FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the Fiscal Year Ended December 31, 1998 Commission file number 0-16005

Unigene Laboratories, Inc.
(Exact name of registrant as specified in its charter)

Delaware 22-2328609
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

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

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class
Common Stock, $.01 Par Value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within 60 days prior
to the date of filing. Aggregate market value as of March 2, 1999: $37,529,448.

APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's classes of
Common Stock, as of the latest practicable date. Common Stock, $.01 Par
Value--39,621,018 shares as of March 2, 1999.

DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) any annual report
to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.

NONE.

PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the items captioned "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Form 10-K constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Art of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or activities of
the Company, or industry results, to be materially different from any future
results, performance or activities expressed or implied by such forward-looking
statements. Such factors include: general economic and business conditions, the
financial condition of the Company, competition, the Company's dependence on
other companies to commercialize, manufacture and sell products using the
Company's technologies, the uncertainty of results of preclinical and clinical
testing, the risk of product liability and liability for human clinical trials,
the Company's 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 of the Company's
products and other factors discussed in this Form 10-K.

Item 1. Business.

Background

Unigene Laboratories, Inc. ("Unigene" or "Company"), was incorporated under the
laws of the State of Delaware in 1980. The Company is a biopharmaceutical
company that is focusing on the development of Calcitonin products for the
treatment of osteoporosis and other indications. The Company is currently
producing pharmaceutical grade Calcitonin in accordance with current Good
Manufacturing Practice ("cGMP") guidelines, developing production technology
improvements, and testing novel Calcitonin formulations. In January 1999, the
Company received its first product approval for its injectable Calcitonin
product (having the tradename FORCALTONIN(TM)) for the treatment of Paget's
disease and hypercalcemia. This approval covers the 15 member states of the
European Union. The Company has several licensing and distribution agreements in
place, and is seeking additional agreements to market and distribute this
product in selected territories.

One of the principal scientific accomplishments of the Company was its success
in combining its proprietary amidation process with bacterial recombinant DNA
technology to develop a peptide hormone production process. The Company believes
that its proprietary amidation process will be a key step in the more efficient
and economical commercial production of certain peptide hormones with diverse
therapeutic applications. Many of these hormones cannot be produced at a
reasonable cost in sufficient quantities for clinical testing or commercial use
by currently available production processes. Using its proprietary process, the
Company has produced laboratory-scale quantities of seven such peptide hormones:
human Calcitonin, salmon Calcitonin, human Growth Hormone Releasing Factor,
human Calcitonin Gene-Related Peptide, human Corticotropin Releasing Factor,
human Amylin and a human Magainin. During 1991, a study commissioned by the
Company was prepared by a professor of chemical engineering at the Massachusetts
Institute of Technology. The study evaluated the economics for producing
Calcitonin and indicated that the Company's process for producing Calcitonin
should significantly reduce the cost and time required for commercial production
of multi-kilogram quantities as compared to current methods of production.

The Company also has developed a proprietary oral delivery technology which has
successfully delivered Calcitonin into the blood stream of human subjects. It is
the subject of international patent applications and a U.S. counterpart of one
such application received a Notice of Allowance in 1998. The formulation has
been shown in repeated clinical studies to regularly deliver measurable
quantities of the hormone into the bloodstream. The Company believes that such a
formulation may expedite the regulatory approval process for an oral Calcitonin
product because it should be easier to establish its performance efficacy as
compared to a formulation that does not produce measurable Calcitonin blood
levels. The Company believes that the components of the proprietary oral
formulation can enable the delivery of other peptides in addition to Calcitonin
and it has initiated studies to investigate such possibilities.

Business Strategy

The Company's business strategy is to develop proprietary products and processes
with applications in human health care in order to generate revenues from
license fees, royalties on third party sales and/or direct sales of bulk or
finished products. Generally, the Company seeks sponsors and licensees to
provide research funding and assume responsibility for obtaining appropriate
regulatory approvals, clinical testing, and marketing of products derived from
the Company's research activities, and in this regard the Company is dependent
on large pharmaceutical companies, having much greater resources than the
Company. However, in certain cases, the Company may retain responsibility for
clinical testing and for obtaining the required regulatory approvals. To date,
the Company has focused its efforts primarily on the manufacture of, and the
development of novel delivery systems for, salmon Calcitonin.

Warner-Lambert License Agreement

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. Upon execution of the agreement, the
Company received $6 million in payments from Warner-Lambert, consisting of a $3
million licensing fee and a $3 million equity investment by Warner-Lambert
(695,066 shares of the Company's Common Stock were purchased at a price of
approximately $4.32 per share). Under the terms of the license agreement, the
Company is eligible to receive up to $48.5 million in additional milestone
payments during the course of the development program if specified milestones
are achieved. Several milestones were achieved during 1998, resulting in
payments to the Company totaling $5 million. The Company also received a $2.5
milestone payment in February 1999. An additional $8 million would be received
if other milestones are achieved prior to the commencement of Phase I clinical
studies in the U.S., scheduled for later this year. If the product is
successfully commercialized, the Company also would receive revenue from the
sale of raw material to Warner-Lambert and royalties on product sales by
Warner-Lambert and its affiliates.

The Company has retained the right to license the use of its technologies for
injectable and nasal formulations of Calcitonin on a worldwide basis and has
licensed distributors in the U.K. and Ireland and in Israel. The Company is
actively seeking other licensing and/or supply agreements with pharmaceutical
companies for injectable and nasal forms of Calcitonin. However, there is no
assurance that any additional revenue-generating agreements will be signed.

Production Facility

The Company has been producing salmon Calcitonin since 1992. The Company has
constructed a cGMP facility for the production of pharmaceutical-grade
Calcitonin at leased premises located in Boonton, New Jersey. The facility began
producing salmon Calcitonin under cGMP guidelines in 1996. The facility also
produces Unigene's proprietary amidating enzyme for use in producing Calcitonin.
The current production level of the facility is between 0.5-1.0 kilogram of bulk
Calcitonin per year.

The design of the facility is intended to allow for substantial increases in
Calcitonin production utilizing the existing equipment. In March 1997, the
Company announced that an improvement to its proprietary production process had
been developed that can boost the Company's annual production of Calcitonin by
at least fourfold. However, if an oral Calcitonin product is successfully
commercialized, the Company will be required to incur additional expenditures to
expand or upgrade its manufacturing operations to satisfy its supply obligations
under the Warner-Lambert license agreement. Although the facility will initially
be exclusively devoted to Calcitonin production, it would be suitable for
producing other peptide hormone products in the future.

The Company is following conventional procedures to secure the approval of the
facility by regulatory agencies that will allow the Company to manufacture its
Calcitonin for human use. Although the facility was inspected by European health
authorities pursuant to the filing of its injectable Calcitonin dossier and
found to be in compliance with cGMP guidelines, there can be no assurance that
its operations will remain in compliance or that approval by other agencies will
be obtained. In addition, there is no assurance that the facility production
goals will be achieved, that there will be a market for the Company's products,
or that such production will be profitable to the Company.

Government Regulation

The laboratory research, development and production activities of the Company
and its sponsors, collaborators and licensees, and the processes and products
which may be developed by them and the Company's production facility, are
subject to significant regulation by numerous federal, state, local and foreign
governmental authorities. The commercial sale of a pharmaceutical product in the
United States requires the approval of the FDA and overseas by similar
regulatory agencies. This requires various animal and human studies. The Company
or its licensees then must prepare the required documentation and must apply to
the appropriate regulatory agencies for approval of the product for human use.

The regulatory approval process for a pharmaceutical product requires
substantial resources and may take a number of years. There can be no assurance
that additional regulatory approvals will be obtained for the production
facility or for any of the Company's products or that such approvals will be
obtained in a timely manner. The inability to obtain, or delays in obtaining,
such approvals would adversely affect the Company's ability to continue to fund
its programs, produce marketable products, or receive revenue from milestone
payments, product sales or royalties. Furthermore, the extent of any adverse
governmental regulation that may arise from future legislative and
administrative action cannot be predicted.

The Company's production facility may, from time to time, be audited by the FDA
or other regulatory agencies to ensure that it is operating in compliance with
cGMP guidelines. These guidelines require that production operations be
conducted in strict compliance with, among other things, the Company's written
protocols for reagent qualification, process execution, data recording,
instrument calibration and quality monitoring. Such agencies are empowered to
suspend production operations and/or product sales if, in their opinion,
significant and/or repeated deviations from these protocols have occurred. Such
a suspension could have a material adverse impact on the Company's future
operations.

European Approval of FORCALTONIN(TM)

During 1996, the Company received authorization to proceed with pivotal clinical
trials in the United States and the United Kingdom for its injectable form of
Calcitonin (having the tradename FORCALTONIN(TM)). Both the U.S. and U.K.
authorities authorized an abbreviated clinical program consisting of
bioequivalence and safety studies. These trials were completed in early 1997 and
demonstrated that the injectable product was bioequivalent to an injectable
salmon Calcitonin product currently on the market.

In August 1997, the Company's registration dossier for injectable FORCALTONIN
was formally submitted to the European Union health authorities for approval
under a procedure by which product approval can be obtained simultaneously in
all 15-member nations of the European Union. This was the Company's first
product registration filing. In September 1998, the European Committee for
Proprietary Medicinal Products ("CPMP") adopted a unanimous Positive Opinion on
the Company's injectable Calcitonin product, stating that it was approvable for
the indications of Paget's disease and hypercalcemia associated with malignancy.
In January 1999, the Company received approval from the CPMP to market its
injectable Calcitonin product in all 15 member states of the European Union for
these two indications. The Company expects to market this product in Europe in
1999 in the U.K., Ireland, and possibly other countries. The Company expects to
shortly file a supplementary submission, called a Type II Variation, in order to
expand the approved indications to include the treatment of osteoporosis.
However, there can be no assurance that the Type II Variation will be approved.

