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        of Contents









**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-QSB**





(Mark
      One)


[X]
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT
      OF 1934


**For
      the quarterly period ended September 30, 2006**





[  
      ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934


For
      the
      transitional period from __________________ to __________________





**BIOSPECIFICS
                TECHNOLOGIES CORP.**


(Exact
      name of small business issuer as specified in its charter)





**Delaware**
            **0-19879**
            **11-3054851**(State
                or other jurisdiction
            (Commission
                file number)
            (I.R.S.
                Employerof
                incorporation or organization)
            
            Identification
                No.)




**35
      Wilbur Street**


**Lynbrook,
      NY 11563**


(Address
      of principal executive office)





**516.593.7000**


(Issuer’s
      telephone number)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or 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
      [
  ]  No  [X]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).




Yes
      [   ]  No  [X]




State
      the
      number of shares outstanding of the issuer's classes of common equity, as of
      the
      latest practicable date:





Class
                of Stock
            
            Outstanding
                May 01, 2007Common
                Stock ($.001 par value)
            
            5,261,549





Transitional
      Small Business Disclosure Format (Check one):  Yes [   ] No
      [X]





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          of Contents





**BIOSPECIFICS
      TECHNOLOGIES CORP.**





**TABLEOF
      CONTENTS**








**Page****PART
                I – FINANCIAL INFORMATION****ITEM
                1.**
            Consolidated
                Financial Statements
            2Consolidated
                Balance Sheet as of September 30, 2006
                and December 31, 2005
            2Consolidated
                Statements of Operations for
                the Three and Nine Months Ended September 30, 2006 and
                2005
            3Consolidated
                Statements of Cash Flows for the
                Nine Months Ended September 30, 2006 and 2005
            4Notes
                to Consolidated Financial
                Statements
            5**ITEM
                2.**
            Management’s
                Discussion and Analysis
            13**ITEM
                3.**
            Controls
                and Procedures
            20**PART
                II – OTHER INFORMATION**
            20**ITEM
                1.**
            Legal
                Proceedings
            20**ITEM
                2.**
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            20**ITEM
                3.**
            Defaults
                Upon Senior Securities
            20**ITEM
                4.**
            Submission
                of Matters to a Vote of Security
                Holders
            20**ITEM
                5.**
            Other
                Information
            20**ITEM
                6.**
            Exhibits
            20




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          of Contents




**Introductory
      Comments – Terminology**





Throughout
      this quarterly report on Form 10-QSB (this “Report”), the terms “BioSpecifics,”
“Company,” “we,” “our,” and “us” refer to BioSpecifics Technologies Corp. and
      its subsidiaries, Advance Biofactures Corporation (“ABC-NY”), Advance
      Biofactures of Curacao, N.V. (“ABC-Curacao”), which was sold in 2006, and
      BioSpecifics Pharma GmbH, which was liquidated in 2005. We also owned two
      dormant companies, BioSpecifics N.V. and Biota N.V., which were liquidated
      in
      January 2007.





**Introductory
      Comments – Forward Looking Statements**





This
      Report includes “forward-looking statements” within the meaning of
      Section 27A of the Securities Act of 1933, as amended, and Section 21E
      of the Securities and Exchange Act of 1934, as amended. All statements other
      than statements of historical facts are “forward looking statements” for
      purposes of these provisions, including any projections of earnings, revenues
      or
      other financial items, any statements of the plans and objectives of management
      for future operations, any statements concerning proposed new products or
      licensing or collaborative arrangements, any statements regarding future
      economic conditions or performance, and any statement of assumptions underlying
      any of the foregoing. In some cases, forward-looking statements can be
      identified by the use of terminology such as “may,” “will,” “expects,” “plans,”
“anticipates,” estimates,” “potential,” or “continue” or the negative thereof or
      other comparable terminology. Although we believe that the expectations
      reflected in the forward-looking statements contained in this Report are
      reasonable, there can be no assurance that such expectations or any of the
      forward-looking statements will prove to be correct, and actual results could
      differ materially from those projected or assumed in the forward-looking
      statements. Our future financial condition and results of operations, as well
      as
      any forward-looking statements, are subject to inherent risks and uncertainties,
      including but not limited to the risk factors set forth below, and for the
      reasons described elsewhere in this Report. All forward-looking statements
      and
      reasons why results may differ included in this Report are made as of the date
      hereof, and we assume no obligation to update these forward-looking statements
      or reasons why actual results might differ.





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          of Contents





**PARTI
–
FINANCIAL
      INFORMATION**





**Item1:  Consolidated
      Financial
      Statements**





**BIOSPECIFICS
                TECHNOLOGIES CORP. AND SUBSIDIARIES****ConsolidatedBalance
                Sheets**





**September
                30,**
            
            
            **December
                31,****2006**
            
            
            **2005**(unaudited)
            
            
            (audited)**Assets****Current
                assets:**Cash
                and cash equivalents
            
            $
            5,269,698
            
            
            $
            539,380Accounts
                receivable, net
            
            
            430,234
            
            
            
            20,257Accounts
                receivable of discontinued operations
            
            
            593,524
            
            
            
            3,067,614Prepaid
                expenses and other current assets
            
            
            92,161
            
            
            
            103,220**Total
                current assets**
            
            ****
            **6,385,617**
            
            
            ****
            **3,730,471**Property,
                plant and equipment, net
            
            
            320,771
            
            
            
            408,783Accrued
                tax and other liabilities of discontinued operations
            
            
            -
            
            
            
            2,445,678Receivable
                due from long term contract
            
            
            600,000
            
            
            
            -**Total
                assets**
            
            ****
            **7,306,388**
            
            
            ****
            **6,584,932****Liabilities
                and Stockholders' Equity**Current
                liabilities:Accounts
                payable and accrued expenses
            
            
            2,254,369
            
            
            
            1,874,809Deferred
                revenue
            
            
            1,937,117
            
            
            
            2,092,517Current
                liabilities discontinued operations
            
            
            425,239
            
            
            
            809,023Deferred
                employee stock bonus plan
            
            
            -
            
            
            
            168,900Notes
                payable to related parties
            
            
            69,894
            
            
            
            69,894**Total
                current liabilities**
            
            ****
            **4,686,619**
            
            
            ****
            **5,015,143**Long-term
                deferred revenue
            
            
            5,278,027
            
            
            
            4,753,797Minority
                interest in subsidiaries
            
            
            -
            
            
            
            (2,064
            )Other
                liabilities of discontinued operations
            
            
            -
            
            
            
            22,210**Stockholders'
                equity:**Series
                A Preferred stock, $.50 par value, 700,000 shares authorized; none
                outstanding
            
            
            -
            
            
            
            -Common
                stock, $.001 par value; 10,000,000 shares authorized; 5,365,816 and
                5,362,716 shares
              issued
                and outstandingat
                September 30, 2006 and December 31, 2005, respectively
            
            
            5,366
            
            
            
            5,363Additional
                paid-in capital
            
            
            3,737,415
            
            
            
            4,224,964Retained
                earnings
            
            
            (4,983.055
            )
            
            
            (4,877,590
            )Treasury
                stock, 131,267 and 346,561 shares at cost at September 30, 2006 and
                December 31, 2005, respectively
            
            
            (693,957
            )
            
            
            (1,832,864
            )Notes
                receivable from former CEO and Chairman and other related
                party
            
            
            (724,027
            )
            
            
            (724,027
            )**Total
                stockholders' equity**
            
            ****
            **(2,658,258**
            **)**
            
            ****
            **(3,204,154**
            **)****Total
                liabilities and stockholders’ equity**
            
            **$**
            **7,306,388**
            
            
            **$**
            **6.584,932**





**See
                accompanying notes to consolidated financial
                statements**





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          of Contents




**BIOSPECIFICS
                TECHNOLOGIES CORP. AND SUBSIDIARIES****ConsolidatedStatements
                of
                Operations**(unaudited)





**Three
                Months Ended**
              **September
                30,**
            
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005****Revenues:**Net
                sales
            
            $
            5,141
            
            
            $
            5,775
            
            
            $
            18,817
            
            
            $
            32,955Licensing
                fees
            
            
            289,279
            
            
            
            343,818
            
            
            
            867,837
            
            
            
            922,824Consulting
                fees
            
            
            70,000
            
            
            
            -
            
            
            
            163,333
            
            
            
            -364,420
            
            
            
            349,593
            
            
            
            1,049,987
            
            
            
            955,779**Costs
                and expenses:**General
                and administrative
            
            
            769,449
            
            
            
            548,667
            
            
            
            2,668,315
            
            
            
            1,575,469Research
                and development
            
            
            134,194
            
            
            
            55,661
            
            
            
            1,127,406
            
            
            
            321,242903,644
            
            
            
            604,328
            
            
            
            3,795,721
            
            
            
            1,896,711**Operating
                loss from continuing operations**
            
            ****
            **(539,223**
            **)**
            
            ****
            **(254,735**
            **)**
            
            ****
            **(2,826,934**
            **)**
            
            ****
            **(940,932**
            **)****Other
                income (expense):**Investment
                income
            
            
            73,286
            
            
            
            232
            
            
            
            155,424
            
            
            
            2,266Interest
                expense
            
            
            -
            
            
            
            (13,029
            )
            
            
            (521
            )
            
            
            (174,339
            )73,286
            
            
            
            (12,797
            )
            
            
            154,903
            
            
            
            (172,073
            )Loss
                from continuing operations before benefit (expense) for income
                tax
            
            
            (465,937
            )
            
            
            (267,532
            )
            
            
            (2,590,832
            )
            
            
            (1,113,005
            )Income
                tax benefit (expense)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -(465,937
            )
            
            
            (267,532
            )
            
            
            (2,590,832
            )
            
            
            (1,113,005
            )Loss
                before minority interest
            
            
            (465,937
            )
            
            
            (267,532
            )
            
            
            (2,590,832
            )
            
            
            (1,113,005
            )Minority
                interest in income of consolidated subsidiaries
            
            
            -
            
            
            
            3,014
            
            
            
            -
            
            
            
            861**Net
                income (loss) from continuing operations**
            
            ****
            **(465,937**
            **)**
            
            ****
            **(264,518**
            **)**
            
            ****
            **(2,590,832**
            **)**
            
            ****
            **(1,112,144**
            **)****Discontinued
                operations:**Gain
                (loss) from discontinued operations
            
            
            -
            
            
            
            185,332
            
            
            
            (1,115,704
            )
            
            
            427,087Gain
                on the sale of assets
            
            
            -
            
            
            
            -
            
            
            
            3,601,071
            
            
            
            -**Net
                loss**
            
            **$**
            **(465,937**
            **)**
            
            **$**
            **(79,186**
            **)**
            
            **$**
            **(105,464**
            **)**
            
            **$**
            **(685,057**
            **)****Basic
                net income (loss) per share:**From
                continuing operations
            
            $
            (0.09
            )
            
            $
            (0.05
            )
            
            $
            (0.50
            )
            
            $
            (0.22
            )From
                discontinued operations
            
            $
            -
            
            
            $
            0.04
            
            
            $
            0.48
            
            
            $
            0.09**Basic
                net loss per share**
            
            **$**
            **(0.09**
            **)**
            
            **$**
            **(0.01**
            **)**
            
            **$**
            **(0.02**
            **)**
            
            **$**
            **(0.13**
            **)****Diluted
                net income (loss) per share:**From
                continuing operations
            
            $
            (0.09
            )
            
            $
            (0.05
            )
            
            $
            (0.50
            )
            
            $
            (0.22
            )From
                discontinued operations
            
            $
            -
            
            
            $
            0.04
            
            
            $
            0.48
            
            
            $
            0.09**Diluted
                net loss per share**
            
            **$**
            **(0.09**
            **)**
            
            **$**
            **(0.01**
            **)**
            
            **$**
            **(0.02**
            **)**
            
            **$**
            **(0.13**
            **)****Shares
                used in computation of basic net income (loss) per
                share**
            
            ****
            **5,234,429**
            
            
            ****
            **4,996,380**
            
            
            ****
            **5,215,015**
            
            
            ****
            **4,981,983****Shares
                used in computation of diluted net income (loss) per
                share**
            
            ****
            **5,234,429**
            
            
            ****
            **4,996,380**
            
            
            ****
            **5,215,071**
            
            
            ****
            **4,981,983**





**See
                accompanying notes to consolidated financial
                statements**





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          of Contents




**BIOSPECIFICS
                TECHNOLOGIES CORP. AND SUBSIDIARIES****ConsolidatedStatements
                of Cash
                Flows**(unaudited)





**Nine
                Months Ended**
              **September
                30,****Cash
                flows from operating activities:**
            
            **2006**
            
            
            **2005**Net
                loss
            
            $
            (2,590,831
            )
            
            $
            (1,112,144
            )Adjustments
                to reconcile net loss to net cash providedby
                operating activities:Depreciation
                and amortization
            
            
            76,079
            
            
            
            94,722Amortization
                of loan discount
            
            
            -
            
            
            
            70,137Issuance
                of treasury stock as employee bonus
            
            
            -
            
            
            
            22,969Issuance
                of restricted stock for services
            
            
            7,875
            
            
            
            7,875Minority
                interest in loss of subsidiaries
            
            
            -
            
            
            
            (861
            )Stock-based
                compensation expense
            
            
            485,456
            
            
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (928,777
            )
            
            
            (7,791
            )Prepaid
                expenses and other current assets
            
            
            11,059
            
            
            
            (37,075
            )Accounts
                payable and accrued expenses
            
            
            372,960
            
            
            
            (455,213
            )Deferred
                revenue
            
            
            368,830
            
            
            
            2,077,176**Net
                cash provided by (used in) operating activities from continuing
                operations**
            
            ****
            **(2,197,349**
            **)**
            
            ****
            **659,795****Net
                cash provided by discontinued operations**
            
            ****
            **952,360**
            
            
            ****
            **423,118****Cash
                flows from investing activities:**Expenditures
                for property, plant and equipment
            
            
            -
            
            
            
            (14,606
            )**Net
                cash used in investing activities from continuing
                operations**
            
            ****
            **-**
            
            
            ****
            **(14,606**
            **)****Net
                cash provided by investing activities from discontinued
                operations**
            
            ****
            **6,058,713**
            
            
            ****
            **378,234****Cash
                flows from financing activities:**Decrease
                in senior secured convertible debt
            
            
            -
            
            
            
            (1,575,000
            )Decrease
                in short-term debt
            
            
            -
            
            
            
            (100,000
            )Payment
                to minority
                shareholders
            
            
            (83,406
            )
            
            
            -Proceeds
                from stock option exercises
            
            
            -
            
            
            
            13,763Deferred
                loan costs, net
            
            
            -
            
            
            
            54,817**Net
                cash used in financing activities from continuing
                operations**
            
            ****
            **(83,406**
            **)**
            
            ****
            **(1,606,420**
            **)****Net
                cash used in financing activities from discontinued
                operations**
            
            ****
            **-**
            
            
            ****
            **(182,000**
            **)**Increase
                in cash and cash equivalents
            
            
            4,730,318
            
            
            
            (341,879
            )Cash
                and cash equivalents at beginning of year
            
            
            539,380
            
            
            
            1,345,800**Cash
                and cash equivalents at end of period**
            
            **$**
            **5,269,698**
            
            
            **$**
            **1,003,921****Supplemental
                disclosures of cash flow information:**Cash
                paid during the periods for:Interest
            
            $
            521
            
            
            $
            124,691**Supplemental
                disclosures of non-cash transactions:**
              For
                the nine months ended September 30, 2006, the Company reduced its
                liability under the to the employee stock bonus plan by issuing $162,300
                of common stock. The remaining balance of $6,600 was
                cancelled.





**See
                accompanying
                notes to consolidated financial
                statements**




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**BIOSPECIFICS
      TECHNOLOGIES CORP.**


**NOTESTO
      CONSOLIDATED FINANCIAL STATEMENTS**




**September
      30, 2006**


**(Unaudited)**





**1.       ORGANIZATION
      AND DESCRIPTION OF BUSINESS**





We
      are a
      biopharmaceutical company that has manufactured the active pharmaceutical
      ingredient, which is referred to as “API” or “API Enzyme” in this Report, used
      in a Food and Drug Administration (“FDA”) licensed collagenase ointment that has
      been marketed for over 30 years. As a result of our research and development
      efforts we have also developed an injectable collagenase for treatment of
      various diseases or indications. We have a development and license agreement
      with Auxilium Pharmaceuticals, Inc. (“Auxilium”) for injectable collagenase
      (which Auxilium has named “AA4500”) for clinical indications in Dupuytren’s
      disease, Peyronies’s disease and frozen shoulder (*adhesive capsulitis*),
      and Auxilium has an option to acquire additional indications that we may pursue,
      including cellulite and lipomas.  Injectable collagenase has completed
      a pivotal clinical trial for the treatment of Dupuytren’s disease. A Phase III
      clinical trial has been initiated and is currently on clinical hold. During
      its
      earnings conference call on May 1, 2007, Auxilium reported that it expects
      the
      Phase III clinical trial to resume in the fourth quarter of 2007.





Prior
      to
      March 2006, we were a party to an exclusive license agreement with Abbott
      Laboratories, Inc. and its subsidiaries (“Abbott”) for the production of the API
      for topical collagenase. In March 2006 we sold our topical collagenase business
      to DFB Biotech, Inc. and its affiliates (“DFB”), including all rights to the
      exclusive license agreement and we were released of any obligations
      thereunder.





In
      addition, DFB acquired all of the issued and outstanding shares of ABC-Curacao,
      pursuant to an asset purchase agreement between us, DFB and ABC-NY (the “Asset
      Purchase Agreement”). ABC-Curacao manufactured the API Enzyme, which in its
      final formulation was marketed by Abbott.





At
      the
      closing of the Asset Purchase Agreement, DFB (i) acquired from us certain
      inventory and manufacturing equipment used in the topical collagenase business,
      (ii) was granted a perpetual royalty free license to use, solely in connection
      with the topical collagenase business, certain intangible assets retained by
      us
      and (iii) was granted the right (for a limited period of time) to use, solely
      in
      connection with the topical collagenase business, certain tangible assets
      retained by us. As part of the sale, we transferred to DFB our FDA manufacturing
      license.





As
      consideration for the purchased assets including our API inventory we received
      $8 million in cash, DFB’s assumption of certain liabilities, and the right to
      receive earn out payments in the future based on sales of certain products.
      In
      connection with the closing of the Asset Purchase Agreement, we agreed to
      provide certain technical assistance and certain transition services to DFB
      in
      consideration of fees and costs totaling over $1.4 million. At the closing,
      DFB
      paid to us a partial payment of $400,000 in respect of the technical assistance
      to be provided by us. The consulting obligations generally expire during March
      2011.





On
      January 8, 2007, we entered into an Amendment to the Asset Purchase Agreement
      with ABC-NY and DFB (the “Amendment”) in order to clarify the intent of the
      parties with respect to certain provisions of the Asset Purchase Agreement
      and
      the parties are discussing further clarifications to address certain concerns
      raised by Auxilium.





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          of Contents




**2.       SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**




**Basis
      of Presentation**




The
      accompanying consolidated financial statements are unaudited, but include all
      adjustments (consisting only of normal, recurring adjustments) which we consider
      necessary for a fair presentation of our financial position at such dates and
      the operating results and cash flows for those periods. Although we believe
      that
      the disclosures in our financial statements are adequate to make the information
      presented not misleading, certain information normally included in financial
      statements prepared in accordance with accounting principles generally accepted
      (“GAAP”) in the United States (the “U.S.”) has been condensed or omitted
      pursuant to the rules and regulations of the Securities and Exchange Commission
      (the “SEC”) for quarterly reporting.





The
      information included in this Report should be read in conjunction with the
      consolidated financial statements and accompanying notes included in our Annual
      Report on Form 10-KSB for the years ended December 31, 2005, 2004 and 2003
      filed with the SEC on March 2, 2007 and in our Quarterly Reports on Form 10-QSB
      for the quarterly periods ended March 31, 2006 and June 30, 2006 filed with
      the
      SEC on May 25, 2007 and June 1, 2007, respectively. The Consolidated Balance
      Sheet as of December 31, 2005 is derived from our audited consolidated
      financial statements as of that date.





**Principles
      of Consolidation**





The
      unaudited consolidated financial statements include the accounts of the Company
      and its majority-owned subsidiaries, Advance Biofactures Corp., (“ABC-NY”),
      Advance Biofactures of Curacao, N.V. (“ABC-Curacao”) which was sold in 2006,
      BioSpecifics of Curacao N.V. and Biota N.V. and its wholly-owned subsidiary,
      which were liquidated in January 2007, BioSpecifics Pharma GmbH ("Bio Pharma")
      of Germany, which was liquidated during December 2005, after elimination of
      inter-company accounts and transactions. Due to the sale of Advanced Biofactures
      of Curacao N.V. in March 2006 to DFB all accounts of this former subsidiary
      and
      certain operations of ABC-NY are classified as discontinued operations in all
      periods presented.





**Revision
      to Previously Filed First Quarter 2006 Results of
      Operations**




For
      the
      first quarter of 2006, we recorded an adjustment related to the sale of our
      topical collagenase
      business. Specifically within operating results and additional paid in capital
      account of $81,200, which related to a reclassification of shares we purchased
      from our minority shareholders to affect the DFB transaction. The
      reclassification of this expense, and the amounts recognized in connection
      with
      the reclassification, were not reflected in the financial results filed in
      our
      Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2006
      filed with the SEC on May 25, 2007. As compared to the financial information
      filed with our first quarter 2006 10-QSB, these adjustments increased net loss
      by $81,200, or approximately $0.02 per basic and diluted share. The impact
      on
      the consolidated balance sheet data was not material.





**Management
      Estimates**





The
      preparation of unaudited consolidated financial statements in conformity with
      accounting principles generally accepted in the U.S. requires the use of
      management’s estimates and assumptions that affect the amounts reported in the
      unaudited consolidated financial statements and accompanying notes. Actual
      results could differ from those estimates.





**Revenue
      Recognition**




We
      recognize revenues resulting from product sales, from licensing and use of
      our
      technology, and from other services we sometimes perform in connection with
      the
      licensed technology under the guidance of Staff Accounting Bulletin (SAB)
      No. 104, “Revenue Recognition.”




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If
      we
      determine that separate elements exist in a revenue arrangement under Emerging
      Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple
      Deliverables” (EITF 00-21), we recognize revenue for delivered elements only
      when the fair values of undelivered elements are known, when the associated
      earnings process is complete, when payment is reasonably assured and, to the
      extent the milestone amount relates to our performance obligation, when our
      customer confirms that we have met the requirements under the terms of the
      agreement.





Revenues,
      and their respective treatment for financial reporting purposes, are as
      follows:





***Product
      Sales***





We
      recognize revenue from product sales when there is persuasive evidence that
      an
      arrangement exists, title passes, the price is fixed or determinable and
      collectibility is reasonably assured. No right of return exists for our products
      except in the case of damaged goods. To date, we have not experienced any
      significant returns of our products.





Net
      sales
      include the sales of the API Enzyme that are recognized at the time the product
      is shipped to customers for laboratory use.





***License
      Fees***





We
      include revenue recognized from upfront licensing and milestone payments in
      “License Fees” in our unaudited consolidated statements of operations in this
      Report.





*Upfront
      License Fees*





We
      generally recognize revenue from upfront fees when the agreement is signed,
      we
      have completed the earnings process and we have no ongoing performance
      obligation with respect to the arrangement. Nonrefundable upfront technology
      license fees for product candidates for which we are providing continuing
      services related to product development are deferred and recognized as revenue
      over the development period.





*Milestones*





Milestones,
      in the form of additional license fees, typically represent nonrefundable
      payments to be received in conjunction with the achievement of a specific event
      identified in the contract, such as completion of specified development
      activities and/or regulatory submissions and/or approvals. We believe that
      a
      milestone represents the culmination of a distinct earnings process when it
      is
      not associated with ongoing research, development or other performance on our
      part. We recognize such milestones as revenue when they become due and
      collection is reasonably assured. When a milestone does not represent the
      culmination of a distinct earnings process, we recognize revenue in a manner
      similar to that of a nonrefundable upfront license fee.





The
      timing and amount of revenue that we recognize from licenses of technology,
      either from upfront fees or milestones where we are providing continuing
      services related to product development, is primarily dependent upon our
      estimates of the development period. We define the development period as the
      point from which research activities commence up to regulatory approval of
      either our, or our partners’ submission assuming no further research is
      necessary. As product candidates move through the development process, it is
      necessary to revise these estimates to consider changes to the product
      development cycle, such as changes in the clinical development plan, regulatory
      requirements, or various other factors, many of which may be outside of our
      control. Should the FDA or other regulatory agencies require additional data
      or
      information, we would adjust our development period estimates
      accordingly.




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The impact on revenue of changes in our estimates and the
      timing thereof is recognized prospectively over the remaining estimated product
      development period.


***Consulting
      and Technical Assistance Services***





We
      recognize revenues from a consulting and technical assistance contract primarily
      as a result of our agreement with DFB. Consulting revenues are recognized
      ratably over the term of the contract. The consulting obligations to DFB
      generally expire during March 2011.





**Stock-Based
      Compensation**




Effective
      January 1, 2006, we adopted SFAS No. 123, “Share Based Payment
      (Revised 2004)” (“SFAS 123(R)”), which supersedes our previous accounting under
      Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees” (“APB 25”), and related interpretations. SFAS 123(R) requires the
      recognition of compensation expense, using a fair-value based method, for costs
      related to all share-based awards including stock options and stock issued
      under
      our employee stock plans. It requires companies to estimate the fair value
      of
      share-based awards on the date of grant using an option-pricing model. The
      value
      of the portion of the award that is ultimately expected to vest is recognized
      as
      expense on a straight-line basis over the requisite service periods in our
      Consolidated Statements of Operations.




In
      November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
      Staff Position No. 123R-3, “Transition Election Related to Accounting for
      the Tax Effects of Share-Based Payment Awards.” An entity shall follow either
      the transition guidance for the additional paid-in capital (“APIC”) pool in
      paragraph 81 of Statement 123(R) or the alternative transition method described
      in the FASB Staff Position (“FSP”). Paragraph 81 of SFAS 123(R) indicates
      that for purposes of calculating the pool of excess tax benefits available
      to
      absorb tax deficiencies recognized subsequent to the adoption of Statement
      123(R), an entity shall include the net excess tax benefits that would have
      qualified as such had the entity adopted SFAS 123(R) for recognition
      purposes. The FSP provided an alternative transition method for calculating
      the tax effects of stock-based compensation pursuant to SFAS 123(R).
      The FSP includes simplified methods to establish the beginning balance of
      the APIC pool related to the tax effects of employee stock-based compensation,
      and to determine the subsequent impact on the APIC pool and Consolidated
      Statements of Cash Flows of the tax effects of employee stock-based compensation
      awards that are outstanding upon our adoption of SFAS 123(R). We
      are reviewing the two methods and will elect an appropriate method for
      the first reporting period of 2007.




*Prior
      to the Adoption of SFAS 123(R)*




Prior
      to
      the adoption of SFAS 123(R), we accounted for stock-based awards under the
      intrinsic value method, which followed the recognition and measurement
      principles of APB 25 and related interpretations. Accordingly, we recognize
      no
      compensation expense in our Consolidated Statements of Operations with respect
      to options awarded to our employees and directors with exercise prices greater
      than or equal to the fair market value of the underlying common stock at the
      date of grant. However, we recognize compensation expense in our Consolidated
      Statements of Operations with respect to the modification of certain employee
      stock option awards.




We
      account for stock options granted to non-employees at fair value using the
      Black-Scholes option-pricing model in accordance with Emerging Issues Task
      Force
      Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to
      Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
      Services.” Stock options granted to non-employees and stock options that are
      modified and continue to vest when an employee has a change in employment status
      are subject to periodic revaluation over their vesting terms. We recognize
      the
      resulting stock-based compensation expense over the service period in which
      the
      non-employee provides services to the Company.




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The
      table
      below illustrates the effect on net loss and net loss per share if we had
      applied the fair value recognition provisions of SFAS No. 123, “Accounting
      for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for
      Stock-Based Compensation – Transition and Disclosures,” to our stock-based
      employee compensation plans. For purposes of this pro forma disclosure, the
      value of the options was estimated using the Black-Scholes option-pricing model.
      Disclosures for the three and nine months ended September 30, 2006 are not
      presented because stock-based payments were accounted for under SFAS 123(R)
      during this period.




**Three Months Ended**
            
            
            **Nine Months Ended****September
                30, 2005**
            
            
            **September
                30, 2005**Reported
                net loss from continuing operations
            
            $
            264,518
            
            
            $
            1,112,144Deduct:
                Stock-based compensation expense determined under the fair value
                based
                method for all awards, net of taxes
            
            
            3,704
            
            
            
            12,116Pro
                forma net loss
            
            $
            268,222
            
            
            $
            1,124,260Basic
                and diluted net loss per shareAs
                reported
            
            $
            (0.05
            )
            
            $
            (0.22
            )Pro
                forma
            
            $
            (0.05
            )
            
            $
            (0.23
            )




*Adoption
      of SFAS 123(R)*




Employee
      stock-based compensation expense recognized for the three and nine months ended
      September 30, 2006 was calculated based on awards ultimately expected to vest
      and has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures
      to be estimated at the time of grant and revised, if necessary, in subsequent
      periods if actual forfeitures differ from those estimates. We adopted SFAS
      123(R) using the modified prospective application transition method, which
      requires that compensation expense be recognized in the financial statements
      for
      all awards granted after the date of adoption as well as for existing awards
      for
      which the requisite service has not been rendered as of the date of adoption.
      The modified prospective transition method does not require restatement of
      prior
      periods to reflect the impact of SFAS 123(R).





Employee
      stock-based compensation expense recognized under SFAS 123(R) was as
      follows:




**Three Months Ended**
            
            
            **Nine Months Ended****September
                30, 2006**
            
            
            **September
                30, 2006**Research
                and development
            
            $
            12,576
            
            
            $
            73,183General
                and administrative
            
            
            49,118
            
            
            
            412,273Total
                employee stock-based compensation expense
            
            
            61,694
            
            
            
            485,456Tax
                benefit related to employee stock-based compensation
                expense
            
            
            —
            
            
            
            —Net
                effect on net loss
            
            $
            61,694
            
            
            $
            485,456Effect
                on basic and diluted net loss per share
            
            $
            (0.01
            )
            
            $
            (0.09
            )




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*Valuation
      Assumptions*




The
      employee stock-based compensation expense recognized under FAS 123(R) for the
      three and nine months ended September 30, 2006 and presented in the pro forma
      disclosure required under FAS 123 for the three and nine month periods of 2005
      was determined using the Black-Scholes option valuation model. Option valuation
      models require the input of subjective assumptions and these assumptions can
      vary over time. The weighted average assumptions used are as follows:




**Employee
                Stock Option Plans****Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Expected
                term (in years)
            5.0
            
            5.0
            
            5.0
            
            5.0Volatility
            128%
            
            87%
            
            128%
            
            87%Risk-free
                interest rate
            5.0%
            
            6.0%
            
            5.0%
            
            6.0%Dividend
                yield
            0%
            
            0%
            
            0%
            
            0%




*Expected
      Term:*Our expected term represents the period that our stock-based awards
      are expected to be outstanding and was determined based on historical experience
      of similar awards, giving consideration to the contractual terms of the
      stock-based awards, vesting schedules and expectations of future employee
      behavior as influenced by changes to the terms of stock-based awards.




*Expected
      Volatility:* Expected volatility is based on the historical volatility of
      our common stock.




*Risk-Free
      Interest Rate:* We base the risk-free interest rate on the implied yield
      available on U.S. Treasury zero-coupon issues with an equivalent remaining
      term
      equal to the expected term of our options at the time of grant.




*Expected
      Dividend:* We have not issued any dividends and do not anticipate paying any
      cash dividends in the foreseeable future. We therefore have assumed a dividend
      yield of zero for purposes of these fair value estimations.





*Stock
      Option Activity*




A
      summary
      of our stock option and warrant activity during the nine months ended September
      30, 2006 is presented below:




**Option**
            
            **Total Number**
              **of
                Shares**
            
            
            **Weighted-Average**
              **Exercise
                Price**Outstanding
                as of December 31, 2005
            
            973,887
            
            
            $1.36Granted
                (1)
            
            731,824
            
            
            $0.96Forfeited
                (2)
            
            (327,175)
            
            
            $1.22Exercised
            
            --
            
            
            --Expired
                (3)
            
            (100,000)
            
            
            $1.10Outstanding
                as of September 30, 2006
            
            1,278,536
            
            
            $1.19Exercisable
                as of September 30, 2006
            
            1,178,536
            
            
            $1.22


________________________________________________________________________________




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(1)
      In
      January 2006, 150,000 stock options were granted to two consultants in
      connection with a research and development license. The stock options were
      subsequently cancelled and are not included in the stock options granted in
      the
      above table.




(2)
      On
      April 6, 2006 315,675 stock options were forfeited by former employees in
      connection with the sale of our topical collagenase business in March
      2006.




(3)
      On
      April 20, 2006 100,000 stock options granted to our former CEO and Chairman
      expired under the terms and conditions of our stock option plan.




The
      weighted-average grant-date fair value for options granted during the nine
      months ended September 30, 2006 was $0.95 per share and $1.48 per share in
      the
      corresponding nine month period of 2005. During the nine months ended September
      30, 2006 and 2005, zero and $13,763 was received from stock options exercised
      by
      employees, respectively.




The
      weighted-average remaining contractual life of options outstanding and
      exercisable as of September 30, 2006 was zero years as all stock options were
      100% vested except for 100,000 options granted in September 2006 which vest
      based on the achievement of certain milestones. The aggregate intrinsic value
      of
      options outstanding and exercisable as of September 30, 2006 was approximately
      $162,317. Aggregate intrinsic value represents the total pre-tax intrinsic
      value, based on the closing prices of our common stock of $1.15 on September
      30,
      2006, which would have been received by the option holders had all option
      holders exercised their options as of that date. Total unrecognized compensation
      cost related to nonvested stock options outstanding as of September 30, 2006
      was
      $64,375.





**Recent
      Accounting Pronouncements**





In
      July
      2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes,” which is effective for fiscal years beginning after
      December 15, 2006. The Interpretation prescribes a recognition threshold
      and measurement attribute for the financial statement recognition and
      measurement of a tax position taken or expected to be taken in a tax return.
      The
      Interpretation also provides guidance on derecognition, classification, interest
      and penalties, accounting for interim periods, disclosure, and transition.
      We
      will adopt the Interpretation on January 1, 2007. We are in the process of
      determining the impact of the Interpretation on our financial position and
      results of operations.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      No. 157”). SFAS No. 157 provides a framework for measuring fair value in
      accordance with GAAP, and expands disclosures regarding fair value measurements
      and the effect on earnings. SFAS No. 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. We are in the process of evaluating the impact SFAS
      No. 157 will have on our financial position and results of
      operations.





In
      September 2006, the U.S. Securities and Exchange Commission (“SEC”) released
      Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements,” (“SAB No. 108”), which provides interpretive guidance on the SEC’s
      views regarding the process of quantifying the materiality of financial
      statement misstatements. SAB No. 108 is effective for years ending after
      November 15, 2006. The application of SAB No. 108 is not expected
      to have a material effect on our financial position and results of
      operations.





**3.DISCONTINUED
      OPERATIONS**





Prior
      to
      March 2006, we were a party to an exclusive license agreement with Abbott for
      the production of the API for topical collagenase.In
      March 2006 we sold our topical collagenase business to DFB, including all rights
      to the exclusive license agreement and we were released of any obligations
      thereunder.




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In
      addition, DFB acquired all of the issued and outstanding shares of ABC-Curacao,
      pursuant to the Asset Purchase Agreement between us, DFB and ABC-NY. ABC-Curacao
      manufactured the API Enzyme, which in its final formulation was marketed by
      Abbott.





At
      the
      closing of the Asset Purchase Agreement, DFB (i) acquired from us certain
      inventory and manufacturing equipment used in the topical collagenase business,
      (ii) was granted a perpetual royalty free license to use, solely in connection
      with the topical collagenase business, certain intangible assets retained by
      us
      and (iii) was granted the right (for a limited period of time) to use, solely
      in
      connection with the topical collagenase business, certain tangible assets
      retained by us. As part of the sale, we transferred to DFB our FDA manufacturing
      license.





As
      consideration for the purchased assets including our API inventory we received
      $8 million in cash, DFB’s assumption of certain liabilities, and the right to
      receive earn out payments in the future based on sales of certain products.
      In
      connection with the closing of the Asset Purchase Agreement, we agreed to
      provide certain technical assistance and certain transition services to DFB
      in
      consideration of fees and costs totaling over $1.4 million. At the closing,
      DFB
      paid to us a partial payment of $400,000 in respect of the technical assistance
      to be provided by us. The consulting obligations generally expire during March
      2011.





For
      accounting purposes, the operating results of ABC-Curacao and certain operations
      of ABC-NY have been classified as discontinued operations in the Consolidated
      Statement of Operations for all periods presented.





Discontinued
      operations are as follows:




**Three
                Months Ended**
              **September
                30,**
            
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Income
                (loss) from discontinued operations
            
            $
            -
            
            
            $
            185,332
            
            
            $
            (1,115,704
            )
            
            $
            427,087Pre-tax
                gain on disposal of discontinued operations (1)
            
            
            -
            
            
            
            -
            
            
            $
            3,601,071
            
            
            
            -Income
                (loss) from discontinued operations
            
            $
            -
            
            
            $
            185,332
            
            
            $
            2,485,367
            
            
            $
            427,087


**_____________________________________________________________________________**




(1)
      We
      did not record any tax liability associated with the gain on the disposal of
      discontinued operations due to our large net operating loss
      carryforwards.




**4.       NET
      LOSS PER SHARE**




In
      accordance with SFAS No. 128, “Earnings Per Share” (SFAS 128), basic net
      loss per share amount is computed using the weighted-average number of shares
      of
      common stock outstanding during the periods presented, while diluted net
      loss per share is computed using the sum of the weighted-average number of
      common and common equivalent shares outstanding. Common equivalent shares used
      in the computation of diluted earnings per share result from the assumed
      exercise of stock options, and convertible notes using the if converted method.
      For the three and nine months ended September 30, 2006 and 2005, we incurred
      a
      net loss from continuing operations and, as such, we did not include the effect
      of outstanding stock options or outstanding convertible notes in the diluted
      net
      loss per share calculations, as their effect would have been
      anti-dilutive.




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The
      following table summarizes the number of common equivalent shares excluded
      from
      the calculation of diluted net loss per share from continuing operations
      reported in the consolidated statement of operations as their effect would
      have
      been anti-dilutive:




**Three
                Months Ended**
              **September
                30,**
            
            
            **Nine
                Months Ended**
              **September
                30,****2006**
            
            
            **2005**
            
            
            **2006**
            
            
            **2005**Stock
                options
            
            
            1,125,992
            
            
            
            1,068,114
            
            
            
            1,039,691
            
            
            
            1,056,501Warrants
            
            
            10,000
            
            
            
            10,000
            
            
            
            10,000
            
            
            
            10,000Total
            
            
            1,135,992
            
            
            
            1,078,114
            
            
            
            1,049,691
            
            
            
            1,066,501




**5.       OTHER
      ACCRUED LIABILITIES**




Other
      accrued liabilities consisted of the following:




**September
                  30,**
                **2006**
              
              
              **December 31,**
                **2005**Trade
                  accounts payable and accrued expenses
              
              $
              2,033,079
              
              
              $
              1,382,824Accrued
                  legal and other professional fees
              
              
              47,985
              
              
              
              124,984Accrued
                  payroll and related costs
              
              
              173,305
              
              
              
              366,537Total
              
              $
              2,254,369
              
              
              $
              1,874,345


**6.       INCOME
      TAXES**





We
      did
      not record income tax provisions for either of the three and nine month periods
      ended September 30, 2006 and 2005.





**7.       SUBSEQUENT
      EVENTS**





On
      May 7,
      2007, the Company terminated the employment of its Chief Financial Officer,
      Lawrence Dobroff, effective May 7, 2007. Effective May 7, 2007, we appointed
      Thomas L. Wegman, our President and Principal Executive Officer to serve as
      our
      Principal Financial Officer for the purpose of making the certifications
      required by the Sarbanes-Oxley Act of 2002.





**Item2:  
Management’s
      Discussion and Analysis or Plan
      of Operation**





*The
      following discussion should be read in conjunction with the Financial Statements
      and related notes thereto included elsewhere in this Report.*





***Overview***




We
      are a
      biopharmaceutical company that has manufactured the active pharmaceutical
      ingredient, referred to as “API” or “API Enzyme” in this Report used in a FDA
      licensed collagenase ointment that has been marketed for over 30 years. As
      a
      result of our research and development efforts we have also developed an
      injectable collagenase for treatment of various diseases or indications. We
      have
      a development and license agreement (the “Auxilium Agreement”) with Auxilium for
      injectable collagenase (which Auxilium has named “AA4500”) for clinical
      indications in Dupuytren’s disease, Peyronies’s disease and frozen shoulder
      (*adhesive capsulitis*), and Auxilium has an option to acquire additional
      indications that we may pursue, including cellulite and
      lipomas.  Injectable collagenase has




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completed
      a pivotal clinical trial for the treatment of Dupuytren’s disease. A Phase III
      clinical trial has been initiated and is currently on clinical
      hold.  During its earnings conference call on May 1, 2007, Auxilium
      reported that it expects the Phase III clinical trial to resume in the fourth
      quarter of 2007.




In
      March
      2006, we sold the collagenase topical business to DFB to refocus our efforts
      on
      the clinical indications related to our collagenase injection business. Sales
      of
      this topical collagenase had declined significantly since the peak year of
      1999.
      Under the terms of the Asset Purchase Agreement, DFB assumed ownership and
      operation of our wholly-owned subsidiary, ABC-Curacao, where the API is
      manufactured, along with certain other assets, including our FDA manufacturing
      license.




Prior
      to
      the sale of our collagenase topical business in March 2006, we had been in
      the
      business of manufacturing the API for a topical collagenase prescription
      product.  This topical collagenase product is a FDA approved biologic
      product indicated for debridement of chronic dermal ulcers and severely burned
      areas.  Under the terms of our agreement with Abbott, Abbott
      compounded the API into a topical collagenase ointment utilizing the API Enzyme
      manufactured by us. The topical collagenase was sold primarily to long-term
      care
      centers.





**Outlook**




We
      foresee the potential to generate income from limited sources in the next
      several years. Under the terms of our agreement with DFB, we are scheduled
      to
      receive certain contractual anniversary payments and, if DFB exceeds a certain
      sales target, we would be entitled to an earn out on sales. Under the terms
      of
      our agreement with Auxilium, we may receive milestone payments upon their
      achieving certain regulatory progress and if Auxilium elects to pursue
      additional indications for injectable collagenase (“Additional
      Indications”).  In addition, as a result of our transaction with DFB
      in the first quarter of 2006, our costs have been significantly reduced due
      mainly to the reduction in our workforce.  Based on our current
      business model, we expect to have adequate cash reserves until the third quarter
      of 2008. In the longer term, a significant portion of our revenues are tied
      directly to the success of Auxilium in commercializing AA4500.




**Significant
      Risks**





We
      are
      dependent to a significant extent on third parties, and our principal licensee,
      Auxilium, may not be able to successfully develop products, obtain required
      regulatory approvals, manufacture products at an acceptable cost, in a timely
      manner and with appropriate quality, or successfully market products or maintain
      desired margins for products sold, and as a result we may not achieve sustained
      profitable operations.





**Critical
      Accounting Policies, Estimates and Assumptions**





The
      preparation of unaudited consolidated financial statements in conformity with
      accounting principles generally accepted in the U.S. requires management to
      make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the unaudited consolidated financial statements and the reported amounts of
      revenues and expenses during the reporting period. These estimates are based
      on
      historical experience and on various other assumptions that we believe are
      reasonable under the circumstances. The information at September 30, 2006 and
      for the three and nine months ended September 30, 2006 and 2005 is unaudited
      but
      includes all adjustments (consisting only of normal recurring adjustments)
      which, in the opinion of management, are necessary to state fairly the financial
      information set forth herein. The December 31, 2005 balance sheet amounts
      and disclosures included herein have been derived from the Company’s
      December 31, 2005 audited consolidated financial statements. The interim
      results are not necessarily indicative of results to be expected for the full
      fiscal year. These unaudited consolidated financial statements should be read
      in
      conjunction with the audited consolidated financial statements for the years
      ended December 31, 2005,




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2004
      and
      2003 included in the Company’s Form 10-KSB filed with the SEC on March 2, 2007.
      While our significant accounting policies are described in more detail in the
      notes to our unaudited consolidated financial statements, we believe the
      following accounting policies to be critical to the judgments and estimates
      used
      in the preparation of our unaudited consolidated financial
      statements.





***Revenue
      Recognition****.* We recognize revenues from product sales
      when there is persuasive evidence that an arrangement exists, title passes,
      the
      price is fixed and determinable, and payment is reasonably assured. We currently
      recognize revenues resulting from the licensing and use of our technology and
      from services we sometimes perform in connection with the licensed
      technology.




We
      enter
      into product development licenses, and collaboration agreements that may contain
      multiple elements, such as upfront license fees, and milestones related to
      the
      achievement of particular stages in product development and royalties. As a
      result, significant contract interpretation is sometimes required to determine
      the appropriate accounting, including whether the deliverables specified in
      a
      multiple-element arrangement should be treated as separate units of accounting
      for revenue recognition purposes, and if so, how the aggregate contract value
      should be allocated among the deliverable elements and when to recognize revenue
      for each element.




We
      recognize revenue for delivered elements only when the fair values of
      undelivered elements are known, when the associated earnings process is complete
      and, to the extent the milestone amount relates to our performance obligation,
      when our licensee confirms that we have met the requirements under the terms
      of
      the agreement, and when payment is reasonably assured. Changes in the allocation
      of the contract value between various deliverable elements might impact the
      timing of revenue recognition, but in any event, would not change the total
      revenue recognized on the contract. For example, nonrefundable upfront product
      license fees, for product candidates where we are providing continuing services
      related to product development, are deferred and recognized as revenue over
      the
      development period.





Milestones,
      in the form of additional license fees, typically represent nonrefundable
      payments to be received in conjunction with the achievement of a specific event
      identified in the contract, such as completion of specified clinical development
      activities and/or regulatory submissions and/or approvals. We believe that
      a
      milestone represents the culmination of a distinct earnings process when it
      is
      not associated with ongoing research, development or other performance on our
      part. We recognize such milestones as revenue when they become due and payment
      is reasonably assured. When a milestone does not represent the culmination
      of a
      distinct earnings process, we recognize revenue in a manner similar to that
      of
      an upfront product license fee.





We
      recognize revenues from a consulting and technical assistance contract primarily
      as a result of the Asset Purchase Agreement. Consulting revenues are recognized
      ratably over the term of the contract. The consulting obligations under the
      Asset Purchase Agreement generally expire during March 2011.





***Inventory
      and Warranty Provisions*****.** Our inventories are
      stated at the lower of cost or realizable market value. In assessing the
      ultimate realization of inventories, we are required to make judgments as to
      future demand requirements and compare that with the current inventory
      levels.  In March 2006 we sold our topical collagenase business to
      DFB, including certain product inventory. As of a result of this sale our
      product inventory for the three and nine months ended September 30, 2006 was
      zero.




***Stock
      Based Compensation*****.** Effective January 1, 2006, we
      account for employee stock-based compensation in accordance with SFAS No. 123,
      “Share Based Payment (Revised 2004)” (“SFAS 123(R)”), which supersedes our
      previous accounting under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”), and related
      interpretations. We adopted SFAS 123(R) using the modified prospective
      application transition method, which requires that compensation expense be
      recognized in the financial statements for all awards granted after the date
      of
      adoption as well as for existing awards for which the requisite service has
      not
      been rendered as of the date of adoption. The




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modified
      prospective transition method does not require restatement of prior periods
      to
      reflect the impact of SFAS 123(R).




Under
      the
      provisions of SFAS 123(R), we estimate the fair value of our employee stock
      awards at the date of grant using the Black-Scholes option-pricing model, which
      requires the use of certain subjective assumptions. The most significant
      assumptions are our estimates of the expected volatility of the market price
      of
      our stock and the expected term of the award. Expected volatility is based
      on
      the historical volatility of our common stock. When establishing an estimate
      of
      the expected term of an award, we consider the vesting period for the award,
      our
      historical experience of employee stock option exercises (including forfeitures)
      and the expected volatility. As required under the accounting rules, we review
      our valuation assumptions at each grant date and, as a result, we are likely
      to
      change our valuation assumptions used to value employee stock-based awards
      granted in future periods.




Further,
      SFAS 123(R) requires that employee stock-based compensation costs be recognized
      over the requisite service period, or the vesting period, in a manner similar
      to
      all other forms of compensation paid to employees. Accordingly, for the three
      and nine month periods ended September 30, 2006, we recognized employee
      stock-based compensation related to SFAS 123(R) of $61,694 and $485,456,
      respectively as part of our operating expenses, with an allocation of $73,183
      to
      research and development expense and $412,273 to general and administrative
      expense. We did not recognize any related tax benefit and we did not capitalize
      any employee stock-based compensation costs in inventory as a component of
      cost
      of product sales during the first quarter of 2006 as the amount was immaterial.
      Due to the sale of our manufacturing facility in Curacao we did not capitalize
      employee stock-based compensation costs in inventory or recognize the related
      expenses in cost of product sales during the second and third quarters of
      2006.




Total
      unrecognized compensation cost related to nonvested stock options as of
      September 30, 2006 was $64,375. There was no stock-based compensation expense
      related to employee stock options recognized under FAS 123(R) during the three
      and nine months ended September 30, 2005.





**RESULTS
      OF OPERATIONS**





As
        a
        result of selling our topical collagenase business in March 2006, which was
        included in our prior period consolidated financial statements including
        the
        first, second and third quarter of 2005, we treated these dispositions as
        discontinued operations and reclassified the financial information reported
        for
        all periods presented. Discontinued operations are more fully discussed in
        Note 3 to our consolidated financial statements, included in this
        Report.





**THREE-MONTHS
      ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005**





**Revenues**





*Product
      Revenues, net*





Product
      revenues include the sales of the API Enzyme recognized at the time it is
      shipped to customers. From continuing operations, we had a small amount of
      revenue from the sale of collagenase for laboratory use.  For the
      three months ended September 30, 2006 and 2005 product revenues were $5,141
      and
      $5,775, respectively. This slight decrease of $634 or 11% was primarily related
      to the amount of material required to perform testing by our
      customers.





*Licensing
      Revenues*





For
      the
      three months ended September 30, 2006 and 2005 we recognized as licensing
      revenue $289,279 and $343,818 of the cash payments received from Auxilium in
      calendar years 2005 and 2004,




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respectively.
      This decrease of $54,539 or 16% was primarily due to an extension of the
      development period.





Under
      current accounting guidance, nonrefundable upfront license fees for product
      candidates where we are providing continuing services related to product
      development, are deferred and recognized as revenue over the development period.
      The remaining balance will be recognized over the respective development periods
      or when we determine that we have no ongoing performance
      obligations.





*Consulting
      Services*





We
      recognize revenues from a consulting and technical assistance contract primarily
      as a result of the Asset Purchase Agreement. Consulting revenues are recognized
      ratably over the term of the contract. The consulting obligations under the
      Asset Purchase Agreement generally expire during March 2011. For the three
      months ended September 30, 2006 and 2005 consulting revenue was $70,000 and
      none, respectively. This increase in consulting revenues was primarily the
      result of the timing of the Asset Purchase Agreement.





**Costs
      and Expenses**





*Research
      and Development Activities*





Research
      and development expenses were $134,194 and $55,661 respectively, for the three
      months ended September 30, 2006 and 2005 an increase in the third quarter of
      2006 of $78,553 or 141%. The increase in research and development expenses
      was
      primarily due to external development work which was partially offset by a
      decrease in research and development personnel costs.





*General
      and Administrative Expenses*





General
      and administrative expenses were $769,449 and $548,667 for the three months
      ended September 30, 2006 and 2005, respectively, which was an increase in the
      third quarter of 2006 of $220,782 or 40%. The increase in general and
      administrative expenses is primarily due to consulting expenses and legal and
      patent expenses.





*Other
      Income (expense), net*





Other
      income (expense), net, was $73,286 and $(12,797) for the three months ended
      September 30, 2006 and 2005, respectively. Other income, net during the third
      quarter of 2006 was primarily due to interest earned on our investments. Other
      expense, net during the third quarter of 2005 was primarily due to interest
      expense associated with a note payable to a related party.




*Income
      Taxes*





The
      expense for income taxes for the three months ended September 30, 2006 and
      2005
      was zero. We recorded no income tax benefit in each period because of
      uncertainties with respect to the timing of future utilization of net operating
      loss benefit.





**NINE-MONTHS
      ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005**





**Revenues**





*Product
      Revenues, net*




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Product
      revenues include the sales of the API Enzyme recognized at the time it is
      shipped to customers. From continuing operations, we had a small amount of
      revenue from the sale of collagenase for laboratory use.  For the nine
      months ended September 30, 2006 and 2005 product revenues were $18,817 and
      $32,995, respectively. This decrease of $14,138 or 43% was primarily related
      to
      the amount of material required to perform testing by our
      customers.





*Licensing
      Revenues*





For
      the
      nine months ended September 30, 2006 and 2005 we recognized as licensing revenue
      $867,837 and $922,824 of the cash payments received in calendar years 2005
      and
      2004, respectively. This decrease of $54,987 was primarily due to an extension
      of the development period which was partially offset by the timing of the
      additional milestone payments received in 2005 under the Auxilium
      Agreement.





Under
      current accounting guidance, nonrefundable upfront license fees for product
      candidates where we are providing continuing services related to product
      development, are deferred and recognized as revenue over the development period.
      The remaining balance will be recognized over the respective development periods
      or when we determine that we have no ongoing performance
      obligations.





*Consulting
      Services*





We
      recognize revenues from a consulting and technical assistance contract primarily
      as a result of the Asset Purchase Agreement. Consulting revenues are recognized
      ratably over the term of the contract. The consulting obligations under the
      Asset Purchase Agreement generally expire during March 2011. For the nine months
      ended September 30, 2006 and 2005 consulting revenue was $163,333 and none,
      respectively. This increase in consulting revenues was primarily the result
      of
      the timing of the Asset Purchase Agreement.





**Costs
      and Expenses**





*Research
      and Development Activities*





Research
      and development expenses were $1,127,406 and $321,242 respectively, for the
      nine
      months ended September 30, 2006 and 2005 an increase of $806,164 or 251%. The
      increase in research and development expenses was primarily due to research
      and
      development license expense, employee stock-based compensation expense and
      external development work, which were partially offset by a decrease in research
      and development personnel costs.





*General
      and Administrative Expenses*





General
      and administrative expenses were $2,668,315 and $1,575,469 for the nine months
      ended September 30, 2006 and 2005, respectively, which was an increase of
      $1,092,846 or 69%. The increase in general and administrative expenses is
      primarily due to employee stock-based compensation expense, legal and patent
      expenses and consulting expenses.





*Other
      Income (expense), net*





Other
      income (expense), net, was $154,903 and ($172,073) for the nine months ended
      September 30, 2006 and 2005, respectively. Other income, net during for the
      2006
      period was primarily due to interest earned on our investments. Other expense,
      net for the 2005 period was primarily due to interest expense related to the
      amortization of the 12% senior secured convertible note borrowed in June 2003
      (“2003 Convertible Note”), which had been outstanding during during six months
      of 2005, a $100,000 promissory note, bearing interest at 8%, to a individual
      lender and the interest associated the remaining balance of a loan from
      Korpodeko.




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*Income
      Taxes*





The
      expense for income taxes for the nine months ended September 30, 2006 and 2005
      was zero. We recorded no income tax benefit in each period because of
      uncertainties with respect to the timing of future utilization of net operating
      loss benefit.





**Liquidity
      and Capital Resources**




To
      date,
      we have financed our operations primarily through product sales, debt
      instruments and licensing revenues and royalties under agreements with third
      parties. At September 30, 2006 and December 31, 2005, we had cash and cash
      equivalents in the aggregate of $5,269,698 and $539,380,
      respectively.





*Continuing
      Operations*





Net
      cash
      used in operating activities for the nine months ended September 30, 2006 was
      $2,197,349 as compared to net cash provided by operating activities in the
      2005
      period of $659,795.  In the 2006 period, as compared to the 2005
      period, the changes in net cash from operating activities was primarily
      attributable to an increase in deferred revenue in the 2005 period due to the
      payments received by us under the Auxilium Agreement, accounts receivable
      associated with consulting services under the Asset Purchase Agreement and
      increased costs related to our general and administrative operations partially
      offset by accounts payable and accrued expenses related to a research and
      development license.





Net
      cash
      used by investing activities for the nine months ended September 30, 2006 was
      zero as compared to net cash used in investing activities of $14,606 in 2005
      period. The net cash used in investing activities in the 2005 period was
      primarily the result of capital expenditures.





Net
      cash
      used in financing activities for the nine months ended September 30, 2006 was
      $83,406 as compared to net cash used in financing activities for the 2005 period
      of $1,606,420. Net cash used in the 2006 period was related to a cash payment
      for shares we purchased from our minority shareholders to affect the DFB
      transaction. In the 2005 period net cash used in financing activities was
      primarily due to the repayment of $1,575,000 in connection with the 2003
      Convertible Note and a $100,000 promissory note from an individual lender,
      which
      was partially offset by deferred loan costs associated with the 2003 Convertible
      Note.





*Discontinued
      Operations*





Cash
      flow
      changes from discontinued operations are primarily due to the operating results
      of ABC-Curacao and certain operations of ABC-NY, which have been classified
      as
      discontinued operations.





Net
      cash
      provided by operating activities from discontinued operations in the 2006 and
      2005 periods were $952,360 and $423,118, respectively.





Net
      cash
      provided by investing activities from discontinued operations in the 2006 and
      2005 periods were $6,058,713 and $378,234, respectively.





Net
      cash
      used in financing activities from discontinued operations in the 2006 and 2005
      periods were zero and $182,000.





**Risk
      Factors**





See
“Risk
      Factors” under Item 1, “Description of Business” included in our Annual Report
      on Form 10-KSB for the years ended December 31, 2005, 2004 and
      2003.




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**Item3.  
Controls
      and Procedures**





See
      “Controls and Procedures” under Item 8A included in our Annual Report on Form
      10-KSB for the years ended December 31, 2005, 2004 and 2003.





Additionally,
      following the death of our former Chairman and CEO, Edwin H. Wegman, on February
      16, 2007 and the termination of our Chief Financial Officer, Lawrence Dobroff,
      on May 7, 2007, the Audit Committee adopted the following two
      procedures:





·
            Any
                payment by the Company in excess of $10,000 other than payments for
                previously approved reoccurring expenses requires the written approval
                of
                any member of the Audit Committee in addition to the signature of
                our
                President, Thomas L. Wegman; and





·
            Any
                payment by the Company for the business expenses of our President,
                Thomas
                L. Wegman requires the written approval of any member of the Audit
                Committee.





**PARTII:   OTHER
      INFORMATION**





**Item1.   Legal
      Proceedings**





None.





**Item2.   Unregistered
      Sales of Equity
      Securities and Use of Proceeds**





None.





**Item3.  
Defaults
      Upon Senior
      Securities**





None.





**Item4.   Submission
      of Matters to a Vote of
      Security Holders**





None.





**Item5.   Other
      Information**





None.





**Item6.   Exhibits**





3.1
            Articles
                of Incorporation of the Registrant (incorporated by reference to
                Exhibit
                3.1 to the Registrant's Annual Report on Form 10-KSB for the fiscal
                years
                ended December 31, 2005, 2004 and
                2003).


3.2
            Bylaws
                of the Registrant (incorporated by reference to Exhibit 3.2 to the
                Registrant’s Annual Report on Form 10-KSB for the fiscal years ended
                December 31, 2005, 2004 and 2003).


31.1
            Certification
                of Principal Executive Officer and
                Principal Financial Officer pursuant to
                Rule13a-14(a)/15d-14(a).


32.1
            Certification
                of Principal Executive Officer and
                Principal Financial Officer pursuant to Section 906 of Sarbanes-Oxley
                Act
                of 2002.




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**SIGNATURES**





Pursuant
      to the requirements of the
      Securities Exchange Act of 1934, the registrant has duly caused this report
      to
      be signed on its behalf by the undersigned thereunto duly
      authorized.





**BIOSPECIFICS
                TECHNOLOGIES CORP.**(Registrant)








Date:  June
                25, 2007
            /s/
                  Thomas L. Wegman
              Thomas
                L. Wegman
              President
              (Principal
                Executive and Financial Officer)




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