**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C.**





**FORM
      10-K**





x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




**For
      the fiscal year ended December 31, 2005**





OR




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





For
      the
      transition period from _________ to _________





**Commission
      File number 1-10352**





**COLUMBIA
      LABORATORIES, INC.**


(Exact
      name of Registrant as specified in its charter)





**Delaware**
            **59-2758596**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)**354
                Eisenhower Parkway****Livingston,
                New Jersey**
            **07039**(Address
                of principal executive offices)
            (Zip
                Code)





Registrant's
      telephone number, including area code: **(973)
      994-3999**





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





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





**Common
                Stock, $.01 par value**
            **Nasdaq
                National Market**(Title
                of each class)
            (Name
                of exchange on which registered)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x Noo





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
                accelerated filer o
            Accelerated
                filer x
            Non-accelerated
                filer o





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





o Yes     
      x No





The
      aggregate market value of common stock held by non-affiliates of the registrant
      on June 30, 2005, the last business day of the registrant’s most recently
      completed second fiscal quarter, based on the closing price on that date of
      $3.15, was $90.4 million.





Number
      of
      shares of common stock of Columbia Laboratories, Inc. issued and outstanding
      as
      of March 3, 2006: 41,754,784 **.**





**Documents
      Incorporated By Reference**





Portions
      of the Columbia Laboratories, Inc. (“Columbia” or the “Company”) Proxy Statement
      for the 2006 Annual Meeting of Shareholders (the “Proxy Statement”) are
      incorporated by reference into Part III of this Form 10-K. We expect to file
      our
      Proxy Statement with the Unites States Securities and Exchange Commission
      (“SEC”) and mail it to shareholders on or before April 10,
      2006.


2




**Index
      to Annual Report on Form 10-K**


**Fiscal
      Year Ended December 31, 2005**





**Part
                I**
            
            **Page**Item
                1
            Business
            **4**Item
                1A
            Risk
                Factors
            **17**Item
                1B
            Unresolved
                Staff Comments
            **25**Item
                2
            Properties
            **26**Item
                3
            Legal
                Proceedings
            **26**Item
                4
            Submission
                of Matters to a Vote of Security Holders
            **26****Part
                II**Item
                5
            Market
                for the Registrant’s Common Equity and Related Stockholder Matters and
                Issuer Purchases of Equity Securities
            **28**Item
                6
            Selected
                Financial Data
            **30**Item
                7
            Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
            **31**Item
                7A
            Quantitative
                and Qualitative Disclosures About Market Risks
            **39**Item
                8
            Financial
                Statements and Supplementary Data
            **39**Item9
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosures
            **39**Item
                9A
            Controls
                and Procedures
            **39**Item
                9B
            Other
                Information
            **40****Part
                III**Item
                10
            Directors
                and Executive Officers of the Company*
            **41**Item
                11
            Executive
                Compensation*
            **41**Item
                12
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters*
            **41**Item
                13
            Certain
                Relationships and Related Transactions*
            **41**Item
                14
            Principal
                Accountant Fees and Services
            **41****Part
                IV**Item
                15
            Exhibits
                and Financial Statement Schedules
            **42**





*
      Items
      11, 12, 13, 14 and portions of Item 10 are incorporated by reference to the
      Company’s 2006 Proxy Statement.


3


**PART
      I**





**Item
      1. Business**





**General**





Since
      the
      incorporation of Columbia Laboratories, Inc. (hereinafter “we”, “our”, “us”,
“Columbia” and the “Company”) in 1986 as a Delaware corporation, we have focused
      on developing drugs that improve treatment options for women’s reproductive
      healthcare and endocrine-related disorders. The Company has developed and is
      developing products for vaginal delivery of hormones and other drugs and for
      buccal delivery of hormones and peptides. The vaginal products adhere to the
      vaginal epithelium and the buccal products adhere to the mucosal membrane of
      the
      gum and cheek. Both forms provide sustained and controlled delivery of active
      drug ingredients. This delivery system is particularly useful for active drug
      ingredients that cannot be ingested.





