling bulk Calcitonin.

     o China Joint  Venture.  In June 2000, we entered into a joint venture with
Shijiazhuang  Pharmaceutical  Group  ("SPG"),  a  pharmaceutical  company in the
People's  Republic of China.  The joint venture will  manufacture and distribute
injectable and nasal  Calcitonin  products in China (and possibly other selected
Asian  markets)  for the  treatment  of  osteoporosis.  We own 45% of the  joint
venture and will receive 45% of the joint venture profits. In the first phase of
the  collaboration,  SPG will  contribute  its  existing  injectable  Calcitonin
license to the joint  venture,  which  will allow the joint  venture to sell our
product in China.  The joint venture will need to file a New Drug Application in
China for its injectable and nasal products. In addition,  the joint venture may
be required to conduct brief local human trials.  If the product is  successful,
the joint venture may establish a facility in China to fill injectable and nasal
Calcitonin  products using bulk Calcitonin  produced at our Boonton,  New Jersey
plant. Eventually the joint venture may manufacture the bulk Calcitonin in China
at a new facility that would be  constructed  by the joint  venture.  This would
require  local  financing by the joint  venture.  The joint  venture has not yet
begun operations as of December 31, 2000.

     o Other  License or  Distribution  Arrangements.  In  addition to the joint
venture  with  SPG,  we  have  entered  into  distribution  agreements  for  our
injectable  Calcitonin  product in the United  Kingdom,  Ireland and Israel.  We
continue to seek other licensing or distribution  agreements with pharmaceutical
companies for both the injectable and nasal Calcitonin products. However, we may
not be  successful  in our  efforts to sign any  additional  revenue  generating
agreements.

Competition

     Our  primary  business  activity  has  been   biotechnology   research  and
development.  Biotechnology research is highly competitive,  particularly in the
field of human health care. We compete with specialized biotechnology companies,
major  pharmaceutical and chemical companies,  universities and other non-profit
research organizations,  many of which can devote considerably greater financial
resources to research activities.

     In 1999, we began  manufacturing  cGMP Calcitonin for use in pharmaceutical
products.  In the  development,  manufacture  and sale of peptide  products,  we
compete with contract laboratories and major pharmaceutical  companies.  Many of
our competitors can devote  considerably  greater  financial  resources to these
activities.  Major  competitors in the field of osteoporosis  include  Novartis,
American Home Products,  Merck,  Eli Lilly,  and Procter and Gamble.  We believe
that the unique  safety  and  effectiveness  of  Calcitonin,  combined  with our
patented peptide manufacturing  process and our patented oral formulation,  will
enable it to compete with products marketed by these and other companies.

     We believe  that  success in  competing  with  others in the  biotechnology
industry will be based  primarily upon  scientific  expertise and  technological
superiority.  We also  believe  that  success  will be based on the  ability  to
identify  and  to  pursue   scientifically   feasible  and  commercially  viable
opportunities and to obtain  proprietary  protection for research  achievements.
Our success will further depend on our ability to obtain adequate funding and on
developing, testing, protecting,  producing and marketing products and obtaining
their timely regulatory approval.  We are always at risk that others may develop
superior  processes  or products  that would  render our  processes  or products
noncompetitive or obsolete.

                                       23



Product Manufacture

     We have been producing salmon  Calcitonin since 1992. We constructed a cGMP
facility for the production of Calcitonin at leased premises located in Boonton,
New Jersey. The facility began producing salmon Calcitonin under cGMP guidelines
in 1996. The facility also produces our proprietary  amidating enzyme for use in
producing  Calcitonin.  The current  production level of the facility is between
one and two kilograms of bulk Calcitonin per year.

     The facility can be modified to increase  Calcitonin  production  capacity.
However, if we are successful in our efforts to commercialize an oral Calcitonin
product,  we  expect  that we may  incur  additional  expenditures  to expand or
upgrade our manufacturing operations. Although the facility initially is devoted
exclusively to Calcitonin  production,  it also is suitable for producing  other
peptide products.

     We are  following  conventional  procedures  to secure the  approval of the
facility by regulatory agencies to allow us to manufacture  Calcitonin for human
use. European health  authorities  inspected the facility in connection with the
filing of our  injectable  Calcitonin  dossier and found it to be in  compliance
with cGMP guidelines.  However,  there is the risk that our operations might not
remain in compliance  or that  approval by other  agencies will not be obtained.
The FDA must approve the facility in order to  manufacture  Calcitonin  or other
peptides for sale in the United States.

Government Regulation

     Our laboratory research, development and production activities and those of
our  collaborators  are subject to significant  regulation by numerous  federal,
state, local and foreign governmental authorities.  FDA approval,  following the
successful  completion of various animal and human studies,  is required for the
sale of a  pharmaceutical  product in the United  States.  Foreign sales require
similar studies and approval by regulatory agencies.

     The  regulatory  approval  process for a  pharmaceutical  product  requires
substantial  resources  and can  take  many  years.  There  is a risk  that  any
additional  regulatory approvals required for our production facility or for any
of our  products  will not be  obtained in a timely  manner.  Our  inability  to
obtain,  or delays in obtaining,  these  approvals  would  adversely  affect our
ability to continue to fund our programs,  to produce marketable products, or to
receive  revenue from milestone  payments,  product sales or royalties.  We also
cannot predict the extent of any adverse governmental  regulation that may arise
from future legislative and administrative action.

     The FDA or other regulatory  agencies may audit our production  facility to
ensure that it is  operating  in  compliance  with  current  Good  Manufacturing
Practice  guidelines,  referred  to  as  cGMP.  These  guidelines  require  that
production  operations be conducted in strict  compliance  with our  established
rules for manufacturing  and quality  controls.  These agencies are empowered to
suspend  production  operations  and/or  product  sales  if,  in their  opinion,
significant  or  repeated  changes  from  these  guidelines  have  occurred.   A
suspension by any of these agencies could have a material  adverse impact on our
operations.

Regulatory Approval of Our Injectable Calcitonin Product

     In January  1999,  we received  approval  from the European  Committee  for
Proprietary  Medicinal  Products,  referred  to  as  the  CPMP,  to  market  our
injectable Calcitonin product in all 15 member states of the European Union as a
treatment  for Paget's  disease and for  hypercalcemia.  We began to market this
product in Europe for these  indications in 1999. We have filed a  supplementary
submission  with the CPMP,  called a Type II  Variation,  to expand the approved
indications to include the treatment of osteoporosis.  However,  it is uncertain
whether or when the Type II Variation will be approved by the CPMP.

                                       24



     Regulatory  authorities in many  non-European  Union countries can cite the
approved  European  dossier,  which we believe  could  significantly  reduce the
registration  requirements for injectable Calcitonin in those non-European Union
countries,  and thereby could speed up product launch.  We have been notified by
Switzerland that it intends to approve our injectable Calcitonin product for the
treatment of  osteoporosis,  Paget's  disease and  hypercalcemia;  however,  the
timing of that  approval is  uncertain.  In addition,  we believe that the human
trials  conducted to support the European  filing of the  injectable  Calcitonin
product can be used to support the filing of a New Drug Application with the FDA
for use of our injectable  Calcitonin  product to treat  osteoporosis  and other
indications.  We believe that our abbreviated  clinical program,  which has been
accepted by the FDA, will be sufficient to satisfy approval  requirements in the
United  States  and other  countries.  Accordingly,  we expect  that the  review
process for our  injectable  Calcitonin  product in the United  States and other
countries  may be  shorter  than  that  typically  associated  with  a new  drug
submission for numerous reasons:

     o    The   active    ingredient   is   structurally    identical   to   and
          indistinguishable  from the  active  ingredient  in  products  already
          approved by many regulatory agencies.

     o    The  formulation is essentially  similar to the  formulations  used in
          already approved products.

     o    The human trial  program  that was  accepted by the FDA is  relatively
          brief and involved small numbers of subjects.  As a result, the amount
          of information  that must be reviewed is far less than would have been
          compiled  for the  lengthier  trials  required  for a typical new drug
          submission.

Development of our Oral Calcitonin Product

     In December  1995 and January 1996,  we  successfully  tested a proprietary
Calcitonin oral formulation in two separate human studies in the United Kingdom.
These studies  indicated that the majority of those who received oral Calcitonin
showed  levels of the peptide in blood  samples taken during the trial that were
greater than the minimum levels generally regarded as being required for maximum
medical  benefit.  We believe that these were the first  studies to  demonstrate
that  significant  blood  levels  of  Calcitonin  could be  observed  in  humans
following oral  administration  of the peptide.  In April 1996, we  successfully
conducted  a third  pilot  human  study in the United  Kingdom  which used lower
Calcitonin dosages than in the prior two human trials. The results of this trial
indicated  that every test subject  showed  levels of the peptide in their blood
samples that  exceeded  the minimum  levels  generally  regarded as required for
maximum medical  benefit.  During 1999,  with  Warner-Lambert  (now Pfizer),  we
successfully  concluded  two  pilot  human  studies  using  an  oral  Calcitonin
formulation  manufactured  by  Warner-Lambert.  Both studies showed  significant
measurable blood levels of Calcitonin. In December 1999, Warner-Lambert filed an
Investigational  New Drug  application with the FDA, a Phase I/II study began in
April 2000 and patient  dosing for this study was  completed  in December  2000.
Pfizer  analyzed the results of the study and informed us in March 2001 that the
study did not achieve Pfizer's desired  results.  Pfizer  terminated the license
agreement  citing this  conclusion.  We believe that this study, in which an FDA
approved  product also did not work and which produced  results contrary to many
published  studies,  was not capable of determining  the performance of our oral
Calcitonin  product.  We believe that if patients in the study had also received
calcium supplements,  in addition to the Calcitonin, the results would have been
more  favorable.  Therefore,  we intend to continue the  development of our oral
Calcitonin  product as a treatment of osteoporosis,  and have begun  discussions
with potential  licensees in the U.S. and other countries.  In addition,  due to
the  termination  of the Pfizer  agreement,  we no longer have  restrictions  on
selling bulk Calcitonin.

     We have filed patent  applications  for our oral  formulation in the United
States and in numerous foreign countries. In 1999, we received a U.S. patent for
our basic technology  covering the oral delivery of Calcitonin for the treatment
of osteoporosis. In 2000, we received a U.S. patent extending this protection to
the oral delivery of other peptides.

     There are risks that we will not be successful  in licensing  this product,
that a safe and effective  oral product will not be developed,  that we will not
be successful in obtaining  regulatory  approval of an oral

                                       25



Calcitonin  product,  and that we will not succeed in  developing,  producing or
marketing an oral Calcitonin product.

Development of a Nasal Calcitonin Product

     A major  pharmaceutical  company  received  FDA  approval  in 1995  for the
marketing of a nasal spray Calcitonin product,  which has substantially enlarged
the U.S.  market for  Calcitonin.  During 1999, we completed  preliminary  human
studies for our proprietary nasal Calcitonin  product.  A patent application for
the  product  was  filed  in  February   2000.  In  January  2000  we  filed  an
Investigational  New Drug Application with the FDA to begin human testing of our
nasal product as a treatment for  osteoporosis.  In February 2000, we began U.S.
human  studies.  In  December  2000,  we  successfully  completed  a human study
demonstrating  similar blood levels  between our product and that of an existing
nasal  Calcitonin  product.  We have  initiated a second  human study with final
results  expected in  mid-2001.  We are seeking to license our nasal  Calcitonin
product in the U.S.  and other  countries  for the  treatment  of  osteoporosis.
However,  we may  not be  successful  in  our  efforts  to  conclude  a  license
agreement,  to obtain governmental  approval of our nasal Calcitonin product, or
to manufacture and sell the product.

Collaborative Research Programs

     We are currently engaged in two collaborative research programs:

     o    Rutgers  University  College  of  Pharmacy  continues  to  study  oral
          delivery of Calcitonin and other peptides.

     o    We are in  collaboration  with Yale  University,  to  investigate  new
          applications for various peptides,  including Calcitonin  gene-related
          peptide.  In 1996,  we reported  that this  peptide  accelerated  bone
          growth and  prevented  bone loss in an animal model  system.  However,
          this  peptide  may not have the same  effect in humans.  We may not be
          successful  in  developing,  manufacturing  or marketing any resulting
          product.

Patents and Proprietary Technology

     We have filed a number of  applications  for U.S.  patents  relating to our
proprietary peptide  manufacturing process and our technology for oral delivery.
To date, the following six U.S. patents have issued:

     o    Immunization By Immunogenic Implant, a method for producing antibodies
          for developing diagnostic medical tests

     o    two  patents  related  to the  Alpha-Amidation  Enzyme  and its use in
          manufacturing peptides

     o    a patent covering an improvement in our manufacturing technology

     o    two patents covering oral delivery of peptides

     Other  applications  are  pending.  We also have made  filings in  selected
foreign  countries,  and numerous  foreign  patents have  issued.  However,  our
pending  applications  may not issue as patents  and our issued  patents may not
provide us with significant competitive advantages. Furthermore, our competitors
may independently develop or obtain similar or superior technologies.

     Although  we believe our patents  and patent  applications  are valid,  the
repeal of one or more of our key patents could have a significant adverse effect
upon  our  business.  Detecting  and  proving  infringement  generally  is  more
difficult with process patents than with product patents. In addition, a process
patent's  value is  diminished  if others have  patented the product that can be
produced  using the process.  Under

                                       27



these circumstances, we would require the cooperation of, and likely be required
to share royalties with, the patent holder or its  sublicensees in order to make
and sell the product.

     In some  cases,  we rely on trade  secrets to protect our  inventions.  Our
policy is to include confidentiality provisions in all research contracts, joint
development  agreements and consulting  relationships that provide access to our
trade secrets and other  know-how.  However,  there is a risk that these secrecy
obligations  could  be  breached  causing  us  harm.  To the  extent  licensees,
consultants or other third parties apply technological information independently
developed  by them or by others to our  projects,  disputes  may arise as to the
ownership rights to information, which may not be resolved in our favor.