The clinical trials conducted to support the European filing of the injectable
Calcitonin product will also be used to support a New Drug Application ("NDA")
for injectable Calcitonin with the U.S. Food & Drug Administration ("FDA"). The
Company currently plans to file this application in 1999. The Company believes
that its abbreviated clinical program will be sufficient to satisfy approval
requirements in the United States and elsewhere. Accordingly, the Company
believes that the review process for its injectable Calcitonin product in such
countries may be shorter than that typically associated with a new drug
submission because (i) the active ingredient is structually identical to and
biologically indistinguishable from the active ingredient in products already
approved by many regulatory agencies, (ii) the formulation is essentially
similar to the formulations used in already approved products and (iii) the
clinical trial program that was authorized was relatively brief and involved
small numbers of subjects, so 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. In addition, the approved European dossier can be
readily cited by regulatory authorities in many non-European nations, which
could significantly reduce the registration requirements for injectable
Calcitonin in such countries, thereby accelerating product launch. However,
there can be no assurance that other necessary governmental approvals will be
obtained, or that they will be obtained on an expedited basis.

Oral Calcitonin

Expanded consumer acceptance of Calcitonin pharmaceutical products will depend
on the development of a consumer-accepted delivery system. A major
pharmaceutical company received FDA approval in 1995 for the marketing of a
nasal spray delivery system for Calcitonin, which has substantially enlarged the
U.S. market for Calcitonin. The Company, in collaboration with Warner-Lambert,
and other companies are conducting research on oral delivery systems for
Calcitonin. There can be no assurance that the Company will develop a suitable
oral delivery system or that governmental approval of such delivery system will
be obtained. There also can be no assurance that others have not or will not
develop oral or other delivery systems that have advantages over the Company's
technologies.

In December 1995 and January 1996, the Company successfully tested a proprietary
Calcitonin oral formulation in two separate pilot human studies in the United
Kingdom. These studies indicated that the majority of those who received the
oral Calcitonin showed levels of the hormone in blood samples taken during the
trial which were greater than the minimum levels generally regarded as being
required for maximum therapeutic benefit. The Company believes that these were
the first studies to demonstrate that significant blood levels of Calcitonin
could be observed in humans following oral administration of the hormone. In
April 1996, the Company successfully conducted a third pilot human study in the
United Kingdom which utilized lower Calcitonin dosages than in the prior two
clinical trials. The results of this trial indicated that every test subject
showed levels of the hormone in their blood samples that exceeded the minimum
levels generally regarded as required for maximum therapeutic benefit. However,
there can be no assurance that these results will be replicated in further
studies.

The Company has filed patent applications for its oral formulation in the U.S.
and in many foreign countries. In August 1998, the Company received a Notice of
Allowance from the U.S. Patent & Trademark Office for its fundamental patent
application covering the oral delivery of salmon Calcitonin for the treatment of
osteoporosis. Under the terms of the agreement with Warner-Lambert Company,
Warner-Lambert has assumed responsibility for conducting the clinical trials and
for obtaining regulatory approval of the product from the FDA and other
regulatory agencies. There can be no assurance that any of the pending patent
applications will be approved, that Warner-Lambert will be successful in
obtaining regulatory approval of an oral Calcitonin product or that
Warner-Lambert and the Company will be successful in developing, producing or
marketing an oral Calcitonin product.

Collaborative Research Programs

The Company is currently engaged in two collaborative research programs. One,
with Rutgers University College of Pharmacy, continues to study oral drug
delivery technology for Calcitonin while exploring modifications which may have
applications for delivering other peptides. The second collaboration, performed
in conjunction with Yale University, is investigating novel applications for
certain amidated peptide hormones, including Calcitonin gene-related peptide
("CGRP"). In 1996, the Company reported that CGRP accelerated bone growth and
prevented bone loss in an animal model system. However, there can be no
assurance that CGRP will have the same effect in humans, or that the Company
would be able to develop, manufacture or market such a product.

Risks of International Operations

The Company's potential major customers, partners and licensees include foreign
companies or companies with significant international business. The business
operations of such companies and their ability to pay license fees, royalties
and other amounts due and otherwise perform their obligations under any
agreements they may enter into with the Company may be subject to regulation or
approval by foreign governments. There can be no assurance that required
approvals will be received. The failure to receive required approvals,
governmental regulation and other risks, including political and foreign
currency risks, could affect the ability of the Company to earn or receive
payments pursuant to such agreements and, in such event, may have a material
adverse effect on the Company's future operations.

Competition

The Company's primary business activity to date has been biotechnology research
and development. Biotechnology research is highly competitive, particularly in
the field of human health care. The Company competes 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 than can
the Company.

In 1999, the Company will manufacture cGMP Calcitonin for use in finished
pharmaceutical products. In the development, manufacture and sale of amidated
peptide hormone products, the Company and its licensees will be competing with
contract laboratories and major pharmaceutical companies, many of which can
devote considerably greater financial resources to these activities. Major
competitors in the field of osteoporosis include Novartis, American Home
Products, Merck and Eli Lilly. However, the Company believes that the unique
safety and efficacy characteristics of Calcitonin combined with the Company's
patented hormone manufacturing process, in conjunction with its proprietary oral
delivery technology, will enable it to compete with products marketed by these
companies.

The Company believes that success in competing with others in the biotechnology
industry will be based primarily upon scientific expertise and technological
superiority, the ability to identify and pursue scientifically feasible and
commercially viable opportunities and to obtain proprietary protection for
research achievements, the availability of adequate funding and success in
developing, testing, protecting, producing and marketing products and obtaining
timely regulatory approval. There can be no assurance that others will not
develop processes or products which are superior to, or otherwise preclude the
commercial utilization of, processes or products developed by the Company.

Human Resources

On March 1, 1999, the Company had 72 full-time employees, of whom 24 were
engaged in research, development and regulatory activities, 38 were engaged in
production activities and 10 were engaged in general and administrative
functions. Ten of the Company's employees hold Ph.D. degrees. The Company's
employees have expertise 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 the Company's employees is covered by a collective
bargaining agreement.

Research and Development

The Company has 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 86% of the
Company's employees are directly engaged in activities relating to production
of, regulatory compliance for, and the research and development of
pharmaceutical products. During the years ended December 31, 1998, 1997 and
1996, approximately $9,042,000, $9,416,000 and $8,298,000, respectively, were
spent on these activities.

Patents and Proprietary Technology

The Company has filed applications for U.S. patents relating to proprietary
amidation, bacterial expression and immunization processes and to oral
formulations for Calcitonin and other peptide hormones invented in the course of
its research. To date, the following three U.S. patents have issued:
Immunization By Immunogenic Implant, a process patent, and two patents related
to the Alpha-Amidation Enzyme, both process and product patents. In addition,
the Company has received a Notice of Allowance for its patent application
covering the oral delivery of salmon Calcitonin. Other applications are pending.
Filings relating to the amidation process have also been made in selected
foreign countries and numerous such foreign patents have issued. There can be no
assurance that any of the Company's pending applications will issue as patents
or that the Company's issued patents will provide the Company with significant
competitive advantages. Furthermore, there can be no assurance that competitors
will not independently develop or obtain similar or superior technologies.

Although the Company believes its patents and patent applications are valid, the
invalidation of its Alpha-Amidation Enzyme patent or the rejection of its
fundamental patent application covering the oral delivery of Salmon Calcitonin,
for which a notice of allowance has been received, could have a material adverse
effect upon the Company's business. Although one patent application continues to
be the subject of an interference proceeding, the Company does not believe that
an adverse ruling would have a material adverse effect on the business of the
Company or its prospects. Difficulties in detecting and proving infringement are
generally greater with process patents than with product patents. In addition,
the value of a process patent may be reduced if the products that can be
produced using such process have been patented by others. Under such
circumstances, the cooperation of these patent holders or their sublicensees
would be needed for the commercialization by the Company of the aforementioned
patented products in countries where these companies hold valid patents.

In some cases, the Company relies on trade secrets to protect its inventions. It
is the policy of the Company to include in all research contracts, joint
development agreements and consulting relationships that provide access to the
Company's trade secrets and other know-how confidentiality obligations binding
on the parties involved. However, there can be no assurance that these secrecy
obligations will not be breached to the detriment of the Company. To the extent
sponsors, consultants or other third parties apply technological information
independently developed by them or by others to Company projects, disputes may
arise as to the proprietary rights to such information which may not be resolved
in favor of the Company.

Product Liability

Product liability claims relating to the Company's technology or products may be
asserted against the Company. There can be no assurance that the Company would
have sufficient resources to defend against or satisfy any such claims. Although
the Company has obtained product liability insurance coverage in the amount of
$2 million, product liability or other judgments against the Company in excess
of insurance limits could have a material adverse effect upon the Company's
business and financial condition.

Executive Officers of the Registrant

Served in Such
Position or Office
Name Age Continually Since Position (1)
---- --- ----------------- ------------

Dr. Warren P. Levy (2)(3) 47 1980 President (Chief
Executive Officer)

Dr. Ronald S. Levy (2)(4) 50 1980 Vice President
and Secretary

Jay Levy (2)(5) 75 1980 Treasurer

NOTES:

(1) Each executive officer's term of office is until the first meeting of
the Board of Directors of Unigene following the annual meeting of
stockholders and until the election and qualification of his
successor. Officers serve at the discretion of the Board of
Directors.

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

(3) Dr. Warren P. Levy, a founder of the Company, has served as
President, Chief Executive Officer and Director of the Company since
its 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.

(4) Dr. Ronald S. Levy, a founder of the Company, has served as Vice
President and Director of the Company since its formation in November
1980, and as Secretary since May 1986. Dr. Levy holds a Ph.D. in
bioinorganic chemistry from Pennsylvania State University and a
bachelor's degree in chemistry from Rutgers University.

(5) Mr. Jay Levy, a founder of the Company, has served as Chairman of the
Board of Directors and Treasurer of the Company on a part-time basis
since its formation in November 1980. He also served as Secretary
from 1980 to May 1986. Mr. Levy devotes approximately 15% of his time
to the Company. From 1985 through February 1991, he served as the
principal financial advisor to 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.

Item 2. Properties

The Company owns 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.

The Company's 32,000 square foot cGMP production facility, of which 18,000
square feet are currently being used for the production of pharmaceutical-grade
Calcitonin and can be used for the production of other peptide hormones, was
constructed in a building located in Boonton, New Jersey. The Company leases the
facility under a ten-year agreement which began in February 1994. The Company
has two ten-year renewal options as well as an option to purchase the facility.

Item 3. Legal Proceedings

None.

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

No matters were submitted to a vote of security holders during
the fourth quarter of the year ended December 31, 1998.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
--------------------------------------------------------------

The Company has not declared or paid any cash dividends since inception, and
does not anticipate paying any in the near future.

The Company became a public company in 1987. As of February 16, 1999, there were
534 Common Stockholders of record. The Common Stock trades on the Nasdaq Stock
Market under the symbol UGNE. The prices below represent high and low sale
prices and are as reported to the Company by the Nasdaq Stock Market.

1998 1997
---- ----
High-Low High-Low
-------- --------

1st Quarter: $3.59-2.47 $4.69-1.91
2nd Quarter: 3.06-1.81 7.00-2.63
3rd Quarter: 2.13-0.94 5.16-3.31
4th Quarter: 1.88-1.13 4.47-2.19

Recent Sales of Unregistered Securities
- ---------------------------------------

In the fourth quarter of 1998, the Company issued 448,834 shares of Common Stock
upon the conversion of $502,694 in principal amount of the Company's 9.5%
Convertible Debentures. All of such shares were issued by the Company without
registration in reliance on an exemption under Section 3(a) (9) of the
Securities Act.

Item 6. Selected Financial Data

(In thousands, except per share data)

Years Ended December 31 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------

Licensing & other revenue ........ $ 5,050 $ 3,003 $ 308 $ 8 $ 258

Research & development
expenses ......................... 9,042 9,416 8,298 6,876 5,137

Loss before extraordinary
item ............................. (6,737) (10,128) (10,597) (9,435) (6,319)

Extraordinary item ............... (144) -- -- -- --

Net loss ......................... (6,881) (10,128) (10,597) (9,435) (6,319)

Diluted loss per share:
Loss before extraordinary item (.17) (.27) (.38) (.44) (.32)

Extraordinary item ........... (.01) -- -- -- --
-------- -------- -------- -------- --------
Net loss ..................... (.18) (.27) (.38) (.44) (.32)

At December 31

Working capital (deficiency) ..... (1,805) 310 2,954 (4,061) (1,907)

Total assets ..................... 11,564 13,692 17,169 13,332 14,211

Long-term debt ................... 3,931 1,608 2,788 3,955 --

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

RESULTS OF OPERATIONS

Revenue for 1998 consisted primarily of milestone payments totaling $5 million
from Warner-Lambert Company, under the July 1997 licensing agreement, as the
result of the achievement of various benchmarks in the development of an oral
Calcitonin product for treating osteoporosis.

Revenue for 1997 consisted primarily of a license fee of $3,000,000 from
Warner-Lambert Company, under the aforementioned agreement.

Revenue for 1996 consisted primarily of a license fee of $300,000 from the
Company's joint venture in China. It is uncertain whether or not the Company
will be able to recognize revenue from the sale of its products in China.

Research and development, the Company's largest expense, decreased 4% in 1998 to
$9,042,000 from $9,416,000 in 1997, after increasing 13% in 1997 from $8,298,000
in 1996. The 1998 decrease was primarily due to reduced regulatory filing fees
and regulatory consultant expenses as compared to 1997, as well as to the
reimbursement in 1998 of certain research expenses by Warner-Lambert Company. In
addition, 1998 expenditures were reduced for both production and laboratory
supplies, partially offset by increased personnel expenditures. The 1997
increase was primarily attributable to increased supplies and personnel
expenditures related to increased Calcitonin production and oral Calcitonin
development, as well as regulatory filing fees and payments to regulatory and
scientific consultants, due to the regulatory filing activity in Europe during
1997. Expenditures for the sponsorship of collaborative research programs were
$280,000, $465,000 and $411,000 in 1998, 1997 and 1996, respectively, which are
included as research and development expenses.

Settlement of contractual right expense was $1,669,000 in 1997. In February
1997, the Company issued an aggregate of 490,000 shares of its Common Stock to
the holders of the Company's 9.5% Senior Secured Convertible Debentures in
consideration for the cancellation of an obligation of the Company to pay to the
holders a fee equal to 2% of the sum of the market value as of December 31, 1998
of all of the Company's outstanding shares of Common Stock plus the principal
amount of all outstanding debt of the Company, less its cash on deposit, up to a
maximum fee of $3,000,000. The expense associated with this transaction was
valued at $1,669,000, based on a closing price of the Common Stock of $3.40625
on February 7, 1997.

General and administrative expenses increased 3% in 1998 to $2,068,000 from
$2,016,000 in 1997, after decreasing 5% in 1997 from $2,115,000 in 1996. The
1998 increase was primarily due to increased expenditures in 1998 for employee
health insurance and public relations, partially offset by reduced legal fees as
a result of legal fees incurred in 1997 related to the Warner-Lambert license
agreement. The 1997 decrease was primarily due to a reduction in public
relations expenses paid in 1996, which consisted in part of the issuance of
warrants as non-cash compensation in 1996.

Interest and other income decreased $96,000 or 47% in 1998 from 1997, after
decreasing $26,000 or 11% in 1997 from 1996. The 1998 decrease was due to lower
interest income resulting from reduced funds available for investment in 1998.
The 1997 decrease was due to gains on settlement of debt recognized in 1996,
partially offset by higher interest income in 1997.

Interest expense increased $551,000 or 235% in 1998 from 1997, after decreasing
$487,000 or 68% in 1997 from 1996. The 1998 increase principally was due to the
amortization of the value of the beneficial conversion feature and related
warrants of the Company's 5% convertible debentures amounting to $490,000,
partially offset by a reduction in other outstanding debt from the prior year as
a result of partial conversions into Common Stock in 1997 and 1998 of the
Company's convertible debentures and notes payable to stockholders. The 1997
decrease was due to a reduction in outstanding debt from the prior year as a
result of the partial conversion into Common Stock of convertible debentures and
notes payable to stockholders.

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 the Company's 10%
Convertible Debentures in September 1998. See Note 5 to Notes to Financial
Statements.

During 1998, revenue increased more than $2,000,000 from 1997 due to the
achievement of various milestones in the Warner-Lambert agreement. In addition,
in 1998 total operating expenses decreased almost $2,000,000 from 1997,
primarily due to the one-time settlement of a contractual right expense in 1997.
These were partially offset by a decline in interest income, an increase in
interest expense and loss on early extinguishment of debt. As a result, net loss
decreased $3,247,000 or 32% for the year ended December 31, 1998 from the prior
year.

During 1997, revenue increased $2,700,000 from 1996 due to the signing of the
licensing agreement with Warner-Lambert. This was mostly offset by an increase
in operating expenses. Research and development expenses increased due to the
Company's first product registration filing involving its injectable FORCALTONIN
product, its sponsorship of two collaborative research projects, and its
continued development work on an oral Calcitonin formulation. In addition, the
Company incurred a non-cash expense of $1,669,000 in settlement of a contractual
right. As a result, net loss decreased $469,000 for the year ended December 31,
1997 from the prior year.

As of December 31, 1998, the Company had available for income tax reporting
purposes net operating loss carryforwards in the approximate amount of
$59,900,000, expiring from 1998 through 2018, which are available to reduce
future earnings which would otherwise be subject to federal income taxes. In
addition, the Company has investment tax credits and research and development
credits in the amounts of $50,000 and $2,300,000, respectively, which are
available to reduce the amount of future federal income taxes. These credits
expire from 1998 through 2018.

The Company follows Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes". Given the Company's past history of incurring
operating losses, any deferred tax assets that are recognizable under SFAS 109
have been fully reserved. As of December 31, 1998 and 1997, under SFAS 109, the
Company had deferred tax assets of approximately $26,300,000 and $23,400,000,
respectively, subject to valuation allowances of $26,300,000 and $23,400,000,
respectively. The deferred tax assets were generated primarily as a result of
the Company's net operating losses and tax credits generated.

LIQUIDITY AND CAPITAL RESOURCES

During 1994, the Company completed construction of its peptide production
facility in Boonton, New Jersey. The facility was constructed in a shell
building that is being leased under a ten-year net lease which began in February

1994. The Company has two ten-year renewal options as well as an option to
purchase the facility. The total cost of leasehold improvements and process
equipment for this facility, including validation costs, totalled approximately
$12 million. The improvements and equipment were financed primarily from the
remainder of the $17 million of proceeds received as a result of the exercise of
the Company's Class A Warrants in 1991 and proceeds of $2.2 million from the
sale of Common Stock in 1994. There are currently no material commitments
outstanding for capital expenditures relating to either the Boonton facility or
the Company's facility in Fairfield, New Jersey.

The Company, at December 31, 1998, had cash and cash equivalents of $403,000, a
decrease of $1,724,000 from December 31, 1997.

The Company has incurred annual operating losses since its inception and, as a
result, at December 31, 1998 had an accumulated deficit of approximately
$61,331,000 and a working capital deficiency of approximately $1,805,000. The
independent auditors' report covering the Company's 1998 financial statements
includes an explanatory paragraph that states the above 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 ability to generate cash from operations will depend primarily
upon signing research or licensing agreements, achieving defined benchmarks in
such agreements, receiving regulatory approval for its licensed products, and
the commercial sale of these products.

Upon execution of the licensing agreement with Warner-Lambert in July 1997, the
Company received $6 million in payments from Warner-Lambert, consisting of a $3
million licensing fee and a $3 million equity investment by Warner-Lambert. In
addition, the Company is eligible to receive up to $48.5 million in additional
payments during the course of the development program if specified milestones
are achieved. Several milestones were achieved during 1998, resulting in
payments to the Company totaling $5 million. The Company also received a $2.5
million milestone payment in February 1999. An additional $8 million would be
received if other milestones are achieved prior to the commencement of Phase I
clinical studies in the U.S. If the product is successfully commercialized, the
Company also would receive revenue from royalties on product sales by
Warner-Lambert and its affiliates and from the sale of raw material to
Warner-Lambert. The Company has retained the right to license the use of its
technologies for injectable and nasal formulations of Calcitonin on a worldwide
basis.

on a non-cumulative basis; provided, however, that if the Market Price is
greater than or equal to 120% of the Cap Price on the last conversion date in
any month, then up to 20% of the original principal amount may be converted in
such month. If a debenture holder submits a debenture for conversion and the
Market Price is less than or equal to $1.1156, the Company may redeem the
debenture for (i) an amount equal to the principal amount thereof plus a premium
of 12% per year from the date of issuance and (ii) warrants, expiring five years
from the date of issuance, to purchase a number of shares of Common Stock equal
to 25% of the number of shares that would have been issuable upon conversion of
the Debenture at an exercise price equal to 135% of the Conversion Price at the
time of redemption. In no event will the Company issue more than an aggregate of
3,852,500 shares of Common Stock (the "Share Limit") upon conversion of all of
the 5% Debentures, upon exercise of all warrants issued upon conversion or
redemption, and as payment of interest on the 5% Debentures. If conversion of
any 5% Debentures or exercise of any warrants would require the issuance of
shares in excess of the Share Limit, the Company will, as the case may be,
redeem such debentures at a price equal to 120% of the principal amount thereof
or pay in cash the difference between the market price and exercise price of the
number of shares that would have been issuable upon exercise of such warrants
but for the Share Limit.

The Company's cash requirements have increased to approximately $10 - $11
million per year with the opening of its peptide manufacturing facility and with
three Calcitonin products in various stages of development. In addition, the
Company faces principal and interest obligations over the next several years
under its outstanding 5% Debentures and other indebtedness. However, because of
the conversion features of these debentures, a substantial portion is expected
to be converted into Common Stock, thereby decreasing the amount of cash
required for principal and interest payments. See Note 5 of Notes to Financial
Statements.

After receipt of $2.5 million from Warner-Lambert in February 1999, management
believes that the Company currently has sufficient financial resources to
sustain its operations at the current level through the first half of the second
quarter of 1999. The Company will require additional funds to ensure continued
operations beyond that time. If the various milestones in the Warner-Lambert
agreement cannot be achieved on a timely basis, the Company may need outside
financing to sustain its operations. Early-stage milestones primarily relate to
the product's performance characteristics, while the latter-stage milestones are
primarily related to regulatory filings and approvals.

In addition to the Warner-Lambert agreement, management is actively seeking
other licensing and/or supply agreements with pharmaceutical companies for
injectable and nasal forms of Calcitonin. However, there is no assurance that
any additional revenue-generating agreements will be signed. In the absence of,
or the delay in, achieving the Warner-Lambert milestones or in signing other
agreements, obtaining adequate funds from other sources, which might include a
debt or equity financing, would be necessary to sustain the Company's
operations. However, there is no assurance as to the terms on which such
additional funds would be available or that in such circumstances sufficient
funds could be obtained.

While the Company believes that the Warner-Lambert licensing transaction can
satisfy the Company's liquidity requirements this year, satisfying the Company's
long-term liquidity requirements will require the successful commercialization
of the product licensed to Warner-Lambert or one of its other Calcitonin
products. In addition, the commercialization of a Calcitonin product will
require the Company to incur additional capital expenditures, including
expenditures to expand or upgrade the Company's manufacturing operations to
satisfy its supply obligations under the Warner-Lambert license agreement.
However, neither the cost or timing of such capital expenditures are
determinable at this time.

YEAR 2000
- ---------

The Company has established a Year 2000 taskforce that is responsible for
identifying and reviewing all of the Company's internal computer systems for
Year 2000 compliance, including workstations, its accounting system, and control
systems for equipment in the Company's manufacturing and laboratory facilities.
The taskforce is currently taking inventory of all critical and non-critical
systems and has begun to test its systems and workstations for Year 2000
compliance. Of the systems and workstations tested so far, most have been found
to be in compliance. Certain systems, such as the accounting and telephone
systems, have been brought into compliance. Of the workstations tested and found
not to be in compliance, most have been updated to be compliant. The review and
all testing should be completed during the second quarter of 1999. After the
review and testing are completed, the taskforce will determine how to address
any remediation necessary. The Company intends to repair or replace any
noncompliant systems in a timely manner so that the business of the Company will
not be adversely affected.

Because most of the principal hardware and software used by the Company
(including most of the equipment control systems) were acquired by the Company
within the last several years, the Company expects that most of its systems will
be Year 2000 compliant. However, until the taskforce completes its review and
testing, the Company will not be able to assess the level of compliance or make
an accurate estimate of the costs of any remediation. To date, the costs of
remediation have not been material. Contingency plans have not yet been
developed.

The Company has no material relationships with third party suppliers. The
Company could be significantly affected by Year 2000 noncompliance on the part
of Warner-Lambert as the Company currently is dependent upon timely milestone
payments from Warner-Lambert. In addition, the loss of the utility supply to the
Company's laboratory, production and administrative facilities would cause a
shut down of those facilities which, depending on the duration of the shut down,
may have a material adverse impact on the Company's business. In addition, the
loss of telecommunications services and banking services would, as is the case
with all businesses, adversely affect the Company.

OTHER
- -----

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 will be effective for the Company's fiscal year
beginning January 1, 2000. The adoption of SFAS No. 133 is not expected to have
a material effect on the Company's financial position or results of operations.

Item 7A Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

In the normal course of business, the Company is exposed to fluctuations in
interest rates as the Company seeks debt financing to sustain its operations.
The Company does not use derivative instruments or hedging to manage its
exposures.

The information below summarizes the Company's market risks associated with debt
obligations as of December 31, 1998. Fair values included herein have been
estimated taking into consideration the nature and terms of each instrument and
the prevailing economic and market conditions at the balance sheet date. The
table below presents principal cash flows and related interest rates by year of
maturity based on the terms of the debit without consideration as to conversion
features. While convertible debentures may be converted to common stock
beginning January 1999, the Company is unable to predict if and when such
conversions may occur. Variable interest rates disclosed represent the rates at
December 31, 1998. Further information specific to the Company's debt is
presented in Notes 2, 3 and 5 to the financial statements.

Estimated Year of Maturity
Fair Carrying ----------------------------------------------------
Value Amount 1999 2000 2001 2002 2003
---------- --------- --------- ---- ---- ---- ----

Notes payable - stockholders $1,040,000 1,040,000 1,040,000 -- -- -- --
Variable interest rate 8.125% -- -- -- --

5% convertible debentures $4,000,000 3,802,807 -- -- 4,000,000 -- --
Fixed interest rate (1) 5% 5% 5% -- --

(1) At the option of the Company, interest payments may be made using the
Company's Common Stock.

Item 8. Financial Statements and Supplementary Data.

Index to Financial Statements and Related Information

(1) Financial Statements:

Independent Auditors' Report
Balance Sheets at December 31, 1998 and 1997

Statements of Operations for the three years ended December 31, 1998

Statements of Stockholders' Equity for the three years ended December
31, 1998

Statements of Cash Flows for the three years ended December 31, 1998

Notes to Financial Statements

(2) Financial Statement Schedules:

All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.

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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 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 14. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

/S/ KPMG LLP
- ------------
KPMG LLP

Short Hills, New Jersey
February 26, 1999

UNIGENE LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 1998 and 1997

ASSETS 1998 1997
------------ ------------

Current assets:
Cash and cash equivalents ........................... $ 402,664 $ 2,126,327
Prepaid expenses .................................... 317,823 126,703
Other current assets ................................ 887,904 707,542
------------ ------------
Total current assets .................. 1,608,391 2,960,572

Property, plant and equipment - net of
accumulated depreciation and
amortization (Note 4) ............................... 8,085,250 9,298,445

Patents and other intangibles, net ...................... 1,206,018 1,032,994
Other assets ............................................ 664,434 399,889
------------ ------------
$ 11,564,093 $ 13,691,900
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 982,752 $ 1,041,529
Accrued expenses .................................... 1,329,199 999,212
Notes payable - stockholders (Note 3) ............... 1,040,000 610,000
Current portion - capital lease obligations (Note 6) 61,464 --
------------ ------------
Total current liabilities ............. 3,413,415 2,650,741

Notes payable - stockholders (Note 3) ................... -- 655,000
9.5% convertible debentures (Note 5) .................... -- 502,694
10% convertible debentures (Note 5) ..................... -- 450,000
5% convertible debentures (Note 5) ...................... 3,802,807 --
Capital lease obligations, excluding
current portion (Note 6) .............................. 127,783 --

Commitments and contigencies

Stockholders' equity (Note 8):
Common Stock - par value $.01 per share,
authorized 60,000,000 shares, issued
39,384,822 shares in 1998 and
38,517,722 shares in 1997 ........................ 393,848 385,177
Additional paid-in capital .......................... 65,158,403 63,499,439
Accumulated deficit ................................. (61,331,132) (54,450,120)

Less: Treasury stock, at cost,
7,290 shares ................................. (1,031) (1,031)
------------ ------------
Total stockholders' equity ............ 4,220,088 9,433,465
------------ ------------
$ 11,564,093 $ 13,691,900
============ ============

See accompanying notes to financial statements.

UNIGENE LABORATORIES, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1998, 1997 and 1996

1998 1997 1996
------------ ------------ ------------

Licensing and other revenue ................ $ 5,049,844 $ 3,003,299 $ 308,070
------------ ------------ ------------
Operating expenses:
Research and development ............... 9,041,618 9,416,315 8,298,056
Settlement of contractual right
(Note 13) ........................... -- 1,669,063 --
General and administrative ............. 2,067,958 2,015,730 2,115,081
------------ ------------ ------------
11,109,576 13,101,108 10,413,137
------------ ------------ ------------
Operating loss ............................. (6,059,732) (10,097,809) (10,105,067)
------------ ------------ ------------
Other income (expense):
Interest/other income .................. 107,502 203,999 229,665
Interest expense ....................... (784,972) (234,304) (721,697)
------------ ------------ ------------
(677,470) (30,305) (492,032)
------------ ------------ ------------
Loss before
extraordinary item ..................... (6,737,202) (10,128,114) (10,597,099)

Extraordinary item-loss
on early extinguishment of debt (Note 5) (143,810) -- --
------------ ------------ ------------
Net loss ................................... $ (6,881,012) $(10,128,114) $(10,597,099)
============ ============ ============
Earnings per share:
Basic:
Loss before
extraordinary item ................... $ (.17) $ (.27) $ (.38)
Extraordinary item .................... (.01) -- --
------------ ------------ ------------
Net loss ............................... $ (.18) $ (.27) $ (.38)
============ ============ ============

Diluted:
Loss before
extraordinary item ................... $ (.17) $ (.27) $ (.38)
Extraordinary item .................... (.01) -- --
------------ ------------ ------------
Net loss .............................. $ (.18) $ (.27) $ (.38)
============ ============ ============
Weighted average number of shares
outstanding ............................... 38,701,253 37,397,150 27,942,903
============ ============ ============

See accompanying notes to financial statements.

UNIGENE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996

Common Stock
------------------------------ Additional
Number of Par Paid-in Accumulated Treasury
Shares Value Capital Deficit Stock Total
------------ ------------ ------------ ------------ ------------ ------------

Balance,
January 1,
1996 23,813,171 $ 238,132 $ 38,110,512 $(33,724,907) $ (1,031) $ 4,622,706

Sales of stock .. 4,887,029 48,870 7,338,621 -- -- 7,387,491

Conversion of 10%
Debentures ..... 4,403,838 44,038 7,578,173 -- -- 7,622,211

Conversion of 9.5%
Debentures ..... 1,778,401 17,784 1,988,316 -- -- 2,006,100

Exercise of
warrants ....... 330,000 3,300 460,250 -- -- 463,550

Exercise of
stock options .. 140,385 1,404 173,769 -- -- 175,173

Issuance of
warrants as
compensation .... -- -- 180,000 -- -- 180,000

Net loss ........ -- -- -- (10,597,099) -- (10,597,099)
------------ ------------ ------------ ------------ ------------ ------------

(Continued)

UNIGENE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
Years Ended December 31, 1998, 1997 and 1996

Common Stock
-------------------------- Additional
Number of Par Paid-in Accumulated Treasury
Shares Value Capital Deficit Stock Total
---------- ------- ---------- ----------- ------ ----------

Balance,
December 31,
1996 35,352,824 353,528 55,829,641 (44,322,006) (1,031) 11,860,132

Sale of stock 695,066 6,951 2,941,648 -- -- 2,948,599

Settlement of
contractual right 490,000 4,900 1,664,163 -- -- 1,669,063

Exercise of
warrants 712,759 7,127 1,133,020 -- -- 1,140,147

Conversion of 9.5%
Debentures 697,058 6,971 769,235 -- -- 776,206

Exercise of
stock options 282,350 2,823 433,229 -- -- 436,052

Conversion of
10% Debentures 220,465 2,205 398,225 -- -- 400,430

Conversion of
notes payable -
stockholders 57,200 572 199,428 -- -- 200,000

Issuance of warrants
and stock as
compensation 10,000 100 130,850 -- -- 130,950

Net loss -- -- -- (10,128,114) -- (10,128,114)
---------- ------- ---------- ----------- ------ ----------

(Continued)

UNIGENE LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
Years Ended December 31, 1998, 1997 and 1996

Common Stock
----------------------------- Additional
Number of Par Paid-in Accumulated Treasury
Shares Value Capital Deficit Stock Total
------------ ------------ ------------ ------------ ------------ ------------

Balance,
December 31,
1997 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 ......... 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
============ ============ ============ ============ ============ ============

See accompanying notes to financial statements.

UNIGENE LABORATORIES, INC.
STATEMENTS OF CASH FLOWS

Years Ended December 31,
------------------------------------------------
1998 1997 1996

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $ (6,881,012) $(10,128,114) $(10,597,099)
Adjustments to reconcile net loss to net
cash used by operating activities:
Non-cash settlement of contractual right .......... -- 1,669,063 --
Non-cash compensation ............................. 6,574 130,950 180,000
Depreciation and amortization ..................... 1,552,734 1,530,469 1,487,356
Amortization of beneficial conversion feature on 5%
Debentures ..................................... 489,603 -- --
Write-off of other assets ......................... 48,500 -- --
(Increase) decrease in prepaid expenses and other
current assets ................................. (371,482) 148,844 (548,930)
Increase (decrease) in accounts payable and accrued
expenses ....................................... 291,297 370,967 (663,805)
------------ ------------ ------------
Net cash used for operating activities ............ (4,863,786) (6,277,821) (10,142,478)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction of leasehold improvements ............. (8,384) (18,298) (614,479)
Purchase of furniture and equipment ................ (76,486) (430,068) (560,987)
Increase in patents and other assets ............... (264,959) (163,670) (134,034)
------------ ------------ ------------
Net cash used in investing activities .............. (349,829) (612,036) (1,309,500)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of stock ....................... -- 2,948,599 7,387,491
Proceeds from issuance of debt ..................... 4,000,000 -- 8,098,523
Repayment of debt and capital lease
obligations ...................................... (304,138) -- (440,000)
Exercise of stock options and warrants ............. 47,969 1,576,199 638,723
Debt issuance and other costs ...................... (253,879) -- --
------------ ------------ ------------
Net cash provided by financing activities .......... 3,489,952 4,524,798 15,684,737
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents ................................. (1,723,663) (2,365,059) 4,232,759
Cash and cash equivalents at
beginning of period .............................. 2,126,327 4,491,386 258,627
------------ ------------ ------------
Cash and cash equivalents at
end of period .................................... $ 402,664 $ 2,126,327 $ 4,491,386
============ ============ ============

SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities:
Acquisition of equipment through capital leases .... $ 221,900 -- --
Conversion of convertible debentures and accrued
interest into Common Stock ...................... $ 707,069 $ 1,176,636 $ 9,628,311
Conversion of notes payable - stockholders
into Common Stock ................................ $ 225,000 $ 200,000 --
Value of beneficial conversion feature and related
warrants on issuance of convertible debentures .... $ 686,796 -- --
Exchange of notes .................................. -- -- $ 3,300,000
============ ============ ============
Cash paid for interest ............................. $ 119,000 $ 74,000 $ 316,000
============ ============ ============

See accompanying notes to financial statements.

UNIGENE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

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 peptide hormones. 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 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 in all 15 member states of the
European Union. 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 1998 and 1997
almost all of the Company's revenue was generated from one customer,
Warner-Lambert (see Note 12).

2. Summary of Significant Accounting Policies & Practices

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.

Research and Development - Research and development contract revenues are
recognized based upon the successful completion of various benchmarks as set
forth in the individual agreements. Research and development expenditures are
expensed as incurred.

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, 1998, three 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 $104,625 and
$71,856 at December 31, 1998 and 1997, respectively.

Stock Option Plan - The Company accounts for stock options issued to employees
and directors in accordance with the provisions of Accounting Principle 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 Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation",
the Company provides pro forma net income and pro forma earnings per share
disclosures for employee 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 non-employees on a fair value basis in accordance with
SFAS No. 123.

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 adopted the provisions of SFAS No. 128,
"Earnings Per Share" on December 31, 1997. SFAS No. 128 establishes standards
for computing and presenting earnings per share ("EPS"). It also requires
presentation of both basic and diluted EPS for net income on the face of the
income statement. 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. Per
share amounts for 1996 have been retroactively restated to give effect to SFAS
No. 128. 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, 1998, 1997 and 1996 because the
Company's convertible debentures, stock options and warrants were not included
in the calculation since the inclusion of such shares (approximately 9,600,000
potential shares of Common Stock) 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.

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 cost amounts. The
estimated fair values of all of the Company's financial instruments approximate
their carrying amounts in the balance sheet with the exception of debt. The fair
value of the Company's various debt instruments were derived by evaluating the
nature and terms of each instrument and considering the prevailing economic and
market conditions at the balance sheet date. The carrying amount of debt,
including current portions and capital lease obligations, is $5,032,054 and
$2,217,694 at December 31, 1998 and 1997, respectively; and the fair value is
estimated to be $5,229,247 and $2,217,694 at December 31, 1998 and 1997,
respectively.

Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles 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

During 1994, the Company's stockholders approved the adoption of a stock option
plan for outside directors. This plan replaced a plan previously adopted in
1991. As a result, the outside members of the Board of Directors at that time
were granted options, expiring in 2004, except if the individual is no longer a
director, to purchase shares of the Company's Common Stock at $3.00 per share.
These options terminate after the expiration of three months following the
termination of the optionee's services as an outside director. New outside
directors automatically receive stock options for 30,000 shares of Common Stock
upon their election to the Board of Directors having an exercise price equal to
the market value of the Common Stock on the date of grant and becoming
exercisable over a three-year period. At December 31, 1998, options to purchase
90,000 shares were outstanding under this plan, of which options to purchase
40,000 shares were exercisable. Options to purchase 10,000 shares become
exercisable on each of January 28, 1999 and January 28, 2000. Options to
purchase an additional 10,000 shares become exercisable on each of May 1, 1999,
May 1, 2000 and May 1, 2001. Of the options outstanding, options to purchase
30,000 shares of Common Stock were granted at an exercise price of $3.00 per
share; options to purchase 30,000 shares of Common Stock were granted at an
exercise price of $2.81 per share; and options to purchase 30,000 shares of
Common Stock were granted at an exercise price of $2.75 per share.

Notes payable - stockholders. During 1995, members of the Levy family loaned to
the Company $1,905,000. The notes evidencing these loans were issued to Warren
P. Levy, Ronald S. Levy and Jay Levy, each an officer and director of the
Company, who in the aggregate own 11% of the Company's outstanding Common Stock,
and to another member of their family. These notes bear interest at the Merrill
Lynch Margin Loan Rate plus .25% (8.125% at December 31, 1998) and $1,850,000 of
the aggregate principal amount is collateralized by security interests in the
Company's Fairfield, New Jersey plant and equipment and Boonton, New Jersey
equipment. Notes for $1,255,000 were originally payable on demand, but in any
event not later than February 10, 1997. Another note for $650,000 was originally
due on February 10, 1997. However, under an agreement entered into with the
holders of the 9.5% Senior Secured Convertible Debentures ("9.5% Debentures",
see Note 5), while any amounts of the 9.5% Debentures were outstanding, an
aggregate of only $1,250,000 of the notes payable - stockholders could be repaid
by the Company over time based upon the achievement of certain corporate
benchmarks. All outstanding 9.5% Debentures were converted in full in 1998,
thereby removing the aforementioned limitations on loan repayment. During 1996,
a total of $440,000 in principal amount of the notes payable - stockholders were
repaid. On May 2, 1997, an aggregate of $200,000 in principal amount of these
loans was converted into 57,200 shares of Common Stock at a conversion price of
$3.4965 per share. The closing price of the Common Stock on May 1, 1997, as
reported by the Nasdaq Stock Market, was $3.21875 per share. On August 6, 1998,
an aggregate of $225,000 in principal amount of these loans was converted into
163,635 shares of Common Stock at a conversion price of $1.375 per share. The
closing price of the Common Stock on August 5, 1998, as reported by the Nasdaq
Stock Market, was $1.31 per share. The balance of these loans, $1,040,000, has
been classified as short-term as of December 31, 1998 as they are payable on
demand.

4. Property, Plant and Equipment

Property, plant and equipment consisted of the following at December 31, 1998
and 1997:

Estimated
Depreciable
1998 1997 Lives
---------- ---------- ----------------

Building and
improvements $1,373,975 $1,373,975 25 years
Leasehold improvements 8,479,312 8,470,928 Lease Term
Manufacturing equipment 3,766,934 3,643,525 10 years
Laboratory equipment 2,657,817 2,694,871 5 years
Other equipment 466,523 466,523 10 years
Office equipment and
furniture 315,186 325,055 5 years
Equipment under capital
leases 221,900 -- Lease Term
----------- -----------
17,281,647 16,974,877
Less accumulated
depreciation and
amortization 9,317,564 7,797,599
----------- -----------
7,964,083 9,177,278
Land 121,167 121,167
----------- ------------
$ 8,085,250 $9,298,445
========= =========

Depreciation and amortization expense on property, plant and equipment was
$1,520,000, $1,506,000, and $1,473,000 in 1998, 1997 and 1996, respectively.

5. Convertible Debentures

In March 1996, a secured $3,300,000 loan was exchanged for 9.5% Senior Secured
Convertible Debentures of an equal principal amount. These debentures matured
November 15, 1998 and were convertible into shares of Common Stock. The initial
conversion rate was $1.15 per share, subject to certain reset provisions. In
October 1996, the conversion rate was reset to $1.12 per share as a result of
the private placement completed in October 1996 (see Note 8). As of November 15,
1998, all $3,300,000 of principal amount of these debentures had been converted
into approximately 2,924,000 shares of Common Stock.

In March 1996, the Company completed a private placement of $9.08 million
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. The 10%
Debentures were convertible into shares of Common Stock at a conversion rate
determined by dividing the principal amount to be converted, plus accrued
interest, by the lower of $2.00 or 85% of the average closing bid price as

reported on Nasdaq for the ten trading days immediately preceding the date of
conversion. 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 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, 1998, an aggregate of 322,000 of these
warrants have been exercised and 132,000 remain unexercised.

In June 1998, the Company completed a private placement of $4 million of 5%
Convertible Debentures (the "5% Debentures"). The Company received net proceeds
of approximately $3.75 million as a result of this placement. The 5% Debentures
mature December 31, 2001. Interest on the 5% Debentures is payable in cash or,
at the option of the Company, in Common Stock. Beginning January 1, 1999, the 5%
Debentures are convertible into (i) Common Stock at a conversion price (the
"Conversion Price") equal to the lower of (a) $1.59 (the "Cap Price") and (b)
the average of the four lowest closing bid prices of the Common Stock during the
18 trading days prior to the date of conversion (the "Market Price") and (ii)
warrants, expiring five years from the date of issuance, to purchase a number of
shares of Common Stock equal to 4% of the number of shares issuable upon
conversion at an exercise price equal to 125% of the Conversion Price. Up to 15%
of the original principal amount of the 5% Debentures may be converted per month
on a non-cumulative basis; provided, however, that if the Market Price is
greater than or equal to 120% of the Cap Price on the last conversion date in
any month, then up to 20% of the original principal amount may be converted in
such month. If a Debenture holder submits a Debenture for conversion and the
Market Price is less than or equal to $1.1156, the Company may redeem the
Debenture for (i) an amount equal to the principal amount thereof plus a premium
of 12% per year from the date of issuance and (ii) warrants, expiring five years
from the date of issuance, to purchase a number of shares of Common Stock equal
to 25% of the number of shares that would have been issuable upon conversion of
the Debenture at an exercise price equal to 135% of the Conversion Price at the
time of redemption. In no event will the Company issue more than an aggregate of
3,852,500 shares of Common Stock (the "Share Limit") upon conversion of all of
the 5% Debentures, upon exercise of all warrants issued upon conversion or
redemption, and as payment of interest on the 5% Debentures. If conversion of
any 5% Debentures or exercise of any warrants would require the issuance of
shares in excess of the Share Limit, the Company will, as the case may be,
redeem such debentures at a price equal to 120% of the principal amount thereof
or pay in cash the difference between the market price and exercise price of the
number of shares that would have been issuable upon exercise of such warrants
but for the Share Limit. Through February 26, 1999, $200,000 of principal amount
of the 5% Debentures had been converted into 164,102 shares of Common Stock and
warrants, exercisable at $1.52, to purchase 6,564 shares of Common Stock.

The Company 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 will be amortized to
interest expense over the earliest conversion periods using the effective
interest method (approximately $490,000 for the year ended December 31, 1998).

6. Obligations Under Capital Leases

The Company entered into various lease arrangements during 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, 1998 are
as follows:

1999 $ 79,044
2000 79,044
2001 62,988
2002 21,375
-------
Total minimum lease payments 242,451

Less amount representing interest 53,204
--------
Present value of net minimum
lease payments 189,247

Less current portion 61,464
--------
Obligations under capital leases,
excluding current portion $127,783
========

The discount rates on these leases vary from 14% to 18%.

7. 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 equipment under various operating
leases expiring in 2001 through 2002. Total future minimum rentals under these
noncancelable operating leases as of December 31, 1998 are as follows:

1999 $ 218,109
2000 218,110
2001 207,819
2002 197,529
2003 185,322
2004 15,444
----------
$1,042,333
==========

Total rent expense was approximately $209,000 for 1998 and approximately
$185,000 for each of 1997 and 1996.

8. Stockholders' Equity

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. During
1995, these warrants were sold by the consultant to an unrelated third party. No
proceeds were received by the Company in connection with this transaction. 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. Compensation expense recognized in 1996 as a result of the
above was approximately $180,000. 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.

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 is
exercisable to purchase one share of Common Stock) and (iii) one quarter of a
Class D Warrant (each whole Class D Warrant is exercisable to purchase one share
of Common Stock). The Class C Warrants and the Class D Warrants each have an
initial exercise price of $3.00 and expire on October 11, 1999, except that the
expiration date of the Class C Warrants may be accelerated under certain
circumstances. In addition, the Warrants contain certain adjustment and
antidilution provisions which, upon the occurrence of certain events, may
require the Company to adjust the exercise price of the Warrants and to issue
additional shares of Common Stock upon the exercise thereof. 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.

During 1996, an aggregate of $10,246,000 in principal amount of convertible
debentures, plus $270,000 of accrued interest, was converted into approximately
6,181,000 shares of Common Stock. During 1997, an aggregate of $1,181,000 in
principal amount of convertible debentures, plus $41,000 of accrued interest,
was converted into approximately 918,000 shares of Common Stock. 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. See Note 5.

During 1997, an aggregate of 713,000 shares of Common Stock were issued due to
the exercise of warrants with net proceeds to the Company of approximately
$1,140,000. The exercise prices of these warrants ranged from $1.38 to $3.00 per
share. As of December 31, 1998, there are warrants outstanding, all of which are
currently exercisable, to purchase an aggregate of 3,924,000 shares of Common
Stock at exercise prices ranging from $1.38 to $3.50 per share.

9. Stock Option Plans

Under the Unigene Laboratories, Inc. 1984 Non-Qualified Stock Option Plan for
Selected Employees (the "1984 Plan"), each option granted expires no later than
the tenth anniversary of the date of its grant. The 1984 Plan terminated in
November 1994; however, 50,000 options previously granted continue to be
outstanding and exercisable under that plan as of December 31, 1998.

During 1994, the Company's stockholders approved the adoption of the 1994
Employee Stock Option Plan (the "1994 Plan"). All employees of the Company are
eligible to participate in the 1994 Plan, including executive officers and
directors who are employees of the Company. The 1994 Plan is administered by the
employee Stock Option Committee of the Board of Directors, which selects the

employees to be granted options, fixes the number of shares to be covered by the
options granted and determines the exercise price and other terms and conditions
of each option. Originally, a maximum of 1,500,000 shares of Common Stock was
reserved for issuance under the 1994 Plan. In June 1997, the stockholders of the
Company approved an amendment to the 1994 Plan increasing the total number of
shares authorized for issuance by 750,000 shares to 2,250,000 shares. Options
granted under the 1994 Plan have a maximum term of ten years. The purchase price
of the shares issuable upon the exercise of each option cannot be less than the
fair market value of the Common Stock on the date that the option is granted.
The 1994 Plan will terminate on June 16, 2004, unless earlier terminated.
Transactions under the 1984 and 1994 Plans are as follows:

Options Option Price
Outstanding Per Share
------------ -----------

January 1, 1996 879,400 $1.00-$3.00

1996: Granted 818,500 $1.88-$3.13
Cancelled (58,200)
Exercised (140,385) $1.00-$1.63
--------- -----------
December 31, 1996 1,499,315 $1.00-$3.13

1997: Granted 34,000 $2.03-$4.25
Cancelled (39,500)
Exercised (282,350) $1.06-$2.81
--------- -----------
December 31, 1997 1,211,465 $1.06-$4.25

1998: Granted 580,750 $1.00-$2.94
Cancelled (56,600)
Exercised (40,500) $1.00-$1.63
--------- -----------
December 31, 1998 1,695,115 $1.00-$4.25
--------- ------------

The 1998 stock option grants include a grant of 537,250 options of which 261,500
vested immediately and the remainder vest upon the achievement of certain
company-wide objectives. No compensation expense was recognized during 1998 as
the options' exercise price exceeded the market price of the Company's stock. An
additional 137,875 options vested in January 1999.

As of December 31, 1998, options to purchase 383,800 shares of Common Stock were
available for grant under the 1994 Plan and options for 1,332,615 shares of
Common Stock were exercisable under the 1994 and 1984 Plans.

The Company has adopted the disclosure-only provisions of SFAS No. 123. The
following pro forma amounts estimate the effects on net loss and net loss per
share had the Company determined compensation cost based on the fair value of
employee and director stock options at the grant date consistent with the
provisions of SFAS No. 123:

1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------

Net loss - as reported $ (6,881,012) $ (10,128,114) $ (10,597,099)
Net loss - pro forma (7,796,012) (10,214,114) (12,054,647)
Basic and diluted net loss per share -
as reported (.18) (.27) (.38)
Basic and diluted net loss per share -
pro forma (.20) (.27) (.43)

The fair value of the stock options granted in 1998, 1997 and 1996 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 63%
in 1998, 59% in 1997 and 62% in 1996; a risk-free interest rate of 4.8% in 1998,
5.25% in 1997 and 6.5% in 1996; and expected lives of 6 years. The weighted
average fair value per share of options granted during the years ended December
31, 1998, 1997 and 1996 were $1.95, $3.44 and $2.80, respectively.

During 1993, a consultant received options to purchase 5,000 shares of the
Company's Common Stock at $4.56 per share. These options expired unexercised in
January 1998. During 1995, the Company granted to a consultant options to
purchase 10,000 shares of the Company's Common Stock, expiring in October 2000,
exercisable at $1.44 per share, none of which have been exercised.

In addition, at December 31, 1998, there were 90,000 options outstanding and
shares reserved under the plan referred to in Note 3.

10. Income Taxes

As of December 31, 1998, the Company had available for income tax reporting
purposes net operating loss carryforwards in the amount of approximately
$59,900,000, expiring from 1998 through 2018, which are available to reduce
future earnings which would otherwise be subject to federal income taxes. In
addition, the Company has investment tax credits and research and development
credits in the amounts of $50,000 and $2,300,000, respectively, which are
available to reduce the amount of future federal income taxes. These credits
expire from 1998 through 2018.

The Company follows SFAS No. 109, "Accounting for Income Taxes." Given the
Company's past history of incurring operating losses, management believes that
it is more likely than not that any deferred tax assets that are recognizable
under SFAS No. 109 will not be recoverable. As of December 31, 1998 and 1997,
under SFAS No. 109, the Company had deferred tax assets of approximately
$26,300,000 and $23,400,000, respectively, subject to valuation allowances of
$26,300,000 and $23,400,00, respectively. The deferred tax assets are 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.

11. 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 a maximum for each employee of $10,000 for 1998 and
$9,500 for 1997 and 1996. The Company's discretionary matching contribution
expense for 1998 and 1997 was approximately $43,000 and $42,000, respectively.
There was no matching contribution for 1996.

12. Research and Licensing Revenue

In June 1995, the Company entered into a joint venture agreement effective as of
March 1996, with the Qingdao General Pharmaceutical Company and its Huanghai
factory for the production and marketing of Calcitonin in China. Under the
agreement, it was intended that the Chinese partners would finance the project,
including the construction and operation of a dedicated manufacturing facility
in China which would utilize the non-proprietary aspects of the Company's
production technology. Unigene would provide the joint venture with technology
and training as well as the Company's proprietary enzyme at a discounted price.
Unigene would receive a combination of fixed fees and annual royalties based
upon sales of the end product. This joint venture contributed $300,000 to 1996
revenues. It is uncertain whether or not the Company will be able to recognize
revenue from the sales of its products in China.

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. Upon execution of the agreement, the
Company received $6 million in payments from Warner-Lambert, consisting of a $3
million licensing fee and a $3 million equity investment by Warner-Lambert
(695,066 shares of Common Stock were purchased at a price of approximately $4.32
per share). Under the terms of the license agreement, the Company is eligible to
receive up to $48.5 million in additional payments during the course of the
development program if specified milestones are achieved. Several milestones
were achieved during 1998, resulting in payments to the Company and the
recognition of revenue totaling $5 million. An additional milestone was achieved
in February 1999, resulting in a payment to the Company of $2.5 million. An
additional $8 million would be received if other milestones are achieved prior
to the commencement of Phase I clinical studies in the U.S. If the product is
successfully commercialized, the Company also would receive revenue from the
sale of raw material to Warner-Lambert and royalties on product sales by
Warner-Lambert and its affiliates. The Company has retained the right to license
the use of its technologies for injectable and nasal formulations of Calcitonin
on a worldwide basis.

13. Settlement of Contractual Right

In February 1997, the Company issued an aggregate of 490,000 shares of Common
Stock to the holders of the Company's 9.5% Senior Secured Convertible Debentures
in consideration for the cancellation of an obligation of the Company to pay to
the holders a fee equal to 2% of the sum of the market value as of December 31,
1998 of all of the Company's outstanding shares of Common Stock plus the
principal amount of all outstanding debt of the Company, less its cash on
deposit, up to a maximum fee of $3,000,000. The expense associated with this
transaction was valued at $1,669,063, based on a closing price of the Common
Stock of $3.40625 on February 7, 1997.

14. Liquidity

The Company has incurred annual operating losses since its inception and, as a
result, at December 31, 1998 has an accumulated deficit of approximately
$61,331,000 and has a working capital deficiency of approximately $1,805,000.
Such results 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 have increased
to approximately $10 to $11 million per year with the opening of its peptide
manufacturing facility.

After the receipt in February 1999 of the $2.5 million milestone payment from
Warner-Lambert, management believes that the Company currently has sufficient
financial resources to sustain its operations at the current level through the
first half of the second quarter of 1999. The Company will require additional
funds to ensure continued operations beyond that time. If the various milestones
in the Warner-Lambert agreement cannot be achieved on a timely basis, the
Company may need outside financing to sustain its operations in the near term.

In addition to the Warner-Lambert agreement, management is actively seeking
other licensing and/or supply agreements with pharmaceutical companies for
injectable and nasal forms of Calcitonin. However, there is no assurance that
any additional revenue-generating agreements will be signed. In the absence of
or the delay in achieving the Warner-Lambert milestones or in signing other
agreements, obtaining adequate funds from other sources, which might include a
debt or equity financing, would be necessary to sustain the Company's
operations. However, there is no assurance as to the terms on which such
additional funds would be available or that in such circumstances sufficient
funds could be obtained.

While the Company believes that the Warner-Lambert licensing transaction will
satisfy the Company's liquidity requirements over the near-term, satisfying the
Company's long-term liquidity requirements will require the successful
commercialization of the product licensed to Warner-Lambert or one of its other
Calcitonin products.

PART III

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

Not applicable.

Item 10. Directors and Executive Officers of the Registrant.

The following table sets forth information with respect to the six directors of
the Company:

Served Continuously
Name Age as Director Since
- ---- ----- -----------------

Warren P. Levy (1) (2) 47 1980
Ronald S. Levy (1) (3) 50 1980
Jay Levy (1) (4) 75 1980
Robert F. Hendrickson (5) 66 1997
Robert G. Ruark (6) 57 1993
Allen Bloom (7) 55 1998

(1) Dr. Warren P. Levy and Dr. Ronald S. Levy are brothers and are the sons of
Mr. Jay Levy. Drs. Levy and Mr. Levy are the Company's only executive officers.

(2) Dr. Warren P. Levy, a founder of the Company, has served as President, Chief
Executive Officer and Director of the Company since its 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.

(3) Dr. Ronald S. Levy, a founder of the Company, has served as Vice President
and Director of the Company since its formation in November 1980 and as
Secretary since May 1986. Dr. Levy holds a Ph.D. in bioinorganic chemistry from
Pennsylvania State University and a bachelor's degree in chemistry from Rutgers
University.

(4) Mr. Jay Levy, a founder of the Company, has served as Chairman of the Board
of Directors and Treasurer of the Company since its formation in November 1980.
Mr. Levy is a part-time employee of the Company and devotes approximately 15% of
his time to the Company. 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. For the seventeen years prior thereto, he performed similar services
for the late Nathan Cummings, a noted industrialist and philanthropist.

(5) 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 Chairman of the Board of Envirogen, Inc. an environmental
biotechnology company, and a director of Cytogen, Inc. and The Liposome Co.,
Inc., both of which are biotechnology companies.

(6) Mr. Robert G. Ruark has been an independent consultant since June 1993.
Prior thereto, he had been employed by Merck and Co., Inc., for 25 years in
legal and administrative capacities. Mr. Ruark, an attorney, has extensive
experience in international licensing and business development. When he retired
in 1993, Mr. Ruark was Vice President of the Merck Human Health Division.

(7) Dr. Allen Bloom, a patent attorney, has been a partner in Dechert Price &
Rhoads, a law firm, for the past five years where he established and heads the
patent practice group which focuses on biotechnology, pharmaceuticals and
medical devices. For the nine years prior thereto, he was Vice President,
General Counsel and Secretary of The Liposome Company, Inc., a biotechnology
company. His responsibilities there included patent, regulatory and licensing
activities. Dr. Bloom holds a Ph.D. in Organic Chemistry from Iowa State
University.

Information concerning the Executive Officers of the Registrant is included in
Item I of Part I above, in the section entitled "Executive Officers of the
Registrant".

Item 11. Executive Compensation.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Executive compensation for 1998 was determined by the Board of Directors of the
Company consisting of Messrs. Warren P. Levy, Ronald S. Levy, Jay Levy, Robert
F. Hendrickson, Robert G. Ruark, and Allen Bloom.

Three of the six member Board of Directors, Warren P. Levy, Ronald S. Levy and
Jay Levy, are executive officers of the Company. Jay Levy is the father of
Warren and Ronald Levy.

During 1995, Warren P. Levy, Ronald S. Levy, Jay Levy, and another family member
loaned a total of $1,905,000 to the Company, of which $1,850,000 is secured by
liens on the Fairfield plant and equipment and the Boonton manufacturing
equipment. The notes bear interest at the Merrill Lynch Margin Loan Rate plus
.25% (8.125% at March 1, 1999). A total of $440,000 in principal payments were
made during 1996. In 1997, an aggregate of $200,000 in principal amount of these
loans was converted into 57,200 shares of Common Stock. In 1998, an aggregate of
$225,000 in principal amount of these loans was converted into 163,635 shares of
Common Stock, leaving an outstanding balance of $1,040,000 at December 31, 1998.
No interest has been paid to date. See Note 3 to the Financial Statements.

EXECUTIVE COMPENSATION

The following table sets forth, for the years 1998, 1997 and 1996, compensation
paid to the Chief Executive Officer of the Company and to each other executive
officer whose compensation in 1998 exceeded $100,000, for services rendered by
such executive officers in all capacities in which they served:

SUMMARY COMPENSATION TABLE
All Other
Annual Compensation Long Term Compensation Compensation (1)
------------------- ---------------------- ---------------
Awards Payouts
------------------------ -------
Other Restricted
Name and Annual Stock Options/ LTIP
Principal Position Year Salary Bonus Compensation Award SARs Payouts
- ------------------ ---- ------ ----- ------------ ----- ---- -------

Warren P. Levy, 1998 $146,231 $ -0- $ -0- $ -0- $ -0- $ -0- $13,830
President, Chief 1997 145,549 -0- -0- -0- -0- -0- 13,810
Executive Officer 1996 145,454 -0- -0- -0- -0- -0- 13,806
and Director

Dr. Ronald S. Levy, 1998 141,618 -0- -0- -0- -0- -0- 16,792
Vice President and 1997 140,895 -0- -0- -0- -0- -0- 16,756
Director 1996 140,889 -0- -0- -0- -0- -0- 16,746

(1) Represents premium paid by the Company on executive split-dollar life
insurance.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

PRINCIPAL STOCKHOLDERS

As of March 2, 1999 the following were the only persons known by the Company to
beneficially own more than 5 percent of the outstanding shares of Common Stock.
The Company has no other class of voting securities outstanding.

Name and Address of Amount of Beneficial Percentage of
Beneficial Owner Ownership Outstanding Shares
---------------- --------- ------------------

The Tail Wind Fund, Ltd. (1) 3,679,816 8.5%
Windermere House
404 East Bay Street
P.O. Box SS-5539
Nassau, Bahamas

Loews Corporation (2) 3,000,000 7.4%
CNA Plaza
Chicago, IL 60685

- ---------

(1) Tail Wind is the holder of 5% Convertible Debentures that are convertible
into Common Stock and Warrants to purchase Common Stock at a variable conversion
price that is tied to the market price of the Common Stock. The amount and
percentage of shares shown as beneficially owned consist of 70,802 shares of
Common Stock; 6,564 shares of Common Stock issuable upon exercise of warrants
owned by Tail Wind; and 3,602,450 shares of Common Stock issuable upon (a)
conversion of 5% Convertible Debentures in the principal amount of $3,800,000
owned by Tail Wind and (b) exercise of warrants issuable upon conversion of such
debentures, which 3,602,450 shares is the maximum number issuable under the
terms of the debentures. Tail Wind has reported that it has sole voting and sole
dispositive power with respect to such shares.

(2) Based on information furnished by Loews Corporation in a Schedule 13G, dated
March 4, 1997, filed with the Securities and Exchange Commission in which it
reports that the securities, which consist of 2,000,000 shares of Common Stock
and warrants to purchase 1,000,000 shares of Common Stock, are owned by
Continental Casualty Company, which is owned by CNA Financial Corp., a company
in which Loews Corporation has an 84% equity interest.

SECURITY OWNERSHIP OF MANAGEMENT

On March 2, 1999, the directors and executive officers listed below, and all
officers and directors as a group, beneficially owned the following number of
shares of Common Stock (including shares of Common Stock issuable upon the
exercise of stock options). Unless otherwise indicated, each such beneficial
owner has reported sole voting power and sole dispositive power with respect to
the shares.

Common Stock of the Company
---------------------------------------------------
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership (1) Class
- ---------------- ----------------------- ------------

Warren P. Levy 1,780,545 (2) 4.5%
Ronald S. Levy 1,795,545 (2) 4.5%
Jay Levy 523,095 (2) 1.3%
Robert F. Hendrickson 35,000 (3) 0.1%
Robert G. Ruark 30,000 (4) 0.1%
Allen Bloom 11,000 (5) --
Officers and Directors
as a Group (6 persons) 4,175,185 (2) (6) 10.5%

(1) Unless otherwise noted, all officers, directors and principal stockholders
have sole voting and investment power with respect to shares indicated as
beneficially owned by them.

(2) An additional 200,000 shares of Common Stock, representing approximately .5%
of the total outstanding, is held by a trust. Jay Levy and members of his
immediate family, including his two sons, Warren P. Levy and Ronald S. Levy,
have pecuniary interests in the trust. As a result, each of such persons may be
deemed to be the beneficial owner of shares held by the trust. Warren P.
Levy, his wife and Ronald S. Levy are co-trustees of the trust.

(3) Includes 20,000 shares of Common Stock which Mr. Hendrickson has the right
to acquire pursuant to stock options which are exercisable immediately.

(4) Consists solely of shares of Common Stock which Mr. Ruark has the right to
acquire pursuant to stock options which are exercisable immediately.

(5) Includes 10,000 shares of Common Stock which Mr. Bloom has the right to
acquire pursuant to stock options which are exercisable on May 1, 1999.

(6) Includes an aggregate of 60,000 shares of Common Stock which such persons
have the right to acquire pursuant to stock options which are exercisable
immediately or by May 1, 1999.

Item 13. Certain Relationships and Related Transactions.

Information concerning the Executive Officers of the Registrant is included in
Item 11 of Part III above, under the section entitled "Compensation Committee
Interlocks and Insider Participation".

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a) (1). Financial Statements
See Item 8.

(a) (2). Financial Statement Schedules.

None.

(b) Exhibits.

See Index to Exhibits which appears on Pages 42 - 44.

The Company did not file any reports on Form 8-K during the quarter
ended December 31, 1998.

SIGNATURES
--------------------

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

UNIGENE LABORATORIES, INC.

March 31, 1999 /s/ Warren P. Levy
------------------
Warren P. Levy, President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

March 31, 1999 /s/ Warren P. Levy
------------------
Warren P. Levy, President,
Chief Executive Officer and
Director

March 31, 1999 /s/ Jay Levy
-------------
Jay Levy, Treasurer,
Chief Financial Officer, Chief
Accounting Officer and Director

March 31, 1999 /s/ Ronald S. Levy
------------------
Ronald S. Levy, Secretary,
Vice President and Director

March 31, 1999 /s/ Robert F. Hendrickson,
--------------------------
Robert F. Hendrickson,
Director

March 31, 1999 /s/ Robert G. Ruark
-------------------
Robert G. Ruark, Director

March 31, 1999 /s/ Allen Bloom
---------------
Allen Bloom, Director

INDEX TO EXHIBITS
-----------------------------

3.1 Certificate of Incorporation and Amendments to July 1, 1986. (1)

3.1.1 Amendments to Certificate of Incorporation filed July 29, 1986 and May
22, 1987. (1)

3.1.2 Amendment to Certificate of Incorporation filed August 22, 1997
(Incorporated by reference to Exhibit 3.1.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997).

3.2 By-Laws. Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement No. 33-04557 on Form S-3.

4.1 Warrant Agreement, dated October 11, 1996, among the Company, BT
Securities Corporation and the purchasers named therein. (Incorporated
by reference to Exhibit 2 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996).

4.2 Specimen Certificate for Common Stock, par value $.01 per share. (1)

10.1 Lease agreement between the Company and Fulton Street Associates, dated
May 20, 1993. (3)

10.2* 1994 Employee Stock Option Plan (incorporated by reference to the
Company's Definitive Proxy Statement dated April 28, 1994, which is set
forth as Appendix A to Exhibit 28 to the Company's Form 10-K for the
year ended December 31, 1993).

10.3* 1994 Outside Directors Stock Option Plan (incorporated by reference to
the Company's Definitive Proxy Statement dated April 28, 1994 which is
set forth as Appendix B to Exhibit 28 to the Company's Form 10-K for
the year ended December 31, 1993).

10.4 Mortgage and Security Agreement between the Company and Jean Levy dated
February 10, 1995. (4)

10.5 Loan and Security Agreement between the Company and Jay Levy, Warren P.
Levy and Ronald S. Levy dated March 2, 1995. (4)

10.6 Non-Competition Agreements with Warren P. Levy and Ronald S. Levy dated
May 29, 1987. (1)

10.7* Split Dollar Agreement dated September 30, 1992 between Unigene
Laboratories, Inc. and Warren P. Levy. (2)

10.8* Split Dollar Agreement dated September 30, 1992 between Unigene
Laboratories, Inc. and Ronald S. Levy. (2)

10.9 Loan and Security Agreement between the Company and Dejufra, Inc. dated
March 15, 1995. (4)

10.10 Amendment to Loan Agreement and Security Agreement between the Company
and Jay Levy, Warren P. Levy and Ronald S. Levy dated March 20, 1995.
(4)

10.11 Registration Rights Agreement between the Company and Swartz
Investments, LLC dated March 12, 1996. (5)

10.12 Amendment to Loan and Security Agreement between the Company and Jay
Levy, Warren P. Levy and Ronald S. Levy dated June 29, 1995. (5)

10.13 Promissory Note between the Company and Jay Levy, Warren P. Levy and
Ronald S. Levy dated June 29, 1995. (5)

10.14 Registration Rights Agreement, dated October 11, 1996, among the
Company, BT Securities Corporation and the purchasers named therein
(incorporated by reference to Exhibit 1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996).

10.15 Letter Agreement dated as of February 7, 1997 among Unigene
Laboratories, Inc., Olympus Securities, Ltd. and Nelson Partners
(incorporated by reference to exhibit to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997).

10.16 License Agreement, dated as of July 15, 1997, between the Company and
Warner-Lambert Company (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K, dated July 15, 1997).

10.17 Stock Purchase Agreement, dated as of July 15, 1997, between the
Company and Warner-Lambert Company (the "Warner-Lambert Agreement")
(incorporated by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K, dated July 15, 1997).

10.18 Purchase Agreement, dated June 29, 1998, between the Company and The
Tail Wind Fund, Ltd. (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10Q for the quarter ended June 30,
1998).

10.19 Registration Rights Agreement, dated June 29, 1998, between the Company
and The Tail Wind Fund, Ltd. (incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10Q for the quarter ended
June 30, 1998).

23 Consent of KPMG LLP.

27 Financial Data Schedules
- ---------------------------

(1) Incorporated by reference to the exhibit of same number to the
Company's Registration Statement No. 33-6877 on Form S-1.

(2) Incorporated by reference to the exhibit of same number to the
Company's Form 10-K for the year ended December 31, 1992.

(3) Incorporated by reference to the exhibit of same number to the
Company's Form 10-K for the year ended December 31, 1993.

(4) Incorporated by reference to the exhibit of same number to the
Company's Form 10-K for the year ended December 31, 1994.

(5) Incorporated by reference to the exhibit of same number to the
Company's Form 10-K for the year ended December 31, 1995.

* Management contracts or compensatory plan or arrangement.