All
      of
      our products and product candidates utilize our Bioadhesive Delivery System
      (“BDS”), which consists principally of a polymer (polycarbophil) and an active
      ingredient. The BDS is based upon the principle of bioadhesion, a process by
      which the polymer adheres to epithelial surfaces or mucosa. The polymer remains
      attached to epithelial surfaces or mucosa and is discharged upon normal cell
      turnover, a physiological process that, depending upon the area of the body,
      occurs every 12 to 72 hours, or longer. This extended period of attachment
      permits the BDS to be utilized in products when extended duration of
      effectiveness is desirable or required.





We
      have
      focused on women's healthcare because of the significant number of women whose
      health and hygiene needs have not been met by available products, and because
      the Company has found vaginal delivery to be a particularly effective way to
      deliver active ingredients to the female reproductive organs. We have found
      buccal delivery to be advantageous for products for both men and women. The
      Company intends to continue to develop products that improve the delivery of
      previously approved and marketed drugs that cannot be ingested.





**Segments**





The
      Company is currently engaged solely in one business segment -- the development,
      licensing and sale of pharmaceutical products. In certain foreign countries
      these products may be classified as medical devices or cosmetics by the
      countries’ regulatory agencies. See footnote 9 to the consolidated financial
      statements for information on foreign operations.





**Operations**





The
      Company was incorporated as a Delaware corporation in 1986. The Company's
      principal executive offices are located at 354 Eisenhower Parkway, Livingston,
      New Jersey 07039, and its telephone number is (973) 994-3999. The Company's
      subsidiaries, all of which are wholly-owned, are Columbia Laboratories (Bermuda)
      Ltd. ("Columbia Bermuda"), Columbia Laboratories (France) SA ("Columbia France")
      and Columbia Laboratories (UK) Limited ("Columbia UK”).





We
      develop products for sale throughout the world. We  contract
      our manufacturing activities to third parties in the United Kingdom, Switzerland
      and Italy. Our own sales and marketing organization operates solely in the
      United States, and is specifically focused on a select group of obstetricians,
      gynecologists, endocrinologists, urologists and primary care physicians. We
      have
      entered into partnerships to commercialize our products outside of the United
      States and within certain markets in the United States, and seek to enter into
      additional partnerships to commercialize our products in new countries and
      with
      additional audiences in the United States that we do not currently
      address.





The
      polymer used in our BDS-based products, medical grade, cross-linked
      polycarbophil, is currently available from only one supplier, Noveon, Inc.
      ("Noveon"). We believe that Noveon will supply as much of the material as we
      may
      require because our products rank among the highest value-added uses of the
      polymer. There can be no assurance that Noveon will continue to supply the
      material. In the event that Noveon cannot or will not supply enough of the
      material to satisfy the Company's needs, we will be required to seek alternative
      sources of polycarbophil. There can be no assurance that an alternative source
      of polycarbophil can be obtained. All of the other raw materials used by the
      Company for our products are available from multiple sources.


4


**Products**





**Crinone** **â** **/Prochieve** **®** **(progesterone gel).** Crinone ® is the
      brand
      name of progesterone gel sold by Ares Trading S.A. (“Serono”) under a worldwide
      license from the Company. Prochieve ® is the
      brand name of the same progesterone gel sold by the Company in the United States
      under a June 2002 sublicense from Serono pursuant to its worldwide license
      of Crinone ® . The
      Company markets Prochieve ® under
      the sublicense to obstetricians, gynecologists and primary care physicians
      in
      the U.S. In addition, Serono has agreed not to market Crinone ® to that
      audience and the Company has agreed not to market Prochieve ® to a
      defined list of fertility specialists in the U.S. See “Licensing and Development
      Agreements.”  Crinone ® / Prochieve ®  is a
      sustained release, vaginally delivered, natural progesterone product.
      Progesterone is a
      hormone manufactured by a woman’s ovaries in the second half of the menstrual
      cycle. Progesterone is responsible for preparing the uterus for pregnancy and,
      if pregnancy occurs, maintaining it until birth, or, if pregnancy does not
      occur, inducing menstruation.