Employees

     As of May 15, 2001 we had 66 full-time employees.  Twenty-one were engaged
in  research,   development  and  regulatory  activities,  33  were  engaged  in
production  activities  and  12  were  engaged  in  general  and  administrative
functions. Ten of our employees hold Ph.D. degrees. Our employees are experts in
molecular biology, including DNA cloning, synthesis,  sequencing and expression;
protein chemistry,  including purification,  amino acid analysis,  synthesis and
sequencing of proteins;  immunology,  including  tissue culture,  monoclonal and
polyclonal   antibody   production   and   immunoassay   development;   chemical
engineering;  pharmaceutical production; quality assurance; and quality control.
None of our employees is covered by a collective bargaining agreement. Warren P.
Levy,  President and Ronald S. Levy,  Executive Vice  President,  both executive
officers and directors, have signed employment agreements with us.

Research and Development

     We have established a multi-disciplinary research team to adapt proprietary
amidation,   biological   production  and  oral  delivery  technologies  to  the
development of  proprietary  products and  processes.  Approximately  82% of our
employees  are  directly  engaged  in  activities  relating  to  production  of,
regulatory  compliance for, and the research and  development of  pharmaceutical
products. We spent $11.5 million on research activities in 2000, $9.4 million in
1999, and $9.0 million in 1998.

Properties

     We  own  a  one-story   office  and  laboratory   facility   consisting  of
approximately  12,500 square feet. The facility is located on a 2.2 acre site in
Fairfield, New Jersey.

     Our 32,000  square foot cGMP  production  facility,  of which 18,000 square
feet are currently  being used for the  production of Calcitonin and can be used
for the production of other peptides,  was constructed in a building  located in
Boonton,  New Jersey.  We lease the facility under a ten-year  agreement,  which
began in February  1994.  We have two 10-year  renewal  options and an option to
purchase the facility.

Litigation

     In July  2000,  the Tail Wind  Fund,  Ltd.,  the  holder of  $2,000,000  in
principal amount of 5% convertible  debentures issued by Unigene to Tail Wind in
a private placement completed in June 1998, filed with the American  Arbitration
Association a demand for arbitration  against Unigene.  In its demand, Tail Wind
claimed  that  it was  owed,  as of June  30,  2000,  approximately  $3,400,000,
consisting  of  principal,  interest and  penalties,  resulting  from  Unigene's
default under various provisions of the debentures and related agreements. These
alleged  defaults  included  Unigene's  failure to redeem the  debentures  after
becoming  obligated  to do so, the  failure to pay  interest  when due,  and the
failure to pay  liquidated  damages  arising  from the  delisting of the Unigene
common stock from the Nasdaq National Market.  See "Management's  Discussion and
Analysis of Financial  Condition and Results of Operations -- Capital  Resources
and  Liquidity."  In July 2000,  Unigene  submitted to the American  Arbitration
Association  a statement  in which it denies the amount of Tail Wind's claim and
makes  certain

                                       27



counterclaims.  A hearing on the matter  before an  arbitrator  appointed by the
American Arbitration  Association is expected to occur in June 2001. The outcome
of the  proceeding is uncertain.  An extremely  unfavorable  ruling could have a
material adverse effect on Unigene.

     In July 2000, Reseau de Voyage Sterling, Inc. filed suit against Unigene in
the Supreme  Court of the State of New York.  Unigene  removed  this case to the
United  States  District  Court  for the  Southern  District  of New  York.  The
plaintiff,  which purchased from a third party a warrant to purchase one million
shares of Unigene common stock, alleges that Unigene breached a verbal agreement
with the plaintiff to extend the term of the warrant beyond its expiration date.
The plaintiff is seeking damages of $2 million.  Following the deposition of the
plaintiff,  counsel for the plaintiff withdrew and the court has stayed the case
until May 2001, to give the  plaintiff an  opportunity  to seek new counsel.  We
believe that this suit is  completely  without  merit,  and we will  continue to
vigorously contest the claim.

                                   Management

Executive Officers and Directors

     The following table sets forth information  regarding  Unigene's  executive
officers and directors:

Name                    Age   Position
- ----------------------  ---   -------------------------------------------------
Warren P. Levy (1)      49    President, Chief Executive Officer, and Director
Ronald S. Levy (1)      52    Executive Vice President, Secretary, and Director
Jay Levy (1)            77    Chairman of the Board and Treasurer
James P. Gilligan       49    Vice President of Product Development
Robert F. Hendrickson   68    Director
Allen Bloom             57    Director

- -------------
     (1) Dr. Warren P. Levy and Dr. Ronald S. Levy are brothers and are the sons
of Mr. Jay Levy.

     Each executive  officer's term of office  continues until the first meeting
of the Board of Directors following the annual meeting of stockholders and until
the election  and  qualification  of his  successor.  All officers  serve at the
discretion of the Board of Directors.

     Warren P. Levy.  Dr.  Warren P. Levy,  a founder of Unigene,  has served as
President and Chief Executive Officer, and as a director, since our formation in
November 1980. Dr. Levy holds a Ph.D. in biochemistry and molecular biology from
Northwestern   University  and  a  bachelor's   degree  in  chemistry  from  the
Massachusetts Institute of Technology.

     Ronald S. Levy.  Dr. Ronald S. Levy, a founder of Unigene,  has served as a
director since our formation in November 1980, as Executive Vice President since
April 1999,  and as Secretary  since May 1986. Dr. Levy served as Vice President
from November 1980 through  March 1999.  Dr. Levy holds a Ph.D. in  bioinorganic
chemistry  from  Pennsylvania  State  University  and  a  bachelor's  degree  in
chemistry from Rutgers University.

     Jay Levy. Mr. Jay Levy, a founder of Unigene, has served as the Chairman of
the Board of Directors and as Treasurer since our formation in November 1980. He
served as Secretary from 1980 to May 1986.  Mr. Levy is a part-time  employee of
Unigene and devotes  approximately 15% of his time to Unigene. From 1985 through
February  1991,  he served as the principal  financial  advisor to the Estate of
Nathan Cummings and its principal  beneficiary,  The Nathan Cummings Foundation,
Inc.,  a large  charitable  foundation.  From 1968  through  1985,  he performed
similar  services  for the  late  Nathan  Cummings,  a noted  industrialist  and
philanthropist.

                                       28



     James P. Gilligan. Dr. James P. Gilligan has been employed by Unigene since
1981 and has served as Vice President of Product  Development  since April 1999.
From February 1995 to March 1999, he served as Director of Product  Development.
Dr.  Gilligan holds a Ph.D. in  pharmacology  from the University of Connecticut
and a Masters of International Business from Seton Hall University.

     Robert F. Hendrickson. Mr. Robert F. Hendrickson was Senior Vice President,
Manufacturing   and  Technology,   for  Merck  &  Co.,  Inc.,  an  international
pharmaceutical  company, from 1985 to 1990. Since 1990, Mr. Hendrickson has been
a  management  consultant  with a number  of  biotechnology  and  pharmaceutical
companies  among his clients.  He is currently a director of Envirogen,  Inc. an
environmental  biotechnology  company, and of Cytogen, Inc. and The Liposome Co,
Inc., each of which is a biotechnology company.

     Dr. Allen Bloom. Dr. Allen Bloom, a patent attorney,  has been a partner in
Dechert Price & Rhoads,  a law firm, for the past six years where he established
and  heads  the  patent   practice  group,   which  focuses  on   biotechnology,
pharmaceuticals and medical devices.  Prior to that time, he was Vice President,
General  Counsel and Secretary of The Liposome  Company,  Inc., a  biotechnology
company, for nine years. His responsibilities there included patent,  regulatory
and licensing activities. Dr. Bloom holds a Ph.D. in organic chemistry from Iowa
State University.

Committees of the Board of Directors

     The  Board  of  Directors  performs  several  important  functions  through
committees.  These  committees are made up of members of the Board of Directors.
Unigene's  by-laws  authorize  the formation of these  committees  and grant the
Board the  authority  to  prescribe  the  functions  of each  committee  and the
standards for  membership of each  committee.  The Board has the following  four
standing committees. The Board does not have a standing nominating committee.

     Audit  Committee.  The  responsibilities  of the  Audit  Committee  include
annually  recommending a firm of independent  public accountants to the Board to
act as our  auditors,  reviewing the scope of the annual audit with the auditors
in  advance,  and  reviewing  the  results of the audit and the  adequacy of our
accounting,  financial and operating controls.  The Audit Committee also reviews
our accounting and reporting  principles,  policies and practices;  and approves
fees paid to the auditors for audit and non-audit services.  The current members
of the Audit Committee are Messrs. Jay Levy, Bloom and Hendrickson.

     Compensation Committee.  The responsibilities of the Compensation Committee
include  reviewing  and  approving  the  compensation,  including  salaries  and
bonuses,  of  our  officers.   The  Compensation  Committee  also  oversees  the
administration  of our 401(k) plan and reviews and approves general benefits and
compensation  strategies.  The current members of the Compensation Committee are
Messrs. Jay Levy, Bloom and Hendrickson.

     Stock Option Committee (2000 Stock Option Plan). The Stock Option Committee
for the 2000 Stock Option Plan,  subject to the limitations of the plan, selects
the employees to be granted options, fixes the number of shares to be covered by
each  option  grant,  and  determines  the  exercise  price and other  terms and
conditions of each option.  The current  members of this Stock Option  Committee
are Messrs. Bloom and Hendrickson.

     Stock Option  Committee  (Directors  Stock Option  Plan).  The Stock Option
Committee for the Directors Stock Option Plan, subject to the limitations of the
plan, interprets the plan and makes all determinations  necessary for the plan's
administration.  The current members of this Stock Option  Committee are Messrs.
Jay Levy, Warren Levy and Ronald Levy.

                                       29



Director Compensation

     Directors  who are not  employees  receive an annual  retainer of $8,000 as
well as a fee of $1,000 for each Board meeting attended. Mr. Hendrickson and Dr.
Bloom were the only  directors who received such fees in 2000.  Board members do
not earn additional compensation for service on a committee.

     Under the Director Stock Option Plan,  each person elected to the Board who
is not an employee  receives,  on the date of his initial  election,  an initial
option to purchase  21,000 shares of Unigene  common  stock.  On May 1st of each
year,  each  non-employee  director  receives an  additional  option to purchase
10,000  shares  of  Unigene  common  stock if he has  served  as a  non-employee
director  for at least six months  prior to the grant  date.  Each  option has a
ten-year  term and the  exercise  price is equal to the market  price of Unigene
common  stock on the  date of the  grant.  Each  initial  option  vests in equal
installments of 1/3 over a period of three years,  commencing on the date of the
grant, and each additional option vests in its entirety on the first anniversary
of the grant. If the director's  service as a non-employee  director  terminates
prior to the expiration of the option term, the options will remain  exercisable
for a 90-day period following  termination of service,  except if a non-employee
director resigns due to disability,  the options will remain exercisable for 180
days following termination, and if a non-employee director dies while serving as
a director,  or within 90 days following termination of service (180 days in the
case of disability),  the options will remain exercisable for 180 days following
the person's death.  After such period,  the options will terminate and cease to
be exercisable.

Employment Agreements

     Unigene entered into an employment  agreement,  effective  January 1, 2000,
with Dr. Warren P. Levy for an initial term of two years.  Under the  agreement,
Dr. Levy will serve as President and Chief Executive Officer at an annual salary
of $160,000 for the first year of the agreement.  The Compensation Committee has
discretion to approve salary increases beyond this first year.

     Unigene entered into an employment  agreement,  effective  January 1, 2000,
with Dr. Ronald S. Levy for an initial term of two years.  Under the  agreement,
Dr. Levy will serve as Executive  Vice President at an annual salary of $155,000
for the first year of the agreement. Salary increases beyond this first year are
at the discretion of the Compensation Committee.

     Each agreement  provides that, after the first two-year term, the agreement
will be renewed on a  year-to-year  basis unless either party notifies the other
of the desire not to renew the agreement.  Either party must give this notice no
later than three months prior to the scheduled  termination date. Each agreement
also  provides  that,  if Unigene  terminates  the  employment  of the executive
without cause or the executive resigns for good reason,  which the executive has
a right to do upon a change of control of Unigene or a significant  reduction of
the  executive's  responsibilities  without  his  consent,  Unigene  will make a
lump-sum  severance  payment to the executive  equal to the salary that he would
have earned for the remaining  term of this  agreement,  if the  remaining  term
(either  the  initial  term or as  extended)  is more than one  year;  or if the
remaining term of the agreement  (either the initial term or as extended) is one
year or less, a lump-sum  payment equal to the executive's  then-current  annual
salary.

Compensation Committee Interlocks and Insider Participation

     The Board of Directors determined executive compensation for 2000. Three of
the five  Board  members,  Warren P.  Levy,  Ronald  S.  Levy and Jay Levy,  are
executive officers. Jay Levy is the father of Warren and Ronald Levy.

     To satisfy Unigene's  short-term liquidity needs, Jay Levy, the Chairman of
the Board and an officer of Unigene,  and Warren Levy and Ronald Levy, directors
and officers of Unigene,  and another Levy family  member from time to time have
made loans to Unigene.  During February 2000, Jay Levy loaned us $300,000.  This
loan was repaid in April 2000. During the third and fourth quarters of 2000, Jay
Levy and another  family  member  loaned  Unigene an aggregate of  $1,655,000 in
demand  loans and Warren  Levy

                                       30



and Ronald Levy loaned  Unigene an aggregate of $78,323 in demand  loans.  As of
December 31, 2000,  total  accrued  interest on these loans was $922,000 and the
outstanding  loans  by these  individuals  to  Unigene  totaled  $4,743,323  and
consisted of:

o loans from the Levys in the aggregate  principal  amount of $2,873,323,  which
are  evidenced by demand  notes  bearing a floating  interest  rate equal to the
Merrill  Lynch Margin Loan Rate plus .25% (9.875% at December 31, 2000) that are
classified as short-term debt. These loans are secured by a security interest in
Unigene's equipment and/or real property.

o loans from Jay Levy in the aggregate principal amount of $1,870,000  evidenced
by term notes maturing  January 2002, and bearing  interest at the fixed rate of
6% per year. These loans are secured by a security  interest in all of Unigene's
equipment  and a mortgage on  Unigene's  real  property.  The terms of the notes
require Unigene 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.

     Interest and principal  payments  required  under these loans have not been
made by  Unigene,  but the Levys have waived all  default  provisions  including
additional interest penalties due under these loans through December 31, 2000.

     From January 1, 2001  through  March 30,  2001,  Jay Levy,  Warren Levy and
Ronald Levy loaned to us an  additional  $1,610,000  at the Merrill Lynch Margin
Loan Rate plus .25%,  of which  $500,000  is secured by a security  interest  in
certain of our patents. No interest has been paid on these loans.

Executive Compensation

     The  following  table  shows,  for the  years  1998,  1999  and  2000,  the
compensation  paid to the Chief  Executive  Officer and to each other  executive
officer  whose salary and bonus,  for their  services in all  capacities in 2000
exceeded $100,000:

                           Summary Compensation Table




                                                                             Long-Term
                                                                            Compensation
                                                                            ------------

                                    Annual Compensation                        Awards
                                    -------------------                        ------          Payouts
                                                               Other         Restricted        -------
                                                               Annual          Stock      Options/     LTIP           All Other
Name and Position          Year    Salary($)   Bonus($)   Compensation($)(2)  Awards($)    SARs(#)   Payouts($)   Compensation($)(1)
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                               
Warren P. Levy             2000    $160,175     $ 0            $    0           $ 0             0       $ 0            $ 13,902
   President, Chief        1999     146,211       0                 0             0             0         0              13,866
   Executive Officer       1998     146,231       0                 0             0             0         0              13,830

Dr. Ronald S. Levy         2000     155,260       0                 0             0             0         0              16,864
   Executive Vice          1999     141,563       0                 0             0             0         0              16,862
   President               1998     141,618       0                 0             0             0         0              16,792

Dr. James P. Gilligan      2000     148,034       0             7,615             0             0         0                 0
   Vice President          1999     139,216       0             7,235             0       135,000         0                 0


1    Represents premium we paid on executive split-dollar life insurance.
2    Represents reimbursement for unused vacation days.

                                       31




Aggregated Option Exercises and Year-End Option Values

     The following table shows information about any option exercises during the
year ended December 31, 2000,  and the number and value of  unexercised  options
held as of December 31, 2000,  by each of the  executive  officers  named in the
Summary Compensation Table:



                                                                   Shares Underlying                 Value of Unexercised
                                 Exercises during                 Unexercised Options               In-the-Money Options(1)
                                 the Fiscal Year                  -------------------               -----------------------
                                 ---------------
                           Number of
           Name          Shares Acquired    Value Realized    Exercisable     Unexercisable      Exercisable      Unexercisable
- ----------------------   ---------------    --------------    -----------     -------------      -----------      -------------
                                                                                                          
 Dr. Warren P. Levy           0                  0                   0                 0                0                   0
 Dr. Ronald S. Levy           0                  0                   0                 0                0                   0
 Dr. James P. Gilligan        0                  0             346,000            44,000          $77,595             $37,755


     1    Based upon a closing price of $1.53 on December 31, 2000.


                             Principal Stockholders

     The following  table shows  information as of May 15, 2001,  concerning the
beneficial  ownership of Unigene  common  stock by each of Unigene's  directors,
each executive officer of Unigene listed in the Summary  Compensation Table, and
all directors and executive officers of Unigene as a group and each other person
known by Unigene to be the beneficial  owner of more than 5% of Unigene's common
stock.

     The  ownership  percentages  listed on the  table  are based on  46,436,940
shares of  Unigene  common  stock  outstanding  as of May 15,  2001.  Beneficial
ownership is  determined  in  accordance  with the rules of the  Securities  and
Exchange Commission.  A person generally is deemed to be the beneficial owner of
shares over which he has either voting or investment  power.  Shares  underlying
options that are currently  exercisable,  or that will become exercisable within
60 days, are deemed to be beneficially  owned by the person holding the options,
and are deemed to be  outstanding  for the purpose of computing  the  beneficial
ownership  percentage of that person,  but are not  considered to be outstanding
for the purpose of computing the ownership percentage of any other person.

     Except as  otherwise  noted,  the persons and the group  identified  in the
table have sole voting and sole investment  power with respect to all the shares
of Unigene common stock shown as beneficially owned by them. Except as otherwise
indicated,  the address of each  beneficial  owner  listed  below is c/o Unigene
Laboratories, Inc., 110 Little Falls Road, Fairfield, New Jersey 07004.

                                 Amount and Nature of
Name of Beneficial Owner         Beneficial Ownership      Percent of Class
- ------------------------         --------------------      ----------------
Fusion Capital Fund II, LLC        3,000,000 (1)                6.3%
222 Merchandise Mart Plaza
Chicago, IL 60654
Warren P. Levy                     1,980,545 (2)                4.3%
Ronald S. Levy                     1,995,545 (2)                4.3%
Jay Levy                             578,095 (3)                1.2%
James P. Gilligan                    345,660 (4)                0.8%
Robert F. Hendrickson                 55,000 (5)                0.1%
Allen Bloom                           31,000 (6)                0.1%
Officers and Directors
     as a Group (6 persons)        4,785,845 (2,7)             10.3%

     1    Includes  1,000,000  shares that Fusion has the right to acquire  upon
          the exercise of a warrant.

     2    Includes 200,000 shares of Unigene common stock held in a family trust
          over which  Warren P. Levy and Ronald S. Levy,  in their  capacity  as
          trustees, share voting and dispositive power.

                                       32




     3    Includes  55,000 shares of Unigene  common stock that Mr. Levy has the
          right  to  acquire  upon  the  exercise  of  stock  options  that  are
          exercisable either immediately or within 60 days.

     4    Includes  326,000 shares of Unigene common stock that Dr. Gilligan has
          the right to  acquire  upon the  exercise  of stock  options  that are
          exercisable either immediately or within 60 days.

     5    Includes  40,000 shares of Unigene  common stock that Mr.  Hendrickson
          has the right to acquire upon the  exercise of stock  options that are
          exercisable either immediately or within 60 days.

     6    Includes  30,000 shares of Unigene common stock that Dr. Bloom has the
          right  to  acquire  upon  the  exercise  of  stock  options  that  are
          exercisable either immediately or within 60 days.

     7    Includes an aggregate of 451,000  shares of Unigene  common stock that
          such  persons  have the right to acquire  upon the  exercise  of stock
          options that are exercisable either immediately or within 60 days.


                            The Financing Transaction

General

     On May 9, 2001,  we entered into a common  stock  purchase  agreement  with
Fusion  Capital  Fund II, LLC under which Fusion  Capital  agreed to purchase on
each trading day during the term of the agreement $43,750 of our common stock up
to an  aggregate of $21  million.  The $21 million is to be purchased  over a 24
month period,  which may be extended an additional six months at our discretion.
The purchase  price of the shares will be equal to a price based upon the future
market price of our common stock without any fixed discount to the market price.

Purchase of shares under the common stock purchase agreement

     Under the common stock purchase agreement,  subject to our right to suspend
purchases and our right to terminate the agreement with Fusion Capital,  each as
described  below,  Fusion  Capital shall purchase on each trading day during the
term of the  agreement  $43,750 of our common  stock up to an  aggregate  of $21
million.  This  daily  purchase  amount  may be  decreased  by us at any time as
described below. We also have the right to increase the daily purchase amount at
any time, provided,  however, that we may not increase the daily purchase amount
above $43,750 unless the closing sale price of our stock is above $4.00 for five
(5) consecutive  trading days.  Under the common stock purchase  agreement,  the
purchase price per share is equal to the lesser of:

     o    the lowest sale price of our common stock on the purchase date; or

     o    the arithmetic  average of the five (5) lowest closing sale prices for
          the common  stock  during the fifteen  (15)  consecutive  trading days
          ending on the trading day immediately preceding such purchase date, to
          be appropriately  adjusted for any  reorganization,  recapitalization,
          non-cash dividend,  stock split or other similar transaction occurring
          during the fifteen (15) consecutive trading days.


                                       33



     However,  Fusion Capital may not purchase  shares of common stock under the
common  stock  purchase  agreement  if Fusion  Capital or its  affiliates  would
beneficially own more than 4.9% of our then aggregate  outstanding  common stock
immediately after the proposed purchase. If the 4.9% limitation is ever reached,
we have the option to increase this  limitation to 9.9%. If the 9.9%  limitation
is ever reached,  this limitation will not limit Fusion Capital's  obligation to
fund the daily purchase amount.

     We have  authorized the issuance and sale of up to 6,000,000  shares of our
common stock to Fusion under the common stock purchase agreement. Based upon the
number of shares we have  authorized,  our selling price will need to average at
least  $3.50 per share for us to receive  the  maximum  proceeds  of $21 million
under the common stock purchase agreement.  Assuming a selling price of $.57 per
share  (the  closing  sale price of the  common  stock on May 15,  2001) and the
purchase  by Fusion of the full  amount of shares  purchasable  under the common
stock purchase agreement,  proceeds to us would be $3,400,000,  unless we choose
to issue more than 6,000,000 shares.

     The following table sets forth the number of shares of Unigene common stock
that  could be sold to  Fusion  under  the terms of the  common  stock  purchase
agreement at varying  purchase  prices,  assuming  Unigene does not exercise its
right under the common stock purchase agreement to suspend purchases by Fusion:

                                                                  Percentage of
                                                                  Outstanding
Assumed Purchase Price                    Number Of Shares         Shares (1)
- --------------------------------------------------------------------------------
$0.57, the closing sale price on
May 15, 2001                                36,842,105                44.2%

$ 1.00                                       21,000,000                31.1
$ 2.00                                       10,500,000                18.4
$ 3.00                                        7,000,000                13.1
$ 4.00                                        5,250,000                10.2
$ 5.00                                        4,200,000                 8.3
$10.00                                        2,100,000                 4.3

     (1)  Based on 46,436,940  shares of Unigene common stock  outstanding as of
          the date of this prospectus,  which includes the 2,000,000  commitment
          shares, but does not include the 1,000,000  shares  issuable  upon the
          exercise of the warrant.

Our right to suspend purchases

     We have the right to suspend  purchases  by Fusion  Capital  upon one day's
notice.  A suspension of purchases will remain in effect until our  cancellation
of such suspension.  To the extent we need to use the cash proceeds of the sales
of common stock under the common stock purchase agreement for working capital or
other business purposes, we do not intend to restrict purchases under the common
stock purchase agreement.

Our right to increase and decrease the daily base amount

     We have the right to decrease  the daily  amount to be  purchased by Fusion
Capital at any time and for any reason effective upon one trading day notice. We
also have the right to increase  the daily  purchase  amount at any time for any
reason;  provided,  however, we may not increase the daily purchase amount above
$43,750  unless the closing  sales price of our common  stock  equals or exceeds
$4.00 per share for at least five (5) consecutive  trading days. For any trading
day that the closing sale price of our common  stock is below  $4.00,  the daily
purchase amount shall not be greater than $43,750.


                                       34




Our termination rights

     We  may,  at any  time,  terminate  the  common  stock  purchase  agreement
effective upon one trading day notice.

Indemnification of Fusion

     Unigene  has  agreed  to  indemnify  and  hold  harmless   Fusion  and  its
affiliates,  shareholders, officers, directors, employees and direct or indirect
investors and their agents or other representatives from and against any and all
liabilities  and related  expenses,  including  reasonable  attorneys'  fees and
disbursements  incurred  by any of them as a result  of, or  arising  out of, or
relating  to, any breach of a Unigene  representation  or  warranty  made in the
transaction  documents  or  related  instruments;  any  breach of any  covenant,
agreement  or  obligation  of Unigene in the  transaction  documents  or related
instruments;  or any cause of action,  suit or claim brought or made against any
of them arising out of or resulting from the execution, delivery, performance or
enforcement of the transaction documents or any related instruments.

     Unigene's  indemnification  obligations  do not extend to any  liability or
expenses that directly and primarily result from the gross negligence or willful
misconduct   of  the  person   indemnified.   To  the  extent   that   Unigene's
indemnification obligations are unenforceable for any reason, Unigene has agreed
to  make  the  maximum  contribution  to the  payment  and  satisfaction  of any
liability and expense that is permissible under applicable law.

Effect of performance of the common stock purchase  agreement on Unigene and our
stockholders

     All shares  registered in this offering will be freely  tradable,  however,
Fusion  has  agreed not to sell the  shares  issued as a  commitment  fee or the
shares  issuable  upon the  exercise  of the  warrant  until the  earlier of 480
trading days from the date of the  agreement,  or the  termination  or a default
under, the common stock purchase  agreement.  Fusion has advised Unigene that it
anticipates  that shares  registered in this offering will be sold over a period
of up to 24 months from the date of this  prospectus.  The sale of a significant
amount of shares  registered  in this offering at any given time could cause the
trading price of our common stock to decline and to be highly  volatile.  Fusion
may  ultimately  purchase all of the shares of common stock  issuable  under the
common  stock  purchase  agreement,  and it may sell all of the shares of common
stock it acquires upon purchase. Therefore, the purchases under the common stock
purchase agreement may result in substantial  dilution to the interests of other
holders of our common stock. However, we have the right to reduce or discontinue
purchases under the common stock purchase agreement and to terminate the common

                                       35



stock purchase  agreement at any time.

No short-selling or hedging by Fusion

     Fusion has agreed that neither it nor any of its affiliates  will engage in
any direct or indirect  short-selling  or hedging of our common stock during any
time prior to the termination of the common stock purchase agreement.

Events of default

     Fusion may  terminate  the common  stock  purchase  agreement  without  any
liability  or payment to Unigene,  and would not be  required  to  purchase  any
additional  shares of common stock,  upon the occurrence of any of the following
events of default:

     -    if for any reason the shares offered by this prospectus cannot be sold
          under this  prospectus for a period of 10 consecutive  trading days or
          for more than an aggregate of 30 trading days in any 365-day period;

     -    the  suspension  from  trading or  failure  of our common  stock to be
          listed  on the OTC  Bulletin  Board  for a  period  of 10  consecutive
          trading  days or for more than an  aggregate of 30 trading days in any
          365-day period;

     -    the  failure  of  Unigene  or the  Unigene  common  stock  to meet the
          maintenance requirements for listing on the Nasdaq SmallCap Market for
          a period of 10 consecutive  trading days or for more than an aggregate
          of 30 trading days in any 365-day period;

     -    the failure of the transfer  agent to issue shares of our common stock
          in connection with a purchase;

     -    any breach of the representations or warranties or covenants contained
          in the common stock purchase agreement or any related agreements which
          has or which  reasonably  could be expected to have a material adverse
          affect on Unigene;

     -    a default of any  payment  obligation  of Unigene or any  acceleration
          prior to maturity in excess of $1.0 million; or

     -    commencement  of insolvency or  bankruptcy  proceedings  by or against
          Unigene.

Commitment shares issued to Fusion

     Fusion has received,  as  consideration  for its commitment to purchase our
common  stock,  2,000,000  shares of our common stock and a five-year warrant to
purchase  1,000,000  shares of our common stock,  exercisable at $.50 per share.
Unless an event of default occurs,  these shares and warrant shares must be held
by Fusion until the earlier of 480 trading days from the date of the  agreement,
or the termination or a default under, the common stock purchase agreement.

No variable priced financings

     Until the  termination  of the common  stock  purchase  agreement,  we have
agreed not to issue,  or enter into any  agreement  with respect to the issuance
of, any variable priced equity or variable priced equity-

                                       36



like securities unless associated with a pharmaceutical licensing transaction or
we have obtained Fusion's prior written consent.

Holdings of Fusion upon termination of the offering

     Because  Fusion may sell all,  some or none of the common stock  offered by
this prospectus,  no estimate can be given as to the amount of common stock that
will be held by Fusion upon early termination of the offering.

                               SELLING STOCKHOLDER

     The selling  stockholder  is Fusion  Capital Fund II, LLC. Under the common
stock  purchase  agreement,  Fusion has agreed to purchase  on each  trading day
during the term of the agreement  $43,750 of our common stock up to an aggregate
of $21 million.  The purchase price of our common stock is based upon the future
market price of our common stock.

     We have authorized the issuance and sale of 6,000,000  shares of our common
stock to Fusion under the common stock purchase agreement.  We have the right to
suspend and/or terminate the common stock purchase agreement without any payment
or  liability  to Fusion.  We have issued  2,000,000  shares of common  stock to
Fusion as a  commitment  fee under  the  common  stock  purchase  agreement.  In
addition,  we issued to Fusion a warrant  to  purchase  1,000,000  shares of our
common stock exercisable at $.50 per share as part of its commitment fee. Unless
an event of default  occurs,  these  shares and  warrant  shares must be held by
Fusion until the earlier of 480 trading days from the date of the agreement,  or
the  date  the  common  stock  purchase  agreement  has  been  terminated.  This
prospectus  relates  to the  offer and sale from time to time by Fusion of these
shares.  The common  stock  purchase  agreement is described in detail under the
heading "The Financing Transaction."

     Because the number of shares of Unigene common stock that will be purchased
by Fusion under the common stock purchase  agreement will depend on the purchase
price  of the  purchase  shares,  which  will be  determined  at the time of the
purchase, and because we may decrease, and under certain circumstances increase,
the rate at which we sell  shares to Fusion,  the  aggregate  number of purchase
shares that will be offered for sale by Fusion is not determinable at this time.
If the  number  of  purchased  shares  offered  for sale by this  prospectus  is
insufficient  to cover all of the purchased  shares and the  commitment  shares,
Unigene  has agreed with Fusion to file a  registration  statement  with the SEC
registering the additional  shares.  Steven G. Martin and Joshua B.  Scheinfeld,
the  principals  of  Fusion,  are deemed to be  beneficial  owners of all of the
shares owned by Fusion.  Messrs.  Martin and  Scheinfeld  have shared voting and
dispositive power of the shares being offered under this prospectus.

     Except for the financing transaction, Fusion has had no position, office or
other  material  relationship  with Unigene or affiliates  within the past three
years. Under the terms of the common stock purchase agreement, Fusion has agreed
that it will not purchase  shares of Unigene common stock under the common stock
purchase  agreement if, after giving effect to the  purchase,  Fusion,  together
with its affiliates, would beneficially own in excess of 4.9% of the outstanding
shares of Unigene common stock. If the 4.9% limitation is reached,  Unigene,  at
its  option,  has the right to  increase  the  limitation  to 9.9%.  If the 9.9%
limitation is reached,  Fusion will remain obligated to comply with its purchase
obligations  under the common stock purchase  agreement,  but otherwise would be
prohibited from increasing its percentage ownership.

                              PLAN OF DISTRIBUTION

     Fusion Capital Fund II, LLC, is offering the shares of Unigene common stock
offered by this  prospectus.  The common stock may be sold or  distributed  from
time to time by the selling  stockholder,  directly to one or more purchasers or
through  brokers,  dealers or  underwriters  who may act solely as agents or may
acquire such common stock as principals, at market prices prevailing at the time
of sale, at prices related to such prevailing market

                                       37




prices, at negotiated prices, or at fixed prices,  which may be changed.  Fusion
may effect the sale of the common  stock  offered by this  prospectus  in one or
more of the following methods:

     -    ordinary brokers' transactions;

     -    transactions involving cross or block trades;

     -    purchases by brokers,  dealers or underwriters as principal and resale
          by such purchasers for their own accounts under this prospectus;

     -    "at the market" to or through market makers or into an existing market
          for the common stock;

     -    in other  ways not  involving  market  makers or  established  trading
          markets,  including  direct  sales to  purchasers  or  sales  effected
          through agents;

     -    in privately negotiated transactions; or

     -    any combination of the foregoing.

     In  order  to  comply  with  the  securities  laws of  certain  states,  if
applicable,  the shares may be sold only through  registered or licensed brokers
or dealers.  Under state securities laws, the shares may not be sold unless they
have been  registered or qualified  for sale in such state or an exemption  from
such registration or qualification requirement is available and complied with.

     Brokers, dealers,  underwriters or agents participating in the distribution
of the shares as agents may  receive  compensation  in the form of  commissions,
discounts or concessions from the selling  stockholder  and/or purchasers of the
common stock for whom such  broker-dealers may act as agent, or to whom they may
sell as principal, or both. The compensation paid to a particular  broker-dealer
may be less than or in excess of customary commissions.

     The  selling  stockholder  is an  "underwriter"  within the  meaning of the
Securities Act of 1933 with respect to this transaction.  Any broker-dealers who
act in  connection  with the sale of the  shares  hereunder  may be deemed to be
"underwriters"  within the meaning of the  Securities  Act, and any  commissions
they  receive  and  proceeds  of any  sale of the  shares  may be  deemed  to be
underwriting discounts and commissions under the Securities Act.

     Neither we nor the selling stockholder can presently estimate the amount of
compensation that any broker, dealer, underwriter or agent will receive. We know
of  no  existing  arrangements  between  the  selling  stockholder,   any  other
stockholder,  broker,  dealer,  underwriter  or  agent  relating  to the sale or
distribution  of the shares.  At a time a particular  offer of shares is made, a
prospectus supplement,  if required, will be distributed that will set forth the
names of any  agents,  underwriters  or dealers  and any  compensation  from the
selling stockholder and any other required information.

     We will pay all of the expenses incident to the registration,  offering and
sale of the  shares  to the  public  other  than  commissions  or  discounts  of
underwriters, broker-dealers or agents. Unigene has also agreed to indemnify the
selling stockholder and related persons against specified liabilities, including
liabilities under the Securities Act of 1933.

     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors,  officers and controlling  persons of Unigene, we
have been advised that in the opinion of the SEC such indemnification is against
public   policy  as  expressed  in  the   Securities   Act  and  is   therefore,
unenforceable.

Fusion and its  affiliates  have  agreed not to engage in any direct or indirect
short selling or hedging of our common stock during the term of the common stock
purchase agreement.

                                       38



     The  selling  stockholder  and  any  other  person  participating  in  such
distribution  will be subject to  applicable  provisions of the exchange act and
the rules and regulations thereunder,  including, without limitation, Regulation
M under the  Securities  Exchange  Act of 1934,  which  may limit the  timing of
purchases  and  sales  of any of the  shares  of  common  stock  by the  selling
stockholder and any other participating  person.  Regulation M may also restrict
the ability of any person  engaged in the  distribution  of the common  stock to
engage in  market-making  activities with respect to the shares of common stock.
All of the foregoing may affect the  marketability of the shares of common stock
and the  ability of any person or entity to engage in  market-making  activities
with respect to the shares of common stock.

     Unigene has entered into a registration  rights agreement with Fusion under
which it has agreed to maintain the  effectiveness  under the  Securities Act of
1933 of the  registration  statement  to which this  prospectus  relates.

                                 Legal Matters

     The validity of the Unigene common stock offered by this prospectus will be
passed upon for Unigene by Covington & Burling, Washington, D.C.

                                     Experts

     Unigene's  audited  financial  statements as of December 31, 2000 and 1999,
and for each of the years in the three-year  period ended December 31, 2000, are
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants,  appearing elsewhere herein,
and upon the  authority of KPMG LLP as experts in accounting  and auditing.  The
report of KPMG LLP covering these financial  statements  contains an explanatory
paragraph that states that the Company's  recurring  losses from  operations and
working capital deficiency raise substantial doubt about the entity's ability to
continue  as a going  concern.  The  financial  statements  do not  include  any
adjustments  that might result from the outcome of that  uncertainty.  Also, the
report of KPMG LLP covering the December 31, 2000 financial statements refers to
a change in the  method  of  revenue  recognition  for  up-front  non-refundable
license fees in 2000.

                             Additional Information

     Unigene has filed a Registration  Statement on Form S-1 with the Securities
and Exchange Commission. This prospectus, which forms a part of the Registration
Statement,  does not contain all of the information included in the Registration
Statement.  Some  information is omitted from this prospectus in accordance with
the rules of the Securities and Exchange  Commission and you should refer to the
Registration Statement and its exhibits for additional information. Unigene also
files annual and quarterly reports,  proxy statements and other information with
the SEC.  You may  review a copy of the  Registration  Statement  and any  other
documents  filed  with the  Securities  and  Exchange  Commission  at its public
reference room located at 450 Fifth Street,  Washington,  D.C. 20549, and at the
SEC's regional offices in Chicago,  Illinois and New York, New York. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the operation of the public  reference  rooms.  Unigene's SEC filings and the
Registration Statement can also be reviewed by accessing the SEC's Internet site
at http://www.sec.gov.

     You  should  rely only on the  information  contained  in this  prospectus.
Unigene has not authorized  anyone to provide you with any  information  that is
different from that contained in this prospectus.  The information  contained in
this  prospectus is accurate as of the date of this  prospectus.  You should not
assume that there has been no changes in the  affairs of Unigene  since the date
of this  prospectus or that the  information in this prospectus is correct as of
any time  after the date of this  prospectus,  regardless  of the time that this
prospectus  is  delivered  or any  sale  of the  common  stock  offered  by this
prospectus is made. This prospectus is not an offer to sell or a solicitation of
an offer to buy the shares covered by this prospectus in any jurisdiction  where
the offer or solicitation is unlawful. In this prospectus, "Unigene," "we," "us"
and "our" refer to Unigene Laboratories, Inc.

                                       39



Unigene Laboratories, Inc.
INDEX TO FINANCIAL STATEMENTS



                                                                                                           Page
                                                                                                           ----
                                                                                                         
Fiscal Years Ended December 31, 2000, 1999 and 1998
   Independent Auditors' Report..........................................................................   F-2
   Balance Sheets--December 31, 2000 and December 31, 1999...............................................   F-3
   Statements of Operations--Years Ended December 31, 2000, 1999 and 1998................................   F-4
   Statements of Stockholders' Equity (Deficit)--Years Ended December 31, 2000, 1999 and 1998............   F-5
   Statements of Cash Flows--Years Ended December 31, 2000, 1999 and 1998................................   F-7
   Notes to Financial Statements--Years Ended December 31, 2000, 1999 and 1998...........................   F-8


                                      F-1




INDEPENDENT AUDITORS' REPORT

The Stockholders and Board of Directors
Unigene Laboratories, Inc.:

We have audited the financial statements of Unigene Laboratories, Inc. as listed
in the accompanying index. These financial  statements are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Unigene Laboratories,  Inc. as
of December 31, 2000 and 1999,  and the results of its  operations  and its cash
flows for each of the years in the three-year period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in Note 17 to the
financial statements,  the Company has suffered recurring losses from operations
and has a working capital  deficiency  which raise  substantial  doubt about its
ability to continue as a going  concern.  Management's  plans in regard to these
matters are also  described in Note 17. The financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.

As  discussed in Note 2 to the  financial  statements,  the Company  changed its
method of accounting for revenue recognition for up-front non-refundable license
fees in 2000.


                                  /S/ KPMG LLP


Short Hills, New Jersey
March 30, 2001

                                      F-2



                           UNIGENE LABORATORIES, INC.
                                 BALANCE SHEETS
                           DECEMBER 31, 2000 and 1999



  ASSETS                                                          2000            1999
  ------                                                          ----            ----
                                                                        
  Current assets:
      Cash and cash equivalents                               $     17,108    $    682,629
      Contract receivables                                         165,671       3,526,229
      Prepaid expenses                                             129,493         210,195
      Inventory (Note 8)                                           415,420         867,566
                                                              ------------    ------------
                    Total current assets                           727,692       5,286,619

  Property, plant and equipment - net (Note 4)                   5,684,127       6,740,354

  Patents and other intangibles, net                             1,288,686       1,264,268
  Investment in joint venture (Note 5)                             900,000            --
  Other assets                                                     446,894         486,612
                                                              ------------    ------------
                                                              $  9,047,399    $ 13,777,853
                                                              ============    ============

  LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
  ---------------------------------------------

  Current liabilities:
      Accounts payable                                        $  2,834,556    $  1,258,334
      Accrued expenses (Note 9)                                  3,761,277       2,217,413
      Notes payable - stockholders (Note 3)                      2,873,323       1,140,000
      Current portion - long-term notes payable -
        stockholders                                             1,870,000         960,606
      5% convertible debentures (Note 6)                         2,400,000       2,400,000
      Current portion - capital lease obligations (Note 10)         55,398          69,708
      Deferred revenue                                             200,000            --
                                                              ------------    ------------
                    Total current liabilities                   13,994,554       8,046,061

  Notes payable - stockholders, excluding
    current portion (Note 3)                                          --           909,394
  Joint venture obligation, excluding current portion              495,000            --
  Capital lease obligations, excluding
    current portion (Note 10)                                       50,572          93,415

  Commitments and contingencies (Notes 5,6,7,11 and 18)
  Stockholders' equity (deficit) (Notes 7,12 and 13):
      Common Stock - par value $.01 per share,
         authorized 60,000,000 shares, issued
         44,441,855 shares in 2000 and
         43,088,184 shares in 1999                                 444,419         430,882
      Additional paid-in capital                                70,053,710      67,207,604
      Deferred stock option compensation                          (284,948)           --
      Deferred stock offering costs                               (327,000)           --
      Accumulated deficit                                      (75,377,877)    (62,908,472)
      Less: Treasury stock, at cost,
             7,290 shares                                           (1,031)         (1,031)
                                                              ------------    ------------
                    Total stockholders' equity (deficit)        (5,492,727)      4,728,983
                                                              ------------    ------------
                                                              $  9,047,399    $ 13,777,853
                                                              ============    ============


See accompanying notes to financial statements.

                                      F-3



                           UNIGENE LABORATORIES, INC.
                            STATEMENTS OF OPERATIONS
                  Years Ended December 31, 2000, 1999 and 1998



                                                         2000             1999            1998
                                                         ----             ----            ----
                                                                            
Licensing and other revenue                          $  3,286,961    $  9,589,413    $  5,049,844
                                                     ------------    ------------    ------------
Operating expenses:
   Research and development                            11,484,379       9,374,528       9,041,618
   General and administrative                           3,187,465       2,211,778       2,067,958
                                                     ------------    ------------    ------------
                                                       14,671,844      11,586,306      11,109,576
                                                     ------------    ------------    ------------
Operating loss                                        (11,384,883)     (1,996,893)     (6,059,732)

Other income (expense):
    Interest income                                        49,130          37,545         107,502
    Interest expense                                   (1,198,508)     (1,171,260)       (784,972)
                                                     ------------    ------------    ------------
Loss before income taxes,
    extraordinary item and cumulative
    effect of accounting change                       (12,534,261)     (3,130,608)     (6,737,202)

Income tax benefit (Note 14)                            1,064,856       1,553,268            --
                                                     ------------    ------------    ------------
Loss before extraordinary item and cumulative
    effect of accounting change                       (11,469,405)     (1,577,340)     (6,737,202)

Extraordinary item-loss
    on early extinguishment of debt (Note 6)                 --              --          (143,810)

Cumulative effect of revenue recognition
    accounting change (Note 2)                         (1,000,000)           --              --
                                                     ------------    ------------    ------------
Net loss                                             $(12,469,405)   $ (1,577,340)   $ (6,881,012)
                                                     ============    ============    ============
Loss per share - basic and diluted:
     Loss before extraordinary item
       and cumulative effect of accounting change    $       (.26)   $       (.04)   $       (.17)
     Extraordinary item                                      --              --              (.01)
    Cumulative effect of accounting change                   (.02)           --              --
                                                     ------------    ------------    ------------
    Net loss per share                               $       (.28)   $       (.04)   $       (.18)
                                                     ============    ============    ============

Weighted average number of shares
 outstanding - basic and diluted                       44,008,154      40,718,519      38,701,253
                                                     ============    ============    ============

Pro forma  amounts  assuming  the new revenue  recognition  principle is applied
retroactively, exclusive of cumulative effect adjustment:

  Loss before extraordinary item                     $(11,469,405)   $   (777,340)   $ (5,937,202)
                                                     ============    ============    ============
  Net loss                                           $(11,469,405)   $   (777,340)   $ (6,081,012)
                                                     ============    ============    ============
Earnings per share -- basic and diluted:
  Loss before extraordinary item                     $       (.26)   $       (.02)   $       (.15)
                                                     ============    ============    ============
  Net loss                                           $       (.26)   $       (.02)   $       (.16)
                                                     ============    ============    ============



See accompanying notes to financial statements.

                                      F-4



                           UNIGENE LABORATORIES, INC.
                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  Years Ended December 31, 2000, 1999 and 1998



                                 Common Stock                       Deferred      Deferred
                                 ------------         Additional     Stock         Stock
                            Number of      Par         Paid-in       Option       Offering   Accumulated   Treasury
                             Shares       Value        Capital    Compensation     Costs       Deficit       Stock        Total
                            ---------     -----       ----------  ------------    --------   -----------   ---------      -----
                                                                                               
Balance,
 January 1, 1998           38,517,722   $385,177     $63,499,439     $ --          $  --    $(54,450,120)   $(1,031)   $ 9,433,465

Conversion of 9.5%
 Debentures                   448,834      4,489         495,705       --             --            --         --          500,194

Conversion of
 notes payable -
 stockholders                 163,635      1,636         220,091       --             --            --         --          221,727

Conversion of
 10% Debentures and
 accrued interest             214,131      2,141         202,234       --             --            --         --          204,375

Value of 5% Debentures
 allocated to beneficial
 conversion feature and
 related warrants                --         --           686,796       --             --            --         --          686,796

Exercise of
 stock options                 40,500        405          47,564       --             --            --         --           47,969

Issuance of warrants
 as compensation                 --         --             6,574       --             --            --         --            6,574

Net loss                         --         --              --         --             --      (6,881,012)      --       (6,881,012)
                         ------------   --------     -----------     ------        -------  ------------    -------    -----------
Balance,
 December 31, 1998         39,384,822    393,848      65,158,403       --             --     (61,331,132)    (1,031)     4,220,088

Conversion of 5%
  Debentures into
  Common Stock
  and Warrants              3,528,125     35,281       1,859,994       --             --            --         --        1,895,275

Issuance of Common
  Stock as payment of
  interest on 5%
  Debentures                  175,237      1,753         189,207       --             --            --         --          190,960

Net loss                         --         --              --         --             --      (1,577,340)      --       (1,577,340)
                         ------------   --------     -----------     ------        -------  ------------    -------    -----------


                                                                     (Continued)

                                      F-5



                           UNIGENE LABORATORIES, INC.
            STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
                  Years Ended December 31, 2000, 1999 and 1998



                                 Common Stock                     Deferred     Deferred
                                 ------------      Additional      Stock        Stock
                            Number of      Par      Paid-in        Option      Offering    Accumulated     Treasury
                             Shares       Value     Capital     Compensation    Costs        Deficit         Stock         Total
                            ---------     -----    ----------   ------------   --------    -----------     ---------       -----
                                                                                              
Balance,
 December 31, 1999        43,088,184   $ 430,882  $ 67,207,604        --           --      $(62,908,472)   $ (1,031)   $  4,728,983

Exercise of
 warrants                  1,118,071      11,181     1,317,087        --           --              --          --         1,328,268

Exercise of
 stock options               235,600       2,356       298,177        --           --              --          --           300,533

Deferred stock
 option compensation            --          --         683,733    (284,948)        --              --          --           398,785

Deferred stock offering
 costs                          --          --         327,000        --       (327,000)           --          --              --

Issuance of warrants
 as compensation                --          --         220,109        --           --              --          --           220,109

Net loss                        --          --            --          --           --       (12,469,405)       --       (12,469,405)
                         ----------   ---------   -----------    ---------    ---------    ------------    --------    ------------

Balance,
 December 31, 2000       44,441,855   $ 444,419   $ 70,053,710   $(284,948)   $(327,000)   $(75,377,877)   $ (1,031)   $ (5,492,727)
                         ==========   =========   ============   =========    =========    ============    ========    ============


See accompanying notes to financial statements.

                                      F-6



                           UNIGENE LABORATORIES, INC.
                            STATEMENTS OF CASH FLOWS



                                                                       Years Ended December 31,
                                                           ------------------------------------------------
                                                                 2000            1999            1998
                                                                 ----            ----            ----
                                                                                   
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                    $(12,469,405)   $ (1,577,340)   $ (6,881,012)
Adjustments to reconcile net loss to net
   cash used by operating activities:
 Non-cash cumulative effect adjustment                         1,000,000            --              --
 Amortization of deferred revenue                               (800,000)           --              --
 Non-cash compensation                                           618,894            --             6,574
 Depreciation and amortization                                 1,617,957       1,558,663       1,552,734
 Amortization of beneficial conversion feature on 5%
    Debentures                                                      --           197,193         489,603
 20% premium on 5% Debentures                                       --           400,000            --
 Payment of interest through the issuance of Common Stock           --           190,960          44,060
 Decrease in other assets                                         42,312          64,528          48,500
 (Increase) decrease in contract receivables                   3,360,558      (3,210,171)       (316,058)
(Increase) decrease in prepaid expenses and
   inventory                                                     532,848        (188,092)        (55,424)
 Increase in accounts payable and accrued
   expenses                                                    2,715,086       1,163,795         247,237
                                                            ------------    ------------    ------------
 Net cash used for operating activities                       (3,381,750)     (1,400,464)     (4,863,786)
                                                            ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction of leasehold and building improvements             (235,764)         (4,010)         (8,384)
Purchase of furniture and equipment                             (283,589)       (134,127)        (76,486)
Increase in patents and other assets                             (69,389)        (88,695)       (264,959)
                                                            ------------    ------------    ------------
Net cash used in investing activities                           (588,742)       (226,832)       (349,829)
                                                            ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt                            --         1,870,000       4,000,000
Proceeds from issuance of short-term debt, net                 1,733,323         100,000            --
Repayment of long-term debt and capital lease
  obligations                                                    (57,153)        (62,739)       (304,138)
Exercise of stock options and warrants                         1,628,801            --            47,969
Debt issuance and other costs                                       --              --          (253,879)
                                                            ------------    ------------    ------------
Net cash provided by financing activities                      3,304,971       1,907,261       3,489,952
                                                            ------------    ------------    ------------
Net increase (decrease) in cash and
  cash equivalents                                              (665,521)        279,965      (1,723,663)
Cash and cash equivalents at
  beginning of period                                            682,629         402,664       2,126,327
                                                            ------------    ------------    ------------
Cash and cash equivalents at end of period                  $     17,108    $    682,629    $    402,664
                                                            ============    ============    ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Investment in joint venture and related obligations         $    900,000            --              --
Acquisition of equipment through capital leases                     --      $     36,617    $    221,900
Conversion of convertible debentures and accrued
  interest  into Common Stock                                       --      $  2,190,960    $    707,069
Conversion of notes payable - stockholders
  into Common Stock                                                 --              --      $    225,000
Value of beneficial conversion feature and related
  warrants on issuance of  5% Debentures                            --              --      $    686,796
                                                            ============    ============    ============
Cash paid for interest                                      $     39,800    $     24,700    $    119,000
                                                            ============    ============    ============


See accompanying notes to financial statements.

                                      F-7



                           UNIGENE LABORATORIES, INC.
                          NOTES TO FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


1.   Description of Business

Unigene  Laboratories,  Inc. (the "Company"),  a biopharmaceutical  company, was
incorporated  in the State of Delaware in 1980.  The Company's  single  business
segment  focuses on  research,  production  and delivery of peptides for medical
use. The Company has  concentrated  most of its efforts to date on one product -
Calcitonin,  for the  treatment  of  osteoporosis  and  other  indications.  The
Company's  initial products will be injectable,  nasal and oral  formulations of
Calcitonin.  The  Company's  Calcitonin  products  require  clinical  trials and
approvals from regulatory agencies as well as acceptance in the marketplace. The
Company's  injectable  Calcitonin product has been approved for marketing in all
15-member  states of the European Union for the treatment of Paget's disease and
hypercalcemia  associated with  malignancy.  Through December 31, 2000, sales of
injectable  Calcitonin have not been significant.  Although the Company believes
its patents and patent  applications  are valid, the invalidation of its patents
or the failure of certain of its pending patent applications to issue as patents
could have a material  adverse  effect upon its business.  The Company  competes
with specialized  biotechnology  companies,  major  pharmaceutical  and chemical
companies and universities and research institutions.  Many of these competitors
have  substantially  greater resources than does the Company.  During 2000, 1999
and 1998,  almost all of the Company's  revenue was generated from one customer,
Pfizer (see Note 16). The Pfizer agreement was terminated in March 2001.

2.   Summary of Significant Accounting Policies & Practices

Segment  Information  -The Company is managed and operated as one business.  The
entire business is managed by a single management team that reports to the chief
executive  officer.  The Company does not operate  separate lines of business or
separate  business  entities  with  respect  to any of its  product  candidates.
Accordingly,  the Company does not prepare discrete  financial  information with
respect to separate  product  areas or by location and does not have  separately
reportable  segments as defined by Statement of Financial  Accounting  Standards
(SFAS) No.  131,  "Disclosures  about  Segments  of an  Enterprise  and  Related
Information."

Property,  Plant and  Equipment - Property,  plant and  equipment are carried at
cost.  Equipment  under  capital  leases are stated at the present  value of the
minimum lease payments. Depreciation is computed using the straight-line method.
Amortization  of equipment  under capital leases and leasehold  improvements  is
computed  over the  shorter of the lease term or  estimated  useful  life of the
asset. Additions and improvements are capitalized, while repairs and maintenance
are charged to expense as incurred.

Research and Development - Research and development  expenses  include the costs
associated  with internal  research and  development by the Company and research
and  development  conducted  for the  Company  by  outside  advisors,  sponsored
university-based  research partners,  and clinical study partners.  All research
and  development  costs  discussed  above are  expensed  as  incurred.  Expenses
reimbursed under research and development  contracts,  which are not refundable,
are recorded as a reduction to research and development expense in the statement
of operations.

Revenue Recognition - Research and development  contract revenues are recognized
based upon the successful  completion of various  benchmarks as set forth in the
individual agreements.  Commencing in 2000, non-refundable license fees received
upon  execution  of  license   agreements   where  the  Company  has  continuing
involvement  are  deferred  and  recognized  as  revenue  over  the  life of the
agreement.  Prior to the implementation of SAB 101,  non-refundable license fees
received  upon  execution  of  license  agreements  were  recognized  as revenue
immediately. Revenue from the sale of product is recognized upon shipment to the
customer.

In December  1999, the  Securities  and Exchange  Commission  staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101").  SAB 101  summarizes  certain of the staff's views in applying  generally
accepted accounting  principles to revenue  recognition in financial  statements
and specifically addresses revenue recognition in the biotechnology industry for
non-refundable technology access fees and other non-refundable fees. The Company
was required to adopt SAB 101, as amended, in the fourth quarter of 2000 with an
effective  date of January 1, 2000, and the  recognition of a cumulative  effect
adjustment  calculated  as of January 1, 2000.  The  Company  adopted SAB 101 in
2000,

                                      F-8



changing its revenue recognition policy for up-front licensing fees that require
services to be performed in the future from  immediate  revenue  recognition  to
deferral  of  revenue  with the  up-front  fee  recognized  over the life of the
agreement.  In 1997,  the  Company  recognized  $3,000,000  in  revenue  from an
up-front licensing fee from Pfizer. With the adoption of SAB 101, the Company is
now recognizing  this revenue over a 45 month period,  equivalent to the term of
its oral  Calcitonin  agreement  with Pfizer which was terminated in March 2001.
The Company  therefore  recognized a non-cash  cumulative  effect  adjustment of
$1,000,000  as of  January  1, 2000  representing  a revenue  deferral  over the
remaining 15 months of the agreement. The Company recognized $800,000 of revenue
in 2000 and $200,000 in revenue will be  recognized  in 2001 as a result of this
deferral.  The pro forma effects of retroactive  application of this new revenue
recognition  principle on net loss and related per share amounts,  for the years
ended  December  31,  2000,  1999  and 1998 are  presented  in the  accompanying
statements of operations.

Patents and Other Intangibles - Patent costs are deferred pending the outcome of
patent   applications.   Successful   patent  costs  are  amortized   using  the
straight-line  method over the lives of the patents.  Unsuccessful  patent costs
are expensed  when  determined  worthless.  As of December 31, 2000,  six of the
Company's  patents had issued in the U.S.  and  numerous  have issued in various
foreign  countries.   Various  other  applications  are  still  pending.   Other
intangibles are recorded at cost and are amortized over their  estimated  useful
lives. Accumulated amortization on patents and other intangibles is $186,000 and
$143,600 at December 31, 2000 and 1999, respectively.

Stock Option Plan - The Company  accounts for stock options  issued to employees
and directors in accordance with the provisions of Accounting  Principles  Board
(APB) Opinion No. 25,  "Accounting  for Stock Issued to Employees",  and related
interpretations. As such, compensation expense is recorded on fixed stock option
grants only if the current  market price of the  underlying  stock  exceeded the
exercise  price;  compensation  expense  on  variable  stock  option  grants  is
estimated until the measurement date. As permitted by SFAS No. 123,  "Accounting
for Stock-Based Compensation", the Company provides pro forma net income and pro
forma  earnings per share  disclosures  for  employee and director  stock option
grants  as if the  fair-value-based  method  defined  in SFAS  No.  123 had been
applied.  The  Company  accounts  for  stock  options  and  warrants  issued  to
consultants  on a fair value basis in accordance  with SFAS No. 123 and Emerging
Issues Task Force Issue No. 96-18,  "Accounting for Equity  Instruments That Are
Issued to Other Than  Employees for Acquiring,  or in Conjunction  with Selling,
Goods or Services."

Impairment of Long-Lived  Assets and  Long-Lived  Assets to Be Disposed Of - The
Company accounts for the impairment of long-lived  assets in accordance with the
provisions of SFAS No. 121,  "Accounting for the Impairment of Long-Lived Assets
and for  Long-Lived  Assets to Be Disposed  Of." This  Statement  requires  that
long-lived  assets  and  certain   identifiable   intangibles  be  reviewed  for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of an asset may not be recoverable.  Recoverability of assets to
be held and used is measured by a comparison of the carrying  amount of an asset
to the future undiscounted net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be recognized is
measured  by the amount by which the  carrying  amount of the assets  exceed the
fair value of the assets.  Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

Net Loss per Share - The Company  computes and  presents  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 being
reported on and the effect was  dilutive.  The  Company's  net loss and weighted
average shares  outstanding  used for computing  diluted loss per share were the
same as that used for computing basic loss per share for each of the years ended
December 31, 2000, 1999 and 1998 because the Company's  convertible  debentures,
stock  options  and  warrants  were not  included in the  calculation  since the
inclusion of such potential shares (approximately  3,200,000 potential shares of
Common Stock at December 31, 2000) would be antidilutive.

Cash Equivalents - The Company considers all highly liquid securities  purchased
with an original maturity of three months or less to be cash equivalents.

Inventory -  Inventories  are stated at the lower of cost  (using the  first-in,
first-out method) or market.

Fair Value of Financial  Instruments - The fair value of a financial  instrument
represents  the amount at which the  instrument  could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation.
Significant differences can arise between the fair value and carrying amounts of
financial instruments that are recognized at historical

                                      F-9



cost  amounts.  Given our  financial  condition  described in Note 17, it is not
practicable to estimate the fair value of our financial  instruments at December
31, 2000.

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

3.   Related Party Transactions

Notes payable - stockholders. Since 1995, Warren P. Levy, Ronald S. Levy and Jay
Levy each an officer and  director of the Company,  and another  member of their
family  (collectively,  the  "Levys"),  have  extended  loans to the Company for
working capital needs.  Each of the loans is evidenced by a promissory note that
sets  the  terms of the  loan.  The  variable  interest  rate on these  notes is
equivalent to the Merrill Lynch Margin Loan Rate plus .25%. The principal amount
is collateralized by security interests in the Company's  Fairfield,  New Jersey
plant and equipment and Boonton, New Jersey equipment.

During 1999,  Jay Levy loaned the Company  $1,500,000  evidenced by demand notes
bearing  interest  at 6% per year.  During the third  quarter of 1999,  Jay Levy
loaned the  Company an  additional  $370,000  evidenced  by term notes  maturing
January 2002 and bearing  interest at 6% per year,  and the $1,500,000 of demand
notes were converted  into 6% term notes maturing  January 2002. The Company has
granted Jay Levy a security  interest in all of its  equipment and a mortgage on
its real property to secure  payment of the term notes,  which are senior to all
notes  payable to Warren Levy and Ronald  Levy.  The Company is required to make
installment  payments on the term notes commencing in October 1999 and ending in
January  2002 in an  aggregate  amount of  $72,426  per  month.  No  installment
payments  were made during 1999 or 2000.  During  2000,  the Levys loaned to the
Company an additional  $1,733,323 in short-term  notes. As of December 31, 2000,
the  outstanding  loans by the Levys to Unigene,  all  classified  as short-term
debt, consisted of: joint loans in the aggregate principal amount of $2,873,323,
which are  evidenced by demand notes  bearing a floating  interest rate equal to
the Merrill  Lynch Margin Loan Rate  plus.25%  (9.875% at December 31, 2000) and
loans from Jay Levy in the aggregate principal amount of $1,870,000 evidenced by
term notes maturing  January 2002, and bearing  interest at the fixed rate of 6%
per  year.  During  2000,  $4,600 in  interest  was paid on these  loans.  As of
December 31, 2000,  accrued  interest on all Levy loans  totalled  approximately
$922,000.

Interest and principal payments required under these loans have not been made by
Unigene,  but the Levys have waived all default provisions  including additional
interest penalties due under these loans through December 31, 2000.

From January 1, 2001  through  March 30, 2001 the Levys loaned to the Company an
additional $1,610,000 of demand notes at the Merrill Lynch Margin Loan Rate plus
 .25%,  of which  $500,000  is secured by a security  interest  in certain of our
patents.

                                      F-10



4.   Property, Plant and Equipment

Property,  plant and  equipment  consisted of the following at December 31, 2000
and 1999:

                                                               Estimated
                                                              Depreciable
                              2000               1999            Lives
                           ----------         -----------     -----------
Building and
  improvements             $1,397,210         $1,377,075      25 years
Leasehold improvements      8,695,851          8,480,222      Lease Term
Manufacturing equipment     4,000,940          3,842,038      10 years
Laboratory equipment        2,815,870          2,704,820      5 years
Other equipment               466,523            466,523      10 years
Office equipment and
  furniture                   340,843            327,206      5 years
Equipment under capital
  leases                      258,517            258,517      Lease Term
                           ----------         ----------
                           17,975,754         17,456,401
Less accumulated
  depreciation and
  amortization             12,412,794         10,837,214
                           ----------         ----------
                            5,562,960          6,619,187
Land                          121,167            121,167
                           ----------         ----------
                           $5,684,127         $6,740,354
                           ==========         ==========

Depreciation  and  amortization  expense on property,  plant and  equipment  was
$1,576,000, $1,520,000, and $1,520,000 in 2000, 1999 and 1998, respectively.

5.       China Joint Venture

In June 2000, we entered into a joint venture with  Shijiazhuang  Pharmaceutical
Group ("SPG"),  a pharmaceutical  company in the People's Republic of China. The
joint venture will  manufacture and distribute  injectable and nasal  Calcitonin
products in China (and possibly  other selected Asian markets) for the treatment
of osteoporosis. We own 45% of the joint venture and will have a 45% interest in
the joint venture profits and losses.  In the first phase of the  collaboration,
SPG will  contribute  its existing  injectable  Calcitonin  license to the joint
venture,  which will allow the joint  venture to sell our product in China.  The
joint  venture  will  need to  file a New  Drug  Application  in  China  for its
injectable and nasal products. In addition, the joint venture may be required to
conduct  brief  local human  trials.  If the  product is  successful,  the joint
venture  may  establish  a  facility  in  China  to fill  injectable  and  nasal
Calcitonin  products using bulk Calcitonin  produced at our Boonton,  New Jersey
plant. Eventually the joint venture may manufacture the bulk Calcitonin in China
at a new facility that would be  constructed  by the joint  venture.  This would
require  local  financing by the joint  venture.  The joint  venture has not yet
begun operations as of December 31, 2000.

Under  the  terms of the  joint  venture  with  SPG,  Unigene  is  obligated  to
contribute up to $405,000 in cash during 2001 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.  As of December 31, 2000, we have
not made any investments in the joint venture. In addition, Unigene is obligated
to pay to the Qingdao General Pharmaceutical Company an aggregate of $350,000 in
14 monthly  installment  payments  of $25,000 in order to  terminate  its former
joint venture in China,  of which $75,000 had been paid as of December 31, 2000.
We recognized the entire $350,000 obligation as an expense in 2000.

                                      F-11



6.   Convertible Debentures

In March 1996, the Company issued $3,300,000 of 9.5% Senior Secured  Convertible
Debentures  in  exchange  for a secured  loan of an equal  amount.  All of these
debentures  had been  converted into  approximately  2,924,000  shares of Common
Stock as of November 15, 1998, the due date of the debentures.

In March 1996, the Company completed a private placement of $9,080,000 aggregate
principal  amount  of 10%  Convertible  Debentures.  The  Company  received  net
proceeds of  approximately  $8.1  million as a result of this  placement.  These
debentures  were to mature  March 4, 1999,  but as of  December  31,  1998,  all
outstanding  10%  Debentures  have been  converted or redeemed in full.  Through
December 31, 1998,  $8,808,515  of principal  amount of these  debentures,  plus
approximately   $355,000  of  accrued   interest,   had  been   converted   into
approximately 4,838,000 shares of Common Stock. Due to restrictions on the total
number of shares which could be issued upon conversion of the 10% Debentures, in
October 1998 the Company  redeemed in cash an additional  $271,485 of principal,
and in connection  therewith paid to the holder $68,899 of accrued  interest and
$143,810 in redemption premiums,  for an aggregate payment of $484,194. The cost
of the redemption  premium of $143,810 was recorded as an extraordinary  loss in
1998.

In June 1998,  Unigene  completed a private placement of $4,000,000 in principal
amount of 5%  convertible  debentures  from which we  realized  net  proceeds of
approximately  $3,750,000.  The 5% debentures  were  convertible  into shares of
Unigene common stock. The interest on the debentures,  at Unigene's option,  was
payable in shares of Unigene common stock.  Upon conversion,  the holder of a 5%
debenture  was  entitled  to receive  warrants to purchase a number of shares of
Unigene  common stock equal to 4% of the number of shares  issued as a result of
the  conversion.  However,  the number of shares of Unigene common stock that we
are obligated to issue, in the aggregate,  upon  conversion,  when combined with
the shares  issued in payment of interest and upon the exercise of the warrants,
is limited to 3,852,500  shares.  After this share limit is reached,  Unigene is
obligated to redeem all 5%  debentures  tendered for  conversion at a redemption
price equal to 120% of the principal amount, plus accrued interest.  In December
1999,  Unigene was unable to convert  $200,000 in principal of the 5% debentures
tendered for  conversion  because the  conversion  would have exceeded the share
limit.  As a result,  we accrued,  as of December 31,  1999,  an amount equal to
$400,000 representing the 20% premium on the outstanding $2,000,000 in principal
amount of 5% debentures  that had not been  converted.  During 1999,  all of the
$2,000,000 in principal amount of 5% debentures were tendered for conversion and
therefore are  classified as a current  liability in the amount of $2,400,000 as
of December 31, 2000.

Through  December  31, 2000,  we issued a total of  3,703,362  shares of Unigene
common  stock  upon  conversion  of  $2,000,000  in  principal  amount of the 5%
debentures and in payment of interest on the 5%  debentures.  Also, we issued an
additional  103,032 shares of Unigene common stock upon the cashless exercise of
all of the 141,123 warrants issued upon conversion of the 5% debentures.

On January 5, 2000,  Unigene  failed to make the required  semi-annual  interest
payment on the outstanding 5% debentures.  As a result, the interest rate on the
outstanding  5%  debentures  has  increased  to 20% per  year.  The  semi-annual
interest  payments due July 5, 2000 and January 5, 2001 also have not been made.
As of December 31, 2000,  the accrued and unpaid  interest on the 5%  debentures
totaled approximately $467,000. In addition, due to the delisting of the Unigene
common stock from the Nasdaq  National  Market in October 1999,  Unigene  became
obligated  under a separate  agreement to pay the holder of the 5% debentures an
amount equal to 2% of the  outstanding  principal  amount of the  debentures per
month.  Unigene has not made any of these  payments to date, but has accrued the
amounts as an expense. As of December 31, 2000, the accrued and unpaid amount of
this penalty totaled approximately $617,000.

The holder of the 5% debentures has commenced an arbitration proceeding in which
the holder  claims  that it is  entitled,  as of June 30,  2000,  to payments in
respect  of the  5%  debentures  in  the  amount  of  approximately  $3,400,000,
consisting  of  principal,  interest and  penalties,  resulting  from  Unigene's
default under various provisions of the debentures and related agreements. These
alleged  defaults  included  Unigene's  failure to redeem the  debentures  after
becoming  obligated  to do so, the  failure to pay  interest  when due,  and the
failure to pay  liquidated  damages  arising  from the  delisting of the Unigene
common stock from the Nasdaq National Market. In July 2000, Unigene submitted to
the American  Arbitration  Association a statement in which it denies the amount
of Tail Wind's claim and makes  certain  counterclaims.  A hearing on the matter
before an  arbitrator  appointed  by the  American  Arbitration  Association  is
expected to occur in June 2001. The outcome of the  proceeding is uncertain.  An
extremely unfavorable ruling could have a material adverse effect on Unigene.

The Company in 1998 estimated the value of the beneficial conversion feature and
related  warrants  at the  issuance  of the 5%  Debentures  to be  approximately
$687,000.  Such  amount was  credited  to  additional  paid-in  capital  and was
amortized to

                                      F-12



interest  expense  over the  earliest  conversion  periods  using the  effective
interest  method  (approximately  $197,000  and  $490,000  for the  years  ended
December 31, 1999 and 1998, respectively).

7.   Fusion Capital Financing


On December 18, 2000,  and as amended  March 30,  2001,  Unigene  entered into a
common stock  purchase  agreement  with Fusion Capital Fund II, LLC, under which
Fusion has agreed to  purchase  up to  $21,000,000  in shares of Unigene  common
stock at the rate of $875,000  per month.  Fusion is  committed  to purchase the
shares over a  twenty-four  month  period,  subject to a six-month  extension or
earlier  termination at our discretion.  We may decrease this amount at any time
that the  price of our  common  stock is less than $15 per  share.  If our stock
price  equals or exceeds $4 per  share,  we have the right to require  Fusion to
purchase,  over a period of 60 days, up to the full remaining portion of the $21
million  commitment.  However,  Fusion's  commitment  does  not  begin  until  a
registration  statement covering the resale of the shares purchased by Fusion is
declared effective by the Securities and Exchange Commission.  We cannot predict
when or if the  SEC  will  declare  our  registration  statement  effective.  In
addition, Unigene must continue to satisfy its requirements that are a condition
to Fusion's  obligation  including:  the continued  effectiveness of the related
registration  statement, no default or acceleration of any obligations in excess
of $1,000,000,  no insolvency or bankruptcy  proceedings,  continued  listing of
Unigene common stock on the OTC Bulletin Board, and we must avoid the failure to
meet the maintenance  requirements for listing on the Nasdaq SmallCap Market for
a period of 10  consecutive  trading  days or for more than an  aggregate  of 30
trading days in any 365-day period.  The selling price per share is equal to the
lesser of: the lowest sale price of our common stock on the day of submission of
a purchase notice by Fusion;  the average of any five closing sale prices of our
common stock,  selected by Fusion,  during the 15 trading days prior to the date
of  submission  of a  purchase  notice by Fusion;  or $15.  In  addition  to the
2,000,000 shares and five-year  warrants to purchase  1,000,000 shares of common
stock at an  exercise  price of $.50 per  share  that we  issued to Fusion as of
March 30, 2001 as compensation  for its  commitment,  the Board of Directors has
authorized the issuance and sale to Fusion of up to 6,000,000  shares of Unigene
common stock in connection with the financing transaction. We may be required to
obtain the  approval  of  Unigene  stockholders  to an  amendment  to  Unigene's
certificate of  incorporation  increasing the number of shares of Unigene common
stock  that the  Company  is  authorized  to  issue  in order to issue  and sell
additional shares to Fusion.

In December  2000, the Company  issued a five-year  warrant to purchase  373,002
shares of Unigene common stock to its investment  banker as a fee for the Fusion
financing  agreement.  The warrant  has an  exercise  price of $1.126 and a fair
value of $327,000 using the  Black-Scholes  pricing model. The fair value of the
warrant has been deferred pending the closing of the Fusion financing.  When the
registration  statement for the financing is declared effective,  these deferred
offering  costs  will  be  charged  to  additional   paid-in  capital.   If  the
registration statement is not declared effective, or the offering is terminated,
these deferred offering costs will be charged to operations.

8.  Inventory - Inventory consists of the following:

                       Dec. 31, 2000         Dec. 31, 1999
                       -------------         -------------
Finished goods          $   89,104            $   596,359
Raw material               326,316                271,207
                        ----------            -----------
     Total              $  415,420            $   867,566
                        ==========            ===========

The Company wrote-off $515,000 of finished goods inventory in the fourth quarter
of 2000 as a result of Pfizer's  termination  of its license  agreement with the
Company.

9.  Accrued expenses - Accrued expenses consist of the following:

                                          Dec. 31, 2000    Dec. 31, 1999
                                          -------------    -------------
Interest - notes payable to stockholders   $  921,722       $   645,290
Interest - 5% convertible debentures        1,083,194           243,196
China joint ventures                          680,000                --
Clinical trials/contract research             665,568           763,352
Vacation pay                                  204,948           187,710
Consultants                                    47,000           164,500
Other                                         158,845           213,365
                                           ----------       -----------
     Total                                 $3,761,277        $2,217,413
                                           ==========        ==========

                                      F-13



10.   Obligations Under Capital Leases

The Company entered into various lease arrangements during 1999 and 1998 which
qualify as capital leases.

The future years' minimum lease payments under the capital leases, together with
the present value of the net minimum lease payments, as of December 31, 2000 are
as follows:

         2001                                                      $   71,860
         2002                                                          48,347
         2003                                                          10,656
                                                                   ----------
                     Total minimum lease payments                      30,863

         Less amount representing interest                             24,893
                                                                   ----------

                     Present value of net minimum
                         lease payments                               105,970

         Less current portion                                          55,398
                                                                   ----------

                     Obligations under capital leases,
                         excluding current portion                 $   50,572
                                                                   ==========

The discount rates on these leases vary from 12% to 18%.

11.   Obligations Under Operating Leases

The  Company is  obligated  under a 10-year  net-lease,  which began in February
1994, for its manufacturing facility located in Boonton, New Jersey. The Company
has two 10-year  renewal  options as well as an option to purchase the facility.
In addition,  the Company leases  laboratory and office  equipment under various
operating  leases  expiring in 2001 through 2003.  Total future minimum  rentals
under  these  noncancelable  operating  leases as of  December  31,  2000 are as
follows:

              2001                        $222,584
              2002                         207,936
              2003                         189,764
              2004                          15,444
                                         ---------
                                          $635,728

Total rent expense was approximately  $259,000,  $243,000 and $209,000 for 2000,
1999 and 1998, respectively.

12.   Stockholders' Equity

In 1996,  the  placement  agent,  in  connection  with the  issuance  of the 10%
Debentures,  received a five-year  warrant to purchase  454,000 shares of Common
Stock at an  exercise  price of $2.10  per  share as  partial  compensation  for
services  rendered.  Through December 31, 2000, an aggregate of 322,000 of these
warrants have been exercised and 132,000 remain unexercised.

In October 1996, the Company completed a private placement of 4,218,804 Units at
a price of $1.75 per Unit. Each Unit consisted of (i) one share of Common Stock,
(ii)  one  quarter  of a Class C  Warrant,  (each  whole  Class  C  Warrant  was
exercisable  to purchase  one share of Common  Stock) and (iii) one quarter of a
Class D Warrant  (each  whole Class D Warrant was  exercisable  to purchase  one
share of Common  Stock).  The Class C Warrants and the Class D Warrants each had
an exercise price of $3.00 and expired  unexercised on October 11, 1999. The fee
paid to the  placement  agent  in the  transaction  consisted  of an  additional
296,935 Units in lieu of cash compensation. The net proceeds to the Company were
approximately $7 million.

In October 1994, the Company  entered into an agreement with a consultant  whose
compensation for its services included the issuance of warrants,  exercisable at
$3.00 per share,  for the purchase of 1,000,000  shares of Common  Stock.  These
warrants expired unexercised in October 1998. During 1996, another  consultant's
compensation  included  warrants to purchase a total of 400,000 shares of Common
Stock at exercise  prices ranging from $1.63 to $3.50 per share.  These warrants
expire in April 2001.

                                      F-14



In connection with the services rendered by various consultants during 1997, the
Company  issued an aggregate of 75,000 stock  purchase  warrants,  expiring from
1999 to 2002,  exercisable at prices ranging from $2.25 to $3.41 per share,  and
10,000  shares of Common  Stock.  Compensation  expense  recognized in 1997 as a
result of these  transactions  was  approximately  $131,000.  During  1998,  the
Company issued  warrants to purchase  5,000 shares of Common Stock,  expiring in
2003, to a consultant.  These warrants are  exercisable  at $2.38,  resulting in
1998  compensation  expense of  approximately  $7,000.  During 2000, the Company
issued warrants to purchase 150,000 shares of Common Stock, expiring in 2005, to
its investment  banker.  These warrants are exercisable at $2.66 and resulted in
2000 compensation expense of $220,000. The Company's investment bankers received
an additional  warrant to purchase 373,002 shares of Common Stock at an exercise
price of $1.126 per share, expiring in 2005, for arranging the Fusion financing.
During 2000, the Company issued to various  consultants 850,536 shares of Common
Stock upon the  exercise of warrants at exercise  prices  ranging  from $1.38 to
$2.43 per share. In addition,  the Company issued to various consultants 263,360
shares of Common  Stock upon the  cashless  exercise of an  aggregate of 475,623
warrants at exercise prices ranging from $.46 to $2 per share.

During  1998,  an  aggregate  of $681,000  in  principal  amount of  convertible
debentures,  plus $44,000 of accrued interest,  was converted into approximately
663,000  shares of Common  Stock.  During 1999,  an aggregate of  $2,000,000  in
principal amount of convertible  debentures,  plus $191,000 of accrued interest,
was converted into approximately 3,703,000 shares of Common Stock. See Note 6.

In August 1998,  an aggregate of $225,000 in principal  amount of notes  payable
from  stockholders  was  converted  into  163,635  shares of  Common  Stock at a
conversion  price of $1.375 per share;  such  conversion was at a price slightly
higher than the then market price of the Common Stock.

As of  December  31,  2000,  there are  warrants  outstanding,  all of which are
currently  exercisable,  to purchase an  aggregate  of 989,000  shares of Common
Stock at exercise prices ranging from $1.13 to $3.50 per share,  with a weighted
average exercise price of $2.11.

13.   Stock Option Plans

During  1994,  the  Company's  stockholders  approved  the  adoption of the 1994
Employee Stock Option Plan (the "1994 Plan").  All employees of the Company were
eligible to  participate  in the 1994 Plan,  including  executive  officers  and
directors who are employees of the Company.  The 1994 Plan terminated on June 6,
2000;  however,  1,729,965 options previously granted continue to be outstanding
and exercisable under that plan as of December 31, 2000.

At the Company's 1999 Annual Meeting, the stockholders  approved the adoption of
a 1999  Directors  Stock  Option Plan (the "1999  Plan") under which each person
elected to the Board after June 23, 1999 who is not an employee will receive, on
the date of his initial election,  an option to purchase 21,000 shares of Common
Stock.  In  addition,  on May 1st of each year,  commencing  May 1,  1999,  each
non-employee director will receive an option to purchase 10,000 shares of Common
Stock if he or she has served as a non-employee director for at least six months
prior to the May 1st grant.  Each option granted under the 1999 Plan will have a
ten-year term and the exercise  price of each option will be equal to the market
price of the Company's Common Stock on the date of the grant. A total of 350,000
shares of Common Stock are reserved for issuance under the 1999 Plan.

In  November  1999,  the Board of  Directors  approved,  subject to  stockholder
approval,  the  adoption of a new Stock Option Plan (the "2000 Plan") to replace
the 1994 Plan. All employees (including directors who are employees), as well as
certain consultants,  are eligible to receive option grants under the 2000 Plan.
Options  granted under the 2000 Plan have a ten-year term and an exercise  price
equal to the market price of the Common Stock on the date of the grant.  A total
of 4,000,000  shares of Common  Stock are  reserved for issuance  under the 2000
Plan.

In November  1999,  the Board  granted  under the 2000 Plan, to employees of the
Company,  stock  options to purchase an  aggregate  of 482,000  shares (of which
14,650 shares were subsequently  cancelled) of Common Stock at an exercise price
of $0.63 per share,  the market  price on the date of grant.  Each of the grants
was made subject to stockholder approval of the 2000 Plan. At the Company's June
6, 2000 Annual Meeting,  the stockholders  approved the 2000 Plan. In accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees",  the measurement  date for valuing the stock options for the purpose
of  determining  compensation  expense was June 6, 2000, the date of stockholder
approval.  The  market  price of the  Common  Stock on this date was  $2.093 per
share.  Therefore,  an  aggregate  of $683,733  will be charged to  compensation
expense over the vesting periods of the options, which vest in approximately 50%

                                      F-15



increments  on November 5, 2000 and  November  5, 2001.  The Company  recognized
$398,785  as  compensation  expense in 2000,  leaving a balance of  $284,948  as
deferred stock option compensation at December 31, 2000.

The following summarizes activity for options granted to directors and employees
under the 1994, 1999 and 2000 Plans:



                                                    Options          Weighted       Weighted
                                                  Exercisable        Average        Average
                                                   At End of        Grant-date      Exercise
                                    Options           Year          Fair Value       Price
                                   ---------      -----------     --------------   ----------
                                                                       
Outstanding January 1, 1998        1,316,465       1,023,090
                                                   =========

     Granted                         610,750                         $  1.50         $ 1.99
     Cancelled                      (91,600)                            --             2.85
     Exercised                       (40,500)                           --             1.18
                                   ---------
Outstanding December 31,1998       1,795,115        1,382,615
                                                    =========

     Granted                         438,000                         $  0.55         $ 0.70
     Cancelled                      (187,250)                           --             2.17
     Exercised                        --                                --             --
                                   ---------
Outstanding December 31, 1999      2,045,865        1,639,615
                                                    =========

     Granted                         571,500                         $  1.96         $ 0.87
     Cancelled                       (64,650)                           --             1.78
     Exercised                      (245,600)                           --             1.28
                                   ---------                         =======         ======
Outstanding December 31, 2000      2,307,115        1,968,540
                                   =========        =========


A summary of options  outstanding  and  exercisable  as of  December  31,  2000,
follows:



                                     Options Outstanding                             Options Exercisable
                  ------------------------------------------------------       ----------------------------------
                                      Weighted Ave.
  Range of          Number              Remaining          Weighted Ave.         Number             Weighted Ave.
Exercise Price    Outstanding         Life  (years)       Exercise Price       Exercisable         Exercise Price
- --------------    -----------         -------------       --------------       ------------        --------------
                                                                                        
$  .50-.98          773,250               9.0                  $  .65             514,925              $  .65
  1.00-1.97         858,365               6.6                    1.81             812,115                1.83
  2.16-4.69         675,500               5.8                    2.81             641,500                2.80
                  ---------                                                     ---------
                  2,307,115                                      1.71           1,968,540                1.84
                  =========                                      ====           =========                ====


As of December 31, 2000, options to purchase 310,000 shares and 3,463,850 shares
of Common Stock were available for grant under the 1999 and 2000 Plans.

The Company  accounts for options  granted to employees and directors  under APB
Opinion No. 25. Had  compensation  cost for  options  granted to  employees  and
directors been determined  consistent with SFAS No. 123, the Company's pro forma
net loss and pro forma  net loss per share  would  have  been as  follows  as of
December 31:




                                                2000             1999              1998
                                            -------------    -------------     ------------
                                                                        
Net loss:
   As reported                              $(12,469,405)      (1,577,340)       (6,881,012)
   Pro forma                                 (12,644,405)      (2,182,340)       (7,796,012)
                                            =============    =============     ============
Basic and diluted net loss per share:
   As reported                              $      (0.28)           (0.04)            (0.18)
   Pro forma                                       (0.29)           (0.05)            (0.20)
                                            =============    =============     ============


                                      F-16



The fair value of the stock options  granted in 2000, 1999 and 1998 is estimated
at grant date using the  Black-Scholes  option-pricing  model with the following
weighted average assumptions: dividend yields of 0%; expected volatility of 103%
in 2000, 74% in 1999 and 63% in 1998; a risk-free interest rate of 4.7% in 2000,
6.4% in 1999 and 4.8% in 1998; and expected lives of 5 years in 2000 and 6 years
in 1999 and 1998.

During  1995,  the Company  granted to a consultant  options to purchase  10,000
shares of the Company's Common Stock, expiring in 2000, immediately  exercisable
at $1.44 per share.  These options were exercised in a cashless  exercise during
2000, resulting in the issuance of 4,175 shares of Common Stock.

14.   Income Taxes

As of  December  31,  2000,  the Company had  available  for federal  income tax
reporting purposes net operating loss carryforwards in the approximate amount of
$68,000,000,  expiring  from 2001 through  2020,  which are  available to reduce
future  earnings which would  otherwise be subject to federal  income taxes.  In
addition,  the Company has research and  development  credits in the approximate
amount of $2,500,000, which are available to reduce the amount of future federal
income taxes.  These credits  expire from 2001 through 2020. The Company has New
Jersey operating loss  carryforwards  in the approximate  amount of $23,300,000,
expiring from 2003 through 2007,  which are available to reduce future earnings,
which would  otherwise  be subject to state income tax. As of December 31, 2000,
approximately  $11,400,000  of these New  Jersey  loss  carryforwards  have been
approved for future sale under a program of the New Jersey Economic  Development
Authority (the "NJEDA").  In order to realize these  benefits,  the Company must
apply to the NJEDA each year and must meet various  requirements  for continuing
eligibility. In addition, the program must continue to be funded by the State of
New Jersey,  and there are limitations  based on the level of  participation  by
other  companies.  As a result,  future tax benefits  will be  recognized in the
financial  statements as specific sales are approved.  In the fourth quarters of
2000 and 1999, the Company realized $1,065,000 and $1,553,000,  respectively, of
tax benefits  arising from the sale of a portion of the Company's New Jersey net
operating  loss  carryforwards  that  had  previously  been  subject  to a  full
valuation allowance.

Given the  Company's  past  history of  incurring  operating  losses,  any gross
deferred  tax assets  that are  recognizable  under SFAS No. 109 have been fully
reserved.  As of December 31, 2000 and 1999,  the Company had gross deferred tax
assets of approximately  $29,000,000 and $26,000,000,  respectively,  subject to
valuation  allowances of $29,000,000 and  $26,000,000,  respectively.  The gross
deferred tax assets were  generated  primarily as a result of the  Company's net
operating  losses  and tax  credits.  The  Company's  ability  to use  such  net
operating  losses may be limited by change in control  provisions under Internal
Revenue Code Section 382.

15.   Employee Benefit Plan

The Company  maintains  a deferred  compensation  plan  covering  all  full-time
employees. The plan allows participants to defer a portion of their compensation
on a pre-tax basis  pursuant to Section  401(k) of the Internal  Revenue Code of
1986, as amended,  up to an annual maximum for each employee set by the Internal
Revenue Service. The Company's  discretionary  matching contribution expense for
2000,   1999  and  1998  was   approximately   $48,000,   $44,000  and  $43,000,
respectively.

16.    Research and Licensing Revenue

In July 1997,  the Company  entered into an agreement  under which it granted to
the Parke-Davis  division of  Warner-Lambert  Company a worldwide license to use
the Company's oral Calcitonin  technology.  In June 2000,  Pfizer Inc.  acquired
Warner-Lambert.  During  1997,  the  Company  received  $3 million for an equity
investment and $3 million for a licensing fee (see Note 2).  Several  milestones
were  achieved  during 1998,  resulting in milestone  revenue of $5 million.  In
1999, two pilot human studies for the Company's oral calcitonin formulation were
successfully concluded, resulting in milestone revenue totaling $5 million. Also
in 1999, the Company and Pfizer identified an oral calcitonin  formulation to be
used in the Phase I/II clinical study entitling the Company to milestone revenue
of an  additional  $4.5  million.  During 2000,  two  milestones  were  achieved
resulting in milestone revenue of $2 million.  Patient dosing for this study was
completed  in  December  2000.  Pfizer  analyzed  the  results of this study and
terminated the agreement in March 2001 citing scientific and technical reasons.

17.    Liquidity

The Company has incurred annual  operating  losses since its inception and, as a
result,  at  December  31,  2000 has an  accumulated  deficit  of  approximately
$75,378,000 and has a working capital  deficiency of approximately  $13,267,000.

                                      F-17



These factors raise substantial doubt about the Company's ability to continue as
a going concern. However, 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.   The  Company's  cash   requirements  are
approximately  $10 to 11 million  per year to operate its  research  and peptide
manufacturing facilities and develop its three Calcitonin products. In addition,
the Company has principal and interest  obligations  under its outstanding notes
payable  to  stockholders  and 5%  Convertible  Debentures  and its  obligations
relating to its current and former joint  ventures in China.  The Company's cash
requirements  related  to the 5%  Debentures  include  the  redemption  premium,
delisting  penalties  and  the  increased  interest  rate  described  in Note 6.
Management  is  actively  seeking   licensing  and/or  supply   agreements  with
pharmaceutical  companies for oral,  nasal and injectable forms of Calcitonin as
well as for other  oral  peptides.  With the  recent  termination  of our Pfizer
collaboration, we currently have no licenses for any of our products in the U.S.
We do not have sufficient financial resources to continue to fund our operations
at the current  level.  We had an operating  cash flow deficit of  $4,864,000 in
1998,  an  operating  cash flow deficit of  $1,400,000  in 1999 and for the year
ended  December 31,  2000,  an operating  cash flow deficit of  $3,382,000.  The
agreement  that we have  entered  into with Fusion  could  provide  Unigene with
funding beginning in the first half of 2001. See Note 7.

Under the  agreement  with Fusion,  after a  registration  statement is declared
effective by the SEC for the resale of the shares of Unigene  common stock to be
sold to Fusion,  Fusion will be required to purchase, at the then current market
price,  shares of Unigene  common stock at the rate of $875,000 per month over a
period of 24 months, provided that Unigene continues to satisfy the requirements
that  are a  condition  to  Fusion's  obligation.  The  Board of  Directors  has
authorized the sale to Fusion of up to 6,000,000 shares of Unigene common stock.
We anticipate that, in order to sell significantly in excess of 6,000,000 shares
to Fusion, it may be necessary to obtain stockholder approval of an amendment to
our  Certificate  of  Incorporation  to increase the number of shares of Unigene
common stock that we are authorized to issue. However, we cannot predict when or
if  the  SEC  will  declare  the  registration   statement  effective,   if  the
stockholders will approve an amendment to our Certificate of Incorporation or if
we will be able to meet the continuing requirements of the Fusion agreement.

If we do not receive any financing  from Fusion,  we will need to secure another
source of financing in order to satisfy our working capital needs,  which may be
unavailable  or the cost of which may be  prohibitively  expensive.  Should such
financing be unavailable or  prohibitively  expensive,  it will be necessary for
Unigene to curtail  significantly its operations or consider alternative uses of
its technology and manufacturing  capability  including the supply of Calcitonin
to other companies. Assuming we are able to raise additional capital through our
agreement with Fusion,  we still anticipate that we may need additional  capital
to implement  fully our business  plans.  We believe that satisfying our capital
requirements over the long term will require the successful commercialization of
our  Calcitonin  product or  another  peptide  product in the United  States and
abroad.  However,  it is uncertain  whether or not any of our  products  will be
approved or will be commercially  successful.  The commercialization of our oral
Calcitonin  product may require us to incur additional  capital  expenditures to
expand  or  upgrade  our  manufacturing  operations  to  satisfy  future  supply
obligations.  However, we cannot determine either the cost or the timing of such
capital expenditures at this time.

18.      Legal Matters

In addition to the arbitration proceedings discussed in Note 6, Reseau de Voyage
Sterling,  Inc.  (Reseau)  filed suit against the Company in July 2000.  Reseau,
which  purchased  from a third party a warrant to purchase one million shares of
Unigene common stock,  alleges that the Company  breached a verbal  agreement to
extend the term of the warrant  beyond its  expiration  date.  Reseau is seeking
damages of $2 million.  We believe that the suit is completely without merit and
we intend to vigorously contest the claim.

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