UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,
 D.C. 20549FORM 10-Q(Mark
 One)xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2008oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 ACT OF 1934For
 the transition period from __________________ to __________________0-19879(Commission
 file number)BIOSPECIFICS TECHNOLOGIES CORP.(Exact
 Name of Registrant as Specified in Its Charter)  Delaware
11-3054851(State
 or Other Jurisdiction
(I.R.S.
 Employerof
 Incorporation or Organization)
Identification
 No.)  35 Wilbur Street Lynbrook, NY 11563(Address
 of Principal Executive Offices) (Zip Code)516.593.7000(Registrants
 Telephone Number, Including Area Code) Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by
Section 12, 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 o Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company
in Rule 12b-2 of the Exchange Act. Large accelerated filer o
Accelerated filer            
     oNon-accelerated filer o (Do not check if a smaller reporting
 company)
Smaller reporting company x Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No x Indicate the number of
shares outstanding of the issuers classes of common stock, as of the latest
practicable date: Class of Stock
Outstanding
 November 4, 2008Common Stock ($.001 par
 value)
6,006,801     BIOSPECIFICS TECHNOLOGIES CORP.

TABLE OF CONTENTS

PagePART I 
FINANCIAL INFORMATIONITEM 1.
Consolidated
Financial Statements

2Consolidated
Balance Sheet as of September 30, 2008 and
 December 31, 2007

2Consolidated
Statements of Operations for the Three and
 Nine Months Ended September, 2008 and 2007

3Consolidated
Statements of Cash Flows for the Nine
 Months Ended September 30, 2008 and 2007

4Notes to
Consolidated Financial Statements

5ITEM 2.
Managements
Discussion and Analysis

14ITEM 3.
Quantitative and
Qualitative Disclosures About Market
 Risk

22ITEM 4.
Controls and
Procedures

22PART II 
OTHER INFORMATIONITEM 1.
Legal
Proceedings

22ITEM 1A.
Risk Factors

22ITEM 2.
Unregistered
Sales of Equity Securities and Use of
 Proceeds

22ITEM 3.
Defaults Upon
Senior Securities

22ITEM 4.
Submission of
Matters to a Vote of Security Holders

23ITEM 5.
Other
Information

23ITEM 6.
Exhibits

23Introductory Comments  Terminology

Throughout this quarterly report on Form 10-Q (this
Report), the
terms BioSpecifics, Company, we, our, and us refer to BioSpecifics
Technologies Corp. and its subsidiary, Advance Biofactures Corporation (ABC-NY).
We also owned two dormant companies, BioSpecifics of Curacao 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.

PART I  FINANCIAL INFORMATION

Item 1: Consolidated Financial
Statements

BIOSPECIFICS TECHNOLOGIES CORP.
Consolidated Balance Sheets

As of
 September 30,
 2008

Fiscal Year
 Ended
 December 31,
 2007(unaudited)

(audited)AssetsCurrent assets:Cash and cash
equivalents

$
3,735,568

$
68,564Short-term investments


1,375,000


975,000Accounts receivable,
net


70,259


108,809Prepaid expenses and other
current assets


305,055


73,158Total current
assets


5,485,882


1,225,531Deferred royalty
buydown


1,250,000


Property, plant and equipment,
net


9,728


35,680Total
 assets


6,745,610


1,261,211Liabilities and
Stockholders EquityCurrent liabilities:Accounts payable and accrued
expenses


674,145


873,460Accrued third-party development
expenses


2,272,969


2,272,969Accrued tax liability





453,553Deferred revenue


1,341,792


1,437,116Accrued tax and other accrued
liabilities of discontinued operations


78,138


78,138Total current
liabilities


4,367,044


5,115,236Long-term deferred
revenue


2,168,113


2,881,633Stockholders
equity:Series A Preferred stock, $.50
par value, 700,000 shares authorized;
 none outstanding





Common stock, $.001 par value;
10,000,000 shares authorized; 6,138,068
 shares and 5,480,768 shares issued and outstanding at September 30, 2008 and
 December 31, 2007, respectively


6,138


5,481Additional paid-in
capital


12,550,156


4,751,447Accumulated deficit


(11,651,884
)

(10,172,855
)Treasury stock, 131,267 shares
at cost at September 30, 2008 and
 December 31, 2007


(693,957
)

(693,957
)Notes receivable from former CEO
and Chairman and other related party





(625,774
)Total stockholders
equity


210,453


(6,735,658
)Total
 liabilities and stockholders equity

$
6,745,610

$
1,261,211See accompanying notes to consolidated financial
statements

2

BIOSPECIFICS TECHNOLOGIES CORP.
Consolidated Statements of Operations(unaudited)

Three Months Ended
 September 30,

Nine Months Ended
 September 302008

2007

2008

2007Revenues:Net sales

$
13,042

$
10,128

$
29,841

$
22,060Royalties








2,028


Licensing fees


266,281


289,279


798,844


867,837Consulting fees


70,000


70,000


354,185


210,000Total Revenues


349,323


369,407


1,184,898


1,099,897Costs and
expenses:General and
administrative


866,574


1,001,384


2,840,346


2,911,798Research and
development


71,737


142,582


260,440


601,001Total Cost and
Expenses


938,311


1,143,966


3,100,786


3,512,799Operating loss from
continuing operations


(588,988
)

(774,559
)

(1,915,888
)

(2,412,902
)Other income
(expense):Interest income


31,511


29,253


89,314


107,396Interest expense


46,979





46,528


Other, net


104,203





108,730


182,693


29,253


244,572


107,396Loss from continuing operations
before benefit (expense) for income
 tax


(406,295
)

(745,306
)

(1,671,316
)

(2,305,506
)Income tax benefit
(expense)


192,287





192,287


(3,600
)Net loss from continuing
operations

$
(214,008
)
$
(745,306
)
$
(1,479,029
)
$
(2,309,106
)Basic and diluted net loss
per share

$
(0.04
)
$
(0.14
)
$
(0.25
)
$
(0.44
)Shares used in computation of
basic and diluted net
 loss per share


5,976,937


5,317,324


5,803,497


5,276,238See accompanying notes to consolidated financial
statements

3

BIOSPECIFICS TECHNOLOGIES CORP.
Consolidated Statements of Cash Flows
(unaudited)

Nine Months EndedSeptember 302008

2007Cash flows from operating
activities:Net loss

$
(1,479,029
)
$
(2,309,106
)Adjustments to reconcile net
loss to net
 cash provided by operating activities:Gain on disposal of fixed
asset


(5,535
)

Depreciation and
amortization


23,487


24,106Stock-based compensation
expense


1,054,147


477,363Changes in operating assets and
 liabilities:Accounts receivable


38,550


(24,190
)Prepaid expenses and other
current assets


(231,897
)

(69,541
)Accounts payable and accrued
expenses


(652,868
)

353,234Deferred revenue


(808,844
)

(702,837
)Net cash used in operating
activities from
 continuing operations


(2,061,989
)

(2,250,971
)Net cash used in discontinued
operations





(321,037
)Cash flows from investing
activities:Maturities of marketable
securities


1,600,000


Purchases of marketable
securities


(2,000,000
)

Payment for royalty
buydown


(1,250,000
)

Proceeds from sale of fixed
asset


8,000


Net cash used in investing
activities


(1,642,000
)

Cash flows from financing
activities:Proceeds from issuance of
capital stock


6,007,047


Proceeds from stock option
exercises


247,388


87,062Proceeds from pay-off of notes
receivable
 from former CEO and Chairman


1,116,558


Net cash provided by
financing activities
 from continuing operations


7,370,993


87,062Increase in cash and cash
equivalents


3,667,004


(2,484,946
)Cash and cash equivalents at
beginning of
 year


68,564


4,367,178Cash and cash equivalents at
end of period

$
3,735,568

$
1,882,232Supplemental disclosures of
cash flow
 information:Cash paid during the periods
for:Interest

$
33,880

$
Taxes

$
225,824

$
3,600Supplemental disclosures of non-cash
transactions:

In March 2007, in full repayment of the $304,398 loan owed to the
Company by Wilbur Street Corporation (WSC), WSC offset $304,398 in back rent
due from the Company in repayment of the loan. The transaction was recorded by
reducing the rent payable by $304,398 and the receivable from the Companys
former CEO and Chairman by $98,253 and increasing additional paid in capital by
$206,145.

See accompanying notes to consolidated
financial statements

4

BIOSPECIFICS TECHNOLOGIES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008
(Unaudited)

1. ORGANIZATION AND
DESCRIPTION OF BUSINESS

We are a biopharmaceutical company that has been involved in the
development of injectable collagenase for multiple indications. We have a
development and license agreement with Auxilium Pharmaceuticals, Inc.
(Auxilium) for injectable collagenase (which Auxilium has named XIAFLEX TM
(formerly known as AA4500)) for clinical indications in Dupuytrens disease,
Peyronies disease and frozen shoulder (adhesive
capsulitis), and Auxilium has an option to acquire additional
indications that we may pursue, including cellulite and lipomas. In June 2008,
Auxilium announced positive top-line efficacy and safety results from the CORD
I and CORD II Phase III clinical trials for XIAFLEXTM in the
treatment of Dupuytrens contracture. In October 2008, Auxilium confirmed that
it remains on track to submit a Biologics License Application (BLA) for
XIAFLEXTM in Dupuytrens contracture in early 2009.

DISCONTINUED OPERATIONS

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
active pharmaceutical ingredient (API or API Enzyme) 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 Advance
Biofactures of Curacao, N.V. (ABC-Curacao), pursuant to the Asset Purchase
Agreement (the Asset Purchase Agreement) between us, DFB and Advance
Biofactures Corp. (ABC-NY). The
operating results of ABC-Curacao and certain operations of ABC-NY have been
classified as discontinued operations in the consolidated financial statements
for all periods presented.

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. To date, we have received a total of $1,000,000 in
payments from DFB. The consulting obligations generally expire during March
2011.

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.

5

The information included in this Report should be read in
conjunction
with our Quarterly Reports on Form 10-Q for the quarterly periods ended March
31, 2008 and June 30, 2008 filed with the SEC on May 15, 2008 and August 12,
2008 and our Annual Report on Form 10-KSB for the year ended December 31,
2007 filed with the SEC on May 2, 2008.

Principles of Consolidation

The unaudited consolidated
financial statements include the accounts of the Company and its subsidiaries,
ABC-NY, BioSpecifics of Curacao N.V. and Biota N.V., and its wholly-owned
subsidiary. BioSpecifics of Curacao N.V. and Biota N.V. were both liquidated
in January 2007. Due to the sale of ABC-Curacao in March 2006 to DFB all
accounts of this former subsidiary and certain operations of ABC-NY are
classified as discontinued operations in the 2007 periods presented.

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.

Cash, Cash Equivalents and Marketable
Securities

Cash, cash equivalents and marketable securities are stated at
market
value. Cash equivalents include only securities having a maturity of three
months or less at the time of purchase. The Company limits its credit risk
associated with cash, cash equivalents and marketable securities by placing its
investments with banks it believes are highly creditworthy.

Fair Value Measurements

SFAS 157 requires expanded disclosures about fair value
measurements.
SFAS 157 applies to other accounting pronouncements that require or permit fair
value measurements, but does not require any new fair value measurements. We
adopted the provisions of SFAS 157 relating to assets and liabilities
recognized or disclosed in the financial statements at fair value on a
recurring basis on January 1, 2008. The adoption of these provisions did not
have a material effect on our consolidated financial statements.

SFAS 157 clarifies that fair value is an exit price, representing
the
price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants based on the highest and
best use of the asset or liability. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. SFAS 157 requires us
to use valuation techniques to measure fair value that maximize the use of
observable inputs and minimize the use of unobservable inputs. These inputs are
prioritized as follows:


Level 1: Observable inputs
 such as quoted prices for identical assets or liabilities in active markets
Level 2: Other inputs that
 are observable directly or indirectly, such as quoted prices for similar
 assets or liabilities or market-corroborated inputs
Level 3: Unobservable
 inputs for which there is little or no market data and which require us to
 develop our own assumptions about how market participants would price the
 assets or liabilitiesThe following table sets forth the fair value of our financial
assets
that were measured on a recurring basis as of September 30, 2008:
6


Level 1

Level 2

Level 3Cash and
 cash equivalents

$
3,735,568





Auction rate
 securities




$
1,375,000


Auction Rate Securities

In October 2008, the Company received notice from UBS of a solution
that provided us the option to continue to hold our Auction Rate Securities
(ARS) or sell the securities back to UBS at par value plus any accrued
interest. On October 24, 2008 we accepted UBSs offer and will instruct UBS if
and when we want to exercise our rights and sell our ARS to UBS during the
period January 2, 2009 through January 4, 2011.

In the first six months of 2008, we classified our auction rate
securities as long-term investments in our consolidated balance sheet as our
ability to liquidate such securities in the short-term was uncertain. The cost
value of these securities held as of September 30, 2008 amounted to
approximately $1.4 million with a current market value of approximately $1.0
million. We previously had recorded a temporary impairment within other
accumulated comprehensive loss of approximately $0.4 million related to these
auction rate securities which we subsequently reversed as of September 30, 2008
due to the solution provided by UBS in October 2008. We currently expect to
sell our ARS to UBS within the next 12 months and therefore have reclassified
our ARS to short-term investments at our original cost value.

Revenue Recognition

We recognize revenues resulting from product sales, royalties, 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.

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 collectability 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.

Royalty Revenue

We recognize royalties under the earn out provision of the Asset
Purchase Agreement with DFB. We have the right to receive earn out payments in
the future based on sales of certain products. Generally,

7

under this agreement we would receive royalty payments and a report
within ninety (90) days from the end of each calendar year; after the licensee
has sold the royalty-bearing product. We recognize royalty revenues when we can
reliably estimate such amounts and collectibility is reasonably assured.
Accordingly, we recognize royalty revenues in the quarter reported to us by our
licensee.

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. 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 contracts
primarily as a result of our agreements with DFB and Auxilium. Consulting
revenues are recognized ratably over the term of the contract. The consulting
obligations to DFB generally expire during March 2011.

Reimbursable Third-Party Development Costs

We accrue expenses to research and development for estimated
third-party development costs that are reimbursable under our agreement with
Auxilium. Estimates are based on contractual terms, historical development
costs, reviewing third-party data and expectations regarding future development
for certain products. Further, we monitor the activities and clinical trials of
our development partners.

8

If conditions or other circumstances change, we may take actions to
revise our reimbursable third-party development cost estimates. These revisions
could result in an incremental increase in research and development costs.
Amendment No.1 to the Development and License Agreement, dated May 5, 2006
provides that Auxilium and BioSpecifics will share equally in third-party costs
for the development of the lyophilization of the injection formulation. On
April 11, 2008, we received an invoice for approximately $2.3 million from
Auxilium, which represents an amount that Auxilium believes is owed by
us through year end 2007 under this provision. Based on the
information available, we are not able to verify the accuracy or the validity
of the charges and have informed Auxilium that we cannot pay the invoice until
we have done so. Based on our preliminary review, we believe that only a
portion of the amount charged actually relates to the development of the
lyophilization of the injection formulation and, therefore, reserve all rights
related to this matter, including but not limited to our right to contest the
amount charged by Auxilium. For the three and nine month periods ended
September 30, 2008, there has been no change to the estimated amount owed and
is still currently under review

Actual results have differed in the past, and may differ in the
future,
from our estimates and could impact our earnings in any period during which an
adjustment is made.

Research and Development
Expenses

Our research and development (R&D)
costs are expensed as incurred. R&D includes, but is not limited to,
internal costs, such as salaries and benefits, costs of materials, lab expense,
facility costs and overhead. R&D also consists of third-party costs, such
as medical professional fees, contract manufacturing costs for material used in
clinical trials, consulting fees and costs associated with clinical study
R&D arrangements. We fund R&D at medical research institutions under
agreements that are generally cancelable. All of these costs are charged to
R&D as incurred, which may be measured by percentage of completion,
contract milestones, patient enrollment, or the passage of time.

Clinical Trial Expenses

Our
cost accruals for clinical trials are based on estimates of the services
received and efforts expended pursuant to contracts with various clinical trial
centers and clinical research organizations. In the normal course of business
we contract with third parties to perform various clinical trial activities in
the ongoing development of potential drugs. The financial terms of these
agreements are subject to negotiation and vary from contract to contract and
may result in uneven payment flows. Payments under the contracts depend on
factors such as the achievement of certain events, the successful enrollment of
patients, the completion of portions of the clinical trial, or similar
conditions. The objective of our accrual policy is to match the recording of
expenses in our financial statements to the actual cost of services received
and efforts expended. As such, expenses related to each patient enrolled in a
clinical trial are recognized ratably beginning upon entry into the trial and
over the course of the patients continued participation in the trial. In the
event of early termination of a clinical trial, we accrue an amount based on
our estimate of the remaining non-cancelable obligations associated with the
winding down of the clinical trial. Our estimates and assumptions could differ
significantly from the amounts that may actually be incurred.

Stock-Based Compensation

Under
the provisions of Statement of Financial Accounting Standards (SFAS)
No. 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 of these
assumptions are our estimates of the expected volatility of the market price of
our stock and the expected term of the award. When establishing an estimate of
the expected term of an award, we consider the vesting period for the award,
our recent historical experience of employee stock option exercises (including
forfeitures) and the expected volatility. As required under the accounting
rules, we review our

9

valuation
assumptions at each grant date and, as a result, our valuation assumptions used
to value employee stock-based awards granted in future periods may change. The
weighted-average assumptions used were as follows:

Quarter Ended 
 September 30,
 2008

Year Ended 
 December 31,
 2007Stock Option PlansExpected
 life, in years

5.0


5.0Risk
 free interest rate

2.6
%

5.0
%Volatility

73
%

106
%Dividend
 yield




Further,
SFAS 123(R) requires that employee stock-based compensation costs to be
recognized over the requisite service period, or the vesting period, in a
manner similar to all other forms of compensation paid to employees. The
allocation of employee stock-based compensation costs to each operating expense
line are estimated based on specific employee headcount information at each
grant date and estimated stock option forfeiture rates and revised, if
necessary, in future periods if actual employee headcount information or
forfeitures differ materially from those estimates. As a result, the amount of
employee stock-based compensation costs we recognize in each operating expense
category in future periods may differ significantly from what we have recorded
in the current period.

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

Three Months Ended
 September 30,

Nine Months Ended
 September 30,2008

2007

2008

2007Research and development

$
20,468

$
4,979

$
30,426

$
9,219General and administrative


295,888


224,240


1,023,721


468,144Total
stock-based compensation expense

$
316,356

$
229,219

$
1,054,147

$
477,363Stock Option Activity

A summary of our stock
option and warrant activity during the nine months ended September 30, 2008 is
presented below:

Option

Total Number
 of Shares

Weighted-Average
 Exercise PriceOutstanding as of
 December 31, 2007


1,409,700


$
1.86Granted


232,500


$
16.00Forfeited






Exercised


(207,300
)

$
1.20Expired


(1,500
)

$
4.38Outstanding
 as of September 30, 2008


1,433,400


$
4.25Exercisable
 as of September 30, 2008


1,150,900


$
2.54The
weighted-average grant-date fair value for options granted during the nine
months ended September 30, 2008 was $16.00 per share and $4.50 per share in the
corresponding nine month period of 2007.

10

During
the nine months ended September 30, 2008 and 2007, $247,388 and $87,062 were
received from stock options exercised by employees, respectively.

The
aggregate intrinsic value of options outstanding and exercisable as of
September 30, 2008 was approximately $21.9 million. Aggregate intrinsic value
represents the total pre-tax intrinsic value, based on the closing price of our
common stock of $19.00 on September 30, 2008, 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 non-vested stock options
outstanding as of September 30, 2008 was approximately $1.7 million which we
expect to recognize over a weighted-average period of 1.1 years.

Property, Plant and
Equipment

Property, plant and equipment are stated
at cost, less accumulated depreciation. Machinery and equipment, furniture and
fixtures, and autos are depreciated on the straight-line basis over their
estimated useful lives of 5 to 10 years. Leasehold improvements are being
amortized over the lesser of their estimated useful lives or the life of the
lease, which is approximately 8 to 10 years.

Recent Accounting Pronouncements

In June 2007, the Emerging Issues Task Force (EITF) reached a
consensus
on EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for
Goods or Services Received to Be Used in Future Research and Development
Activities (EITF No. 07-3). EITF No. 07-3 requires companies that are involved
in research and development activities to defer nonrefundable advance payments
for future research and development activities and to recognize those payments
as goods and services are delivered. The Company will be required to assess on
an ongoing basis whether or not the goods or services will be delivered and to
expense the nonrefundable advance payments immediately if it is determined that
delivery is unlikely. EITF No. 07-3 is effective for new arrangements entered
into subsequent to the beginning of the Companys fiscal year 2009. The
adoption of this EITF did not have a material effect on our consolidated
financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures
about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133. SFAS No. 161 requires enhanced disclosures about an entitys
derivative and hedging activities. Entities will be required to provide
enhanced disclosures about: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedge items are accounted
for under SFAS No. 133 and its related interpretations; and (c) how derivative
instruments and related hedge items affect an entitys financial position,
financial performance and cash flows. The Company is required to adopt SFAS No.
161 beginning in fiscal year 2009. We do not expect the adoption of this FAS
statement to have a material effect on our consolidated financial statements.

In April 2008, the FASB issued FSP FAS 142-3,
Determination of
Useful Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the
factors that should be considered in developing the renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FAS 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 also
requires expanded disclosure related to the determination of intangible asset
useful lives. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008. Earlier adoption is not permitted. We do not expect the
adoption of this FSP to have a material effect on our consolidated financial
statements.

In May 2008, the FASB issued Staff Position No. APB 14-1,
Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement) (the FSP), which clarifies the
accounting for convertible debt instruments that may be settled in cash
(including partial cash settlement) upon conversion. The FSP requires issuers
to account separately for the

11

liability and equity components of certain convertible debt
instruments
in a manner that reflects the issuers nonconvertible debt (unsecured debt)
borrowing rate when interest cost is recognized. The FSP requires bifurcation
of a component of the debt, classification of that component in equity and the
accretion of the resulting discount on the debt to be recognized as part of
interest expense in our consolidated statement of operations. The FSP requires
retrospective application to the terms of instruments as they existed for all
periods presented. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. We do not expect the adoption of this FSP to have a
material effect on our consolidated financial statements.

In May 2008,
the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. This Statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP in the United States (the GAAP hierarchy). This Statement
will not have any impact on the Companys consolidated financial statements.

In May 2008, the FASB issued SFAS No. 163, Accounting for
Financial
Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60. The
scope of this Statement is limited to financial guarantee insurance (and
reinsurance) contracts, as described in this Statement, issued by enterprises included
within the scope of Statement 60. Accordingly, this Statement does not apply to
financial guarantee contracts issued by enterprises excluded from the scope of
Statement 60 or to some insurance contracts that seem similar to financial
guarantee insurance contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivables). This Statement
also does not apply to financial guarantee insurance contracts that are
derivative instruments included within the scope of FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. We do not
expect the adoption of this FAS statement to have a material effect on our
consolidated financial statements.

In June 2008, the FASB issued Emerging Issues Task Force Issue 07-5
Determining whether an Instrument (or Embedded Feature) is indexed to an
Entitys Own Stock (EITF No. 07-5). This Issue is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Early application is not permitted.
Paragraph 11(a) of Statement of Financial Accounting Standard No 133
Accounting for Derivatives and Hedging Activities (SFAS 133) specifies that
a contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Companys own stock and (b) classified in
stockholders equity in the statement of financial position would not be
considered a derivative financial instrument. EITF No.07-5 provides a new
two-step model to be applied in determining whether a financial instrument or
an embedded feature is indexed to an issuers own stock and thus able to
qualify for the SFAS 133 paragraph 11(a) scope exception. We do not expect the
adoption of this EITF to have a material effect on our consolidated financial
statements.

In June 2008, FASB issued EITF Issue No. 08-4, Transition
Guidance for
Conforming Changes to Issue No. 98-5 (EITF No. 08-4). The objective of
EITF No.08-4 is to provide transition guidance for conforming changes made to
EITF No. 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, that result
from EITF No. 00-27 Application of Issue No. 98-5 to Certain Convertible
Instruments, and SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. This Issue is effective
for financial statements issued for fiscal years ending after December 15,
2008. Early application is permitted. We do not expect the adoption of
this EITF to have a material effect on our consolidated financial statements.

12

3. 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 warrants using the if converted method. For the
three and nine months ended September 30, 2008 and 2007, we incurred a net loss
from continuing operations and, as such, we did not include the effect of
outstanding stock options or warrants in the diluted net loss per share
calculations, as their effect would have been anti-dilutive.

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 30,2008

2007

2008

2007Stock options


1,355,912


1,074,531


1,270,527


1,061,844Warrants





10,000





10,000Total


1,355,912


1,084,531


1,270,527


1,071,8444. TOTAL COMPREHENSIVE INCOME (LOSS)

Comprehensive
loss is comprised of net loss and other comprehensive income. Specifically, we
include in other comprehensive income the changes in unrealized gains and
losses on our holdings of available-for-sale securities, which are excluded
from our net loss. The change in other comprehensive income is the direct
result of the offer to repurchase our auction rate securities by UBS described
more fully under Note 2 Summary of Significant
Accounting Policies - Auction Rate Securities. The following table
presents the calculation of our comprehensive income (loss):

Three Months Ended
 September 30,

Nine Months Ended 
 September 30,2008

2007

2008

2007Net
loss

$
(214,008
)
$
(478,002
)
$
(1,479,029
)
$
(1,563,800
)Other comprehensive
income:Change in
unrealized gains on marketable securities


354,572








Total
Comprehensive gain (loss)

$
140,564

$
(478,002
)
$
(1,479,029
)
$
(1,563,800
)5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued
expenses consisted of the following:

September,
 2008

December 31,
 2007Trade accounts payable and accrued expenses

$
470,463

$
686,742Accrued legal and other professional fees


87,592


98,438Accrued payroll and related costs


116,090


88,280Total

$
674,145

$
873,46013

6. INCOME TAXES

In
September 2008, we filed our delinquent federal and state tax returns for the
years ended 2003, 2004, 2005, 2006 and 2007. Prior to finalizing our tax
returns for the aforementioned periods, we had accrued approximately $198,000
in federal and state taxes, $175,000 in penalties and $80,000 in interest under
our original estimates through December 31, 2007.

After
finalizing our tax filings in 2008, we had a change in estimates related to
federal and state taxes, penalties and interest for the prior annual periods
based on a clarification of our intercompany transactions. We accrued an
additional tax expense of approximately $28,000 for federal and state taxes in
third quarter of 2008 related to prior years and postponed the recognition of a
tax benefit of $220,000 for the 2007 period due to net operating loss
carrybacks. We have applied for a refund of this tax benefit and have recorded
a receivable under prepaid expenses and other current assets on our Balance
Sheet as of September 30, 2008. This tax benefit also resulted in a reduction
to penalties and interest of approximately $103,000 and $47,000 respectively.
For the three and nine month period ended September 30, 2008 we had a net tax
benefit of $192,287.

7. RELATED PARTY TRANSACTIONS

On February 1, 2008, the Estate of Edwin H. Wegman (the
Estate) sold
an aggregate of 344,114 shares of the Companys common stock, par value $0.001,
at a purchase price of $12.00 per share to certain private investors. The
Estate used certain of the proceeds of the transaction to repay the loan owed
to the Company by Edwin H. Wegman, our former Chairman and CEO. The total loan
repayment amount was $1,116,558, which represents the principal amount of $625,774 owed to the Company
and accrued interest through January 31, 2008 of $490,784.

In March 2007, in full repayment of the $304,398 loan owed to the
Company by Wilbur Street Corporation (WSC), WSC offset $304,398 in back rent
due from the Company in repayment of the loan.

8. SUBSEQUENT EVENTS

None.

Item 2: Managements
Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in
conjunction with the consolidated financial statements and related notes
thereto included elsewhere in this Report.

Overview

We are a biopharmaceutical company that has been involved in the
development of injectable collagenase for multiple indications. We have a
development and license agreement with Auxilium Pharmaceuticals, Inc.
(Auxilium) for injectable collagenase (which Auxilium has named XIAFLEX TM
(formerly known as AA4500)) for clinical indications in Dupuytrens disease,
Peyronies disease and frozen shoulder (adhesive
capsulitis), and Auxilium has an option to acquire additional
indications that we may pursue, including cellulite and lipomas. In June 2008,
Auxilium announced positive top-line efficacy and safety results from the CORD
I and CORD II Phase III clinical trials for XIAFLEXTM in the
treatment of Dupuytrens contracture. In October 2008, Auxilium confirmed that
it remains on track to submit a Biologics License Application (BLA) for
XIAFLEXTM in Dupuytrens contracture in early 2009.

14

Outlook

We foresee the potential to generate income from limited sources
in the
next several years. Under the terms of our agreement with DFB Biotech, Inc. and
its affiliates (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).

Based on our current business model, we expect to have adequate
cash
reserves until the third quarter of 2010 depending on the amount actually owed
to Auxilium, as discussed in Item 1A, Risk Factors, included in our Annual
Report on Form 10-KSB for the year ended December 31, 2007. As a significant
portion of our revenues is tied directly to the success of Auxilium in
commercializing XIAFLEXTM, we cannot reasonably forecast our financial
condition beyond this time.

Significant Risks

In
recent history we have had operating losses and may not achieve sustained
profitability. As of September 30, 2008, we had an accumulated deficit from
continuing operations of $11,651,884.

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.

In October 2008, the Company received notice from UBS of a solution
that provided us the option to continue to hold our ARS or sell the securities
back to UBS at par value plus any accrued interest. On October 24, 2008 we
accepted UBSs offer and will instruct UBS if and when we want to exercise our
rights and sell our ARS to UBS during the period January 2, 2009 through
January 4, 2011.

In the first six months of 2008, we classified our auction rate
securities as long-term investments in our consolidated balance sheet as our
ability to liquidate such securities in the short-term was uncertain. The cost
value of these securities held as of September 30, 2008 amounted to
approximately $1.4 million with a current market value of approximately $1.0
million. We previously had recorded a temporary impairment within other
accumulated comprehensive loss of approximately $0.4 million related to these
auction rate securities which we subsequently reversed as of September 30, 2008
due to the solution provided by UBS in October 2008. We currently expect to
sell our ARS to UBS within the next 12 months and therefore have reclassified
our ARS to short-term investments at our original cost value.

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, 2008 and
for the three and nine months ended September 30, 2008 and 2007 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, 2007 balance
sheet amounts and disclosures included herein have been derived from the
Companys December 31, 2007

15

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,
2007 and 2006 included in the Companys Form 10-KSB filed with the SEC on May
2, 2008 and our Quarterly Reports on Form 10-Q for the quarter ended March 31,
2008 and June 30, 2008. 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 recognize royalties under the earn out provision of the Asset
Purchase Agreement with DFB. We have the right to receive earn out payments in
the future based on sales of certain products. Royalties are recognized as earned
in accordance with the contract terms when royalties can be reliably measured,
and collectibility is reasonably assured, such as upon the receipt of a royalty
statement from our licensees.

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.

Receivables and Deferred Revenue. Under
our agreement with DFB, we agreed to provide certain technical assistance and
transitional services 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. To date, we have
received a total of $1,000,000 in payments from DFB. The consulting

16

obligations generally expire during March 2011. As of September 30,
2008 the remaining accounts receivable balance due was $400,000 for future
services and was offset by the associated deferred revenues to be recognized in
future periods of $400,000.

Royalty Buy-Down.In August 2008, we signed an agreement to significantly improve the deal
terms related to our future royalty obligations for Peyronies disease by
buying down our future royalty obligations with a one-time cash payment. We
modified our agreement to lower future royalties payable on net sales of
injectable collagenase, XIAFLEX(TM), for Peyronies disease. In addition, we
agreed to pay certain development milestones, if achieved.

As of September 30, 2008, we capitalized $1,250,000 which will be
amortized over approximately five years beginning on the date of the first
commercial sale of XIAFLEX(TM), for Peyronies disease, which represents the
period estimated to be benefited, using the straight-line method. In accordance
with SFAS No. 142, Goodwill and Other
Intangibles,the Company amortizes intangible assets with finite
lives in a manner that reflects the pattern in which the economic benefits of
the assets are consumed or otherwise used up. If that pattern cannot be
reliably determined, the assets are amortized using the straight-line method.

Reimbursable
Third-Party Development Costs. We accrue expenses
to research and development for estimated third-party development costs that
are reimbursable under our agreement with Auxilium. Estimates are based on
contractual terms, historical development costs, reviewing third-party data and
expectations regarding future development for certain products. Further, we
monitor the activities and clinical trials of our development partners.

If conditions or other circumstances change, we may take actions to
revise our reimbursable third-party development cost estimates. These revisions
could result in an incremental increase in research and development costs. For
example, Amendment No.1 to the Development and License Agreement, dated May 5,
2006 provides that Auxilium and BioSpecifics will share equally in third-party
costs for the development of the lyophilization of the injection formulation.
On April 11, 2008, we received an invoice for approximately $2.3 million from
Auxilium, which represents an amount that Auxilium believes is owed by
us through year end 2007 under this provision. Based on the
information available, we are not able to verify the accuracy or the validity
of the charges and have informed Auxilium that we cannot pay the invoice until
we have done so. Based on our preliminary review, we believe that only a
portion of the amount charged actually relates to the development of the
lyophilization of the injection formulation and, therefore, reserve all rights
related to this matter, including but not limited to our right to contest the
amount charged by Auxilium. For the three and nine month periods ended
September 30, 2008, there has been no change to the estimated amount owed and
is still currently under review.

Actual results have differed in the past, and may differ in the
future,
from our estimates and could impact our earnings in any period during which an
adjustment is made.

Stock
Based Compensation. 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

17

to employees. The allocation of employee stock-based compensation
costs
to each operating expense line are estimated based on specific employee
headcount information at each grant date and estimated stock option forfeiture
rates and revised, if necessary, in future periods if actual employee headcount
information or forfeitures differ materially from those estimates. As a result,
the amount of employee stock-based compensation costs we recognize in each
operating expense category in future periods may differ significantly from what
we have recorded in the current period.

RESULTS OF OPERATIONS

THREE-MONTHS ENDED SEPTEMBER 30, 2008 AND
2007

Revenues

Product Revenues, net

Product revenues include the sales of the
API Enzyme recognized at the time it is shipped to customers. We recognized a
small amount of revenue from the sale of collagenase for laboratory use. For
the three months ended September 30, 2008 and 2007 product revenues were
$13,042 and $10,128, respectively. This increase of $2,914 or 29% was primarily
related to the amount of material required to perform testing by our customers.

Royalties

We received all of our royalty revenues from DFB under the earn out
payment provision of the Asset Purchase Agreement. Royalty revenues recognized
under our agreement with DFB for the three months ended September 30, 2008 and 2007
were zero.

Licensing Revenues

For the three months ended September 30,
2008 and 2007, we recognized licensing revenue of $266,281 and $289,279,
respectively. This decrease of $22,998 or 8% was primarily related to the
extension of the development timeline for a certain indication for injectable
collagenase under the Auxilium Agreement. Licensing revenues recognized are
related to the cash payments received under the Auxilium Agreement in prior
years and amortized over the expected 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 consulting and technical assistance contracts primarily
as a result of the Asset Purchase Agreement and an Auxilium consulting
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, 2008 and 2007 consulting revenues were $70,000 in each period.

18

Costs and Expenses

Research and Development Activities

Research and development expenses were
$71,737 and $142,582 respectively, for the three months ended September 30,
2008 and 2007. This decrease of $70,845 or 50% in research and development
expenses was primarily due to certain external study development costs
partially offset by an increase in stock-based compensation.

General and Administrative Expenses

General and administrative expenses were
$866,574 and $1,001,384 for the three months ended September 30, 2008 and 2007,
respectively. The decrease in general and administrative expenses of $134,810
or 13% was primarily due to lower outside consulting expense and legal fees
partially offset by an increase in stock-based compensation expense.

Other Income (expense), net

Other income, net, was $182,693 and
$29,253 for the three months ended September 30, 2008 and 2007, respectively.
Components of other income, net, consist of investment income, a reduction in
interest expense and other, net. Investment income for the three months ended
September 30, 2008 was $31,511 as compared to $29,253 in the comparable period
of 2007. This increase of $2,258 or 8% was primarily due to higher invested
balances during the 2008 period. Interest expense reduction for the three
months ended September 30, 2008 was $46,980 as compared to zero in the 2007
period. This reduction in interest expense is primarily the result of lower
than previously estimated accrued interest associated with our delinquent
federal and state tax returns. Other, net for the three months ended September
30, 2008 was $104,203 as compared to zero in the 2007 period. The increase in
other, net was primarily due to lower than previously estimated tax penalties
due in connection with our delinquent federal and state tax returns.

Income Taxes

In
September 2008, we filed our federal and state tax returns for the years ended
2003, 2004, 2005, 2006 and 2007. We paid federal and state taxes of
approximately $225,000 related to our federal and state tax returns for the
years ended 2003, 2004, 2005 and 2006. We accrued an additional $28,079 in
federal and state taxes related to previous years for the three months ended
September 30, 2008. In connection with the filing of our 2007 federal tax
return, we have applied for a refund of approximately $220,000 and have
recorded a receivable under prepaid expenses and other current assets on our
Balance Sheet as of September 30, 2008 resulting in a net tax benefit of
$192,287 for the three months ended September 30, 2008.

NINE-MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

Revenues

Product Revenues, net

Product revenues include the sales of the
API Enzyme recognized at the time it is shipped to customers. We recognized a
small amount of revenue from the sale of collagenase for laboratory use. For
the nine months ended September 30, 2008 and 2007 product revenues were $29,841
and $22,060, respectively. This increase of $7,781 or 35% was primarily related
to the amount of material required to perform testing by our customers.

19

Royalties

We receive all of our royalty revenues from DFB under the earn out
payment provision of the Asset Purchase Agreement. Royalty revenues recognized
under our agreement with DFB for the nine months ended September 30, 2008 were
$2,028 and zero in the comparable period of 2007. This increase for the 2008
was due to certain foreign sales levels achieved and reported to us in the
second quarter of 2008 by DFB in connection with the sale of topical collagenase.

Licensing Revenues

For the nine months ended September 30,
2008 and 2007, we recognized licensing revenue of $798,844 and $867,837,
respectively. This decrease of $68,993 or 8% was primarily related to the
extension of the development timeline for a certain indication for injectable
collagenase under the Auxilium Agreement. Licensing revenues recognized are
related to the cash payments received under the Auxilium Agreement in prior
years and amortized over the expected 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 consulting and technical assistance contracts primarily
as a result of the Asset Purchase Agreement and an Auxilium consulting
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, 2008 and 2007 consulting revenues were $354,185 and $210,000, respectively.
This increase of $144,185 or 67% was primarily due to the recognition of
revenues earned in connection with the October 2007 consulting agreement with
Auxilium.

Costs and Expenses

Research and Development Activities

Research and development expenses were
$260,440 and $601,001 respectively, for the nine months ended September 30,
2008 and 2007. This decrease of $340,561 or 57% in research and development
expenses was primarily due to lower third-party development costs and certain
external study development expenses partially offset by an increase in
stock-based compensation.

General and Administrative Expenses

General and administrative expenses were
$2,840,346 and $2,911,798 for the nine months ended September 30, 2008 and 2007,
respectively. The decrease in general and administrative expenses of $71,452 or
2% was primarily due to lower administrative personnel costs, legal fees and consulting
expenses partially offset by stock-based compensation.

Other Income (expense), net

Other income, net, was $244,572 and
$107,396 for the nine months ended September 30, 2008 and 2007, respectively.
Components of other income, net consist of investment income, a reduction in
interest expense and other, net. Investment income for the nine months ended
September 30, 2008 was $89,314 as compared to $107,396 in the comparable period
of 2007. This decrease of $18,082 or 17% was primarily due to a lower return on
the invested balances during the 2008 period. Interest expense reduction for
the nine months ended September 30, 2008 was $46,529 as compared to zero in the
2007

20

period. This reduction in interest expense
is primarily the result of lower than previously estimated accrued interest
associated with our delinquent federal and state tax returns. Other, net for
the nine months ended September 30, 2008 was $108,730 as compared to zero in
the 2007 period. The increase in other, net was primarily due to lower than
previously estimated tax penalties due in connection with our delinquent
federal and state tax returns and a small gain from proceeds received from the
sale of a company owned vehicle.

Income Taxes

In
September 2008, we filed our federal and state tax returns for the years ended
2003, 2004, 2005, 2006 and 2007. We paid federal and state taxes of
approximately $225,000 related to our federal and state tax returns for the
years ended 2003, 2004, 2005 and 2006. We accrued an additional $28,079 in
federal and state taxes related to previous years for the nine months ended
September 30, 2008. In connection with the filing of our 2007 federal tax
return, we have applied for a refund of approximately $220,000 and have
recorded a receivable under prepaid expenses and other current assets on our
Balance Sheet as of September 30, 2008 resulting in a net tax benefit of
$192,287 for the nine months ended September 30, 2008.

Liquidity and Capital Resources

To
date, we have financed our operations primarily through product sales, debt
instruments, licensing revenues, royalties under agreements with third parties
and sales of our common stock. At September 30, 2008 and December 31, 2007, we had cash and
cash equivalents in the aggregate of $3,735,568 and $68,564, respectively.

Continuing
Operations

Net cash used in operating activities for
the nine months ended September 30, 2008 was $2,061,989 as compared to net cash
used in operating activities in the 2007 period of $2,250,971. In the 2008 period, as compared to the 2007
period, the changes in net cash used in operating activities was primarily
attributable to a lower net loss for the period, non-cash stock compensation
expense partially offset by payments related to accounts payable, accrued
expenses related to income taxes paid, prepaid expenses and other current
assets and deferred revenue.

Net
cash used in investing activities for the nine months ended
September 30, 2008 was $1,642,000 as compared to net cash used in investing activities in the
2007 period of zero. The
increase in net cash used in investing activities for the 2008 period, reflect
our investment in marketable securities of $2,000,000, a one-time cash payment
related to our future royalty obligations for Peyronies disease of $1,250,000,
offset by maturities of investments of $1,600,000.

Net
cash provided by financing activities for the nine months ended September
30, 2008 was $7,370,993 as
compared to the 2007 period of $87,062. The increase in net cash provided by
financing activities for the 2008 consisted of proceeds from the sale of our
common stock of $6,007,047, repayment of an outstanding loan from our former
Chairman and CEO of $1,116,558 and proceeds received from stock option
exercises of $247,388. Net cash provided by financing activities in the 2007
period was from proceeds received from stock option exercises.

Discontinued Operations

Net cash used in operating
activities from discontinued operations for the nine months ended September 30,
2008 was zero as compared to $321,037 in the comparable period of 2007.

21

Item 3: Quantitative and
Qualitative Disclosures About Market Risk.

Pursuant to Item 305(c) of Regulation S-K, the information under
this
Item 3 is not required to be disclosed until after the first fiscal year end in
which Item 305 is applicable. Item 305 will be first applicable to the Company
in its annual report for the fiscal year ended December 31, 2008.

Item 4. Controls and
Procedures

Evaluation of Disclosure Controls and Procedures

The
Company, under the supervision and with the participation of Thomas L. Wegman,
the Companys President, Principal Executive Officer and Principal Financial
Officer, evaluated the effectiveness of its disclosure controls and procedures
as of the end of the period covered by this Report. Based on that evaluation,
management has concluded that the Companys disclosure controls and procedures
are effective to ensure that information required to be disclosed in reports
filed under the Securities Exchange Act of 1934, as amended (the Exchange
Act), is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC, and that such information is
accumulated and communicated to the Companys management to allow timely
decisions regarding required disclosure. Because of the inherent limitations in
all control systems, any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives, and management necessarily is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Furthermore, our controls and procedures can be circumvented by the
individual acts of some persons, by collusion of two or more people or by
management override of the control, and misstatements due to error or fraud may
occur and not be detected on a timely basis.

Changes in Internal Controls

There
were no changes in our internal controls over financial reporting during the
nine month period ended September 30, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds

On August 19, 2008, the Company closed on the sale of 50,000
shares of
its common stock in a private placement offering to a private investment fund
at a purchase price of $22.50 per share, for aggregate proceeds to the Company
of $1,125,000. The shares were offered and sold in reliance on Section 4(2) of
the Act as private placements of securities exempt from the registration
requirements of the Act. The shares were sold to financially sophisticated
investors who had access to the sort of information which registration under
the Act would disclose. Additionally, no commissions were paid and no general
solicitation was made to any person or entity in connection with the sale of
the shares.

Item 3. Defaults Upon Senior
Securities

None.

22

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

Our 2008 Annual Meeting of Stockholders was held on September 9,
2008
at the offices of Thelen Reid Brown Raysman & Steiner LLP in New York, New
York, in accordance with the Notice of Annual Meeting of Stockholders sent on
or about August 14, 2008. The tables below present the voting results of the
matters voted upon by our stockholders at the meeting:

Proposal 1: Election
of Directors

At the meeting, each of the nominees listed below was elected to
our
Board of Directors to serve as director until the end of his or her respective
term and received the number votes set forth after their respective names
below.

Nominee*

For

Number of Shares
 Against

AbstainToby Wegman

4,555,895

544,653

0Dr. Mark
 Wegman

4,354,850

645,698

100,000

*
The Board is divided into three classes, each of which serves for a term of
three years, with only one class of directors being elected in each year. Each
director holds office for the term for which elected and until his or her
successor shall be elected and shall qualify and be subject to such directors
earlier death, resignation or removal. The term of office of the first class of
directors, presently consisting of Thomas L. Wegman, Dr. Paul A. Gitman and
Matthew Geller, Ph.D. is scheduled to expire at the annual meeting for the year
2009; the term of office of the second class of directors, presently consisting
of Henry Morgan and Michael Schamroth is scheduled to expire on the date of the
annual meeting for the year 2010; and the third class of directors, which was
elected at our 2008 Annual Meeting of Stockholders, consisting of Toby Wegman
and Dr. Mark Wegman is now scheduled to expire at the 2011 Annual Meeting.
Matthew Geller, Ph.D was appointed to the Board on September 22, 2008 to serve
in the first class until the end of the applicable term.

Proposal 2:
Ratification of the selection of Tabriztchi & Co. CPA, P.C. as our
independent registered public accounting firm for the fiscal year ending
December 31, 2008.

At the meeting, our stockholders ratified by the vote set forth
below
the selection of Tabriztchi & Co. CPA, P.C. as our independent registered
public accounting firm for the fiscal year ending December 31, 2008.

Number of SharesFor

Against

Abstain

Broker Non-Votes4,661,430


245,713


193,405


0The number of shares of our common stock eligible to vote as of the
record date of July 23, 2008 was 5,950,801 shares.

Item 5. Other Information

None.

Item 6. 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).23

31*
Certification of Principal Executive Officer and Principal
Financial
 Officer pursuant to Rule13a-14(a)/15d-14(a).*32*
Certification of Principal Executive Officer and Principal
Financial
 Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.** filed herewith24

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:
 November 11, 2008
/s/ Thomas
 L. WegmanThomas L.
 WegmanPresident(Principal
 Executive and Financial Officer)25