Crinone ® / Prochieve ® utilizes
      the Company’s patented BDS, which enables the progesterone to achieve a “First
      Uterine Pass EffectTM”. The product is available in two strengths, an 8%
      progesterone gel and a 4% progesterone gel. It
      is the
      first product designed to deliver progesterone directly to the uterus, thereby
      providing a therapeutic benefit and avoiding high blood levels of progestogens
      seen with orally-delivered synthetic progestins.





Crinone ® /Prochieve ® in the
      8% progesterone gel is approved in the U.S. for progesterone supplementation
      or
      replacement as part of an Assisted Reproductive Technology (“ART”) treatment for
      infertile women with progesterone deficiency. Crinone ® /Prochieve ® in both
      the 8% and 4% progesterone gels is approved in the U.S. for the treatment of
      secondary amenorrhea (loss of menstrual period). Crinone ® was
      first marketed in the U.S. in 1997. In
      2002, Serono
      discontinued marketing Crinone ® 4%
      worldwide. Prochieve ® 8% and
      Prochieve ® 4% were
      first marketed in the U.S. in September 2002 and March 2003,
      respectively.





Outside
      the U.S., Crinone ® has been
      approved for marketing for one or more medical indications in 51 countries.
      The
      medical indications include progesterone supplementation or replacement as
      part
      of an ART treatment for infertile women, the treatment of secondary amenorrhea,
      the prevention of hyperplasia in post-menopausal women receiving hormone
      replacement therapy (“HRT”), the reduction of symptoms of premenstrual syndrome
      (“PMS”), menstrual irregularities, dysmenorrhea and dysfunctional uterine
      bleeding. Prochieve ® is not
      marketed outside the U.S.





The
      most
      common side effects of Crinone ® /Prochieve ® 8% are
      breast enlargement, constipation, somnolence, nausea, headache, and perineal
      pain. The most common side effects of Prochieve ® 4% when
      used in combination with estrogen include cramps, fatigue, depression, emotional
      lability, sleep disorder, and headache. Crinone ® /Prochieve ® is
      contraindicated in the U.S. in patients with active thrombophlebitis or
      thromboembolic disorders, or a history of hormone-associated thrombophlebitis
      or
      thromboembolic disorders, missed abortion, undiagnosed vaginal bleeding, liver
      dysfunction or disease, and known or suspected malignancy of the breast or
      genital organs.





**Striant** **®** **(testosterone buccal system)** .
      Striant ® is
      approved in the U.S. and 15 countries in Europe for hypogonadism. Hypogonadism
      is characterized by a deficiency or absence of endogenous testosterone
      production. Hypogonadism can be caused by conditions associated with the testes,
      pituitary gland or hypothalamus gland, or by a genetic disorder. Signs and
      symptoms of hypogonadism can include decreased libido (sexual desire), erectile
      dysfunction (ED), fatigue, depression, reduced muscle mass, and osteoporosis.
      Testosterone replacement therapy helps to provide and maintain normal levels
      of
      testosterone. It is estimated that hypogonadism affects between four and five
      million men in the United States, approximately one million of whom currently
      receive treatment. Historically, patients have been treated with transdermal
      patches, topical gels or injectable formulations of
      testosterone.


5


In
      October 2002, the Company and Ardana Biosciences, Ltd. (“Ardana”) entered into a
      license and supply agreement under which Ardana has licensed and, after
      obtaining necessary governmental approvals, will sell Striant ® in 18
      European countries (excluding Italy). See “ Licensing
      and Development Agreements”.





In
      May
      2003, the Company and Mipharm S.p.A. (“Mipharm”) entered into a license and
      supply agreement under which Mipharm will market, distribute and sell Striant ® in
      Italy. S ee
      “ Licensing
      and Development Agreements”.





Striant ® utilizes
      the BDS to achieve controlled and sustained delivery of testosterone via the
      buccal cavity. The product, which has the appearance of a small monoconvex
      tablet, rapidly adheres to the buccal mucosa, the small, natural depression
      in
      the mouth where the gum meets the upper lip above the incisor teeth. As it
      is
      exposed to saliva, the product softens into a gel-like form which remains
      comfortably in place over each 12-hour dosing period. Striant ® delivers
      testosterone through the buccal mucosa, where it is absorbed into the
      bloodstream and delivered directly into the superior vena cava (major blood
      vessel), bypassing the gastrointestinal system and liver. Striant ® is able
      to produce circulating testosterone concentrations in hypogonadal males that
      approximate physiologic levels seen in healthy young men. One dose twice a
      day,
      in the morning and in the evening, maintains consistent physiologic levels
      of
      testosterone. Because Striant ® is
      available in a single strength, no dose titration is required.





The
      clinical data supporting the approval of Striant ® by the
      U.S. Food and Drug Administration (“FDA”) were generated from a 12-week U.S.
      multi-center, open-label, single arm trial that evaluated the efficacy, safety
      and tolerability of Striant ® in 98
      hypogonadal men. The most frequent adverse events that occurred with
      Striant ® in that
      trial at an incidence of 1% or greater which were possibly, probably or
      definitely related to the use of Striant ® were:
      gum or mouth irritation (9.2%), bitter taste (4.1%), gum pain (3.1%), gum
      tenderness (3.1%), headache (3.1%), gum edema (2.0%), and taste perversion
      (2.0%). A total of 16 patients reported 19 gum-related adverse events. Of these,
      ten patients (10.2%) reported 12 events of mild intensity, four patients (4.1%)
      reported five events of moderate intensity, and two patients (2.0%) reported
      two
      events of severe intensity. Four patients (4.1%) discontinued treatment with
      Striant ® due to
      gum- or mouth-related adverse events, including two with severe gum irritation,
      one with mouth irritation and one with "bad taste in mouth." The majority of
      the
      gum-related adverse events were transient and resolved within one to 14 days.
      Patients on Striant ® should
      be advised to regularly inspect the gum region where they apply
      Striant ® and
      report any abnormality to their health care professional.





Striant ® is not
      indicated for women and must not be used in women. Testosterone supplements
      may
      cause fetal harm. Striant ® should
      also not be used in patients with known hypersensitivity to any of its
      ingredients, including testosterone USP that is chemically synthesized from
      soy.
      Androgens are contraindicated in men with carcinoma of the breast or known
      carcinoma of the prostate. Edema with or without congestive heart failure may
      be
      a serious complication in patients with preexisting cardiac, renal or hepatic
      disease. In addition to discontinuation of the drug, diuretic therapy may be
      required. Gynecomastia frequently develops and occasionally persists in patients
      being treated with androgens for hypogonadism. The treatment of hypogonadal
      men
      with testosterone esters may potentiate sleep apnea in some patients, especially
      those with risk factors such as obesity or chronic lung diseases. Geriatric
      patients treated with androgens may be at an increased risk for the development
      of prostatic hyperplasia and prostatic carcinoma. In diabetic patients, the
      metabolic effects of androgens may decrease blood glucose and, therefore,
      insulin requirements.





**Advantage-S** **®** **Bioadhesive Contraceptive Gel** . Advantage-S ® is a
      female contraceptive gel that utilizes the BDS to deliver the active spermicidal
      ingredient, nonoxynol-9. The Company began marketing Advantage-S ® in the
      U.S. in July 1998 pursuant to FDA’s ongoing review of over-the-counter drug
      products (including nonoxynol-9 spermicidal products). Among the benefits of Advantage-S ® is that
      it utilizes the Company's BDS, which enables the nonoxynol-9 to adhere to the
      cervix and permits formulation of the product with the lowest dose of
      nonoxynol-9 of all products on the market. On June 29, 2004, the Company sold
      the worldwide marketing rights to Advantage-S ® to
      Lil’
Drug Store Products, Inc. (“Lil’ Drug Store”) and executed two related
      agreements with Lil’ Drug Store: a five year supply agreement, with minimum
      purchase requirements for three years, and a 21⁄2 year professional promotion
      agreement for the Company’s sales force to promote the product to OB/GYNs in the
      U.S. See “Licensing and Development Agreements.”


6


**Replens** **®** **Vaginal Moisturizer** .
      Replens ® replenishes vaginal moisture on a sustained basis and relieves the discomfort
      associated with vaginal dryness. Replens ® was the
      first product utilizing the BDS. In May 2000, the Company sold the U.S. rights
      for Replens ® to Lil’
Drug Store, pursuant to an agreement under which the Company received royalties
      of 10% of sales of Replens ® in the
      U.S until October 2005. On June 29, 2004, the Company sold the remaining
      worldwide marketing rights for Replens ® to Lil’
Drug Store and
      executed two related agreements with Lil’ Drug Store: a five year supply
      agreement, with minimum purchase requirements for three years, and a 21⁄2 year
      professional promotion agreement for the Company’s sales force to continue to
      promote the product to OB/GYNs in the U.S. See “Licensing and Development
      Agreements.”





**RepHresh** **®** **Vaginal Gel.** RepHresh ® Vaginal
      Gel is a feminine hygiene product that can eliminate vaginal odor.
      RepHresh ® works by
      maintaining vaginal pH in the normal physiologic range of 4.5 or below.
      RepHresh ® uses the
      Company’s BDS and
      adheres to the epithelial cells of the vaginal lining for three or more days.
      It
      is available in convenient, pre-filled, disposable applicators. On
      June
      29, 2004, the Company sold the worldwide marketing rights to the product to
      Lil’
Drug Store and executed two related agreements with Lil’ Drug Store: a five year
      supply agreement, with minimum purchase requirements for three years, and a
      21⁄2
year professional promotion agreement for the Company’s sales force to promote
      the product to OB/GYNs in the U.S. See “Licensing and Development
      Agreements.”





**Other
      Products** .
      The
      Company marketed four additional products until April 2000: Advanced Formula
      Legatrin PM ® **** for
      the
      relief of occasional pain and sleeplessness associated with minor muscle aches
      such as night leg cramps; Legatrin â GCM
      FormulaTM ,
      a
      nutritional supplement to support healthy joint function; Vaporizer in a
      Bottle ® ,
      a
      portable cough suppressant for the temporary relief of a cough due to the common
      cold; and Diasorb ® ,
      a
      pediatric antidiarrheal product. These products do not utilize the BDS. In
      May
      2000, the Company licensed these products to Lil’ Drug Store. Under the terms of
      these agreements, the Company receives license fees equal to 20% of the
      licensee’s net sales. These agreements each have five-year terms with provisions
      for automatic renewal and contain options that allow for the acquisition of
      the
      products by the licensee. On December 29, 2000, Lil’ Drug Store purchased
      Vaporizer in a Bottle for $201,800. The production and sale of
      Legatrin â GCM
      Formula and Diasorb ® were
      discontinued during the first half of 2003. The
      license for Advanced
      Formula Legatrin â PM
      renewed automatically to May 2010.





**Research
      and Development**





The
      Company spent $5.8 million in 2005, $5.4 million in 2004 and $3.3 million in
      2003 on research and development activities. The expenditures in 2005 and 2004
      were primarily costs associated with
      the
      Company’s clinical study of Prochieve ® 8%
      (progesterone gel) in preventing preterm delivery in pregnant women who are
      at
      increased risk for preterm birth ,
      discussed below.  Expenditures
      in 2003 were
      primarily costs associated with contracting for, supervising and administering
      the development and clinical studies of Striant ® and the
      delivery of peptides utilizing the BDS. The Company cannot predict whether
      it
      will be successful in the development of the products listed below or any other
      product candidates.





Generally
      the Company’s drug development activities take the following steps in the U.S.
      (and comparable steps in foreign countries): After the Company formulates an
      active drug ingredient into the BDS, it files an Investigational New Drug
      Application (“IND”) with the FDA to begin to test the product in humans. The IND
      becomes effective and the studies may begin if the FDA does not disapprove
      the
      IND within 30 days of its submission. The IND describes how, where, and by
      whom
      the studies will be conducted; information about the safety of the active drug
      ingredient; how it is thought to work in the body; any toxic effects it may
      have; and how it is manufactured. All clinical studies must also be reviewed
      and
      approved by an Institutional Review Board (“IRB”) that is responsible for the
      study site. Progress reports on clinical studies must be submitted at least
      annually to the FDA and the IRB.




Clinical
      studies are divided into three phases. **** Phase
      I
      studies typically involve small numbers of normal, healthy volunteers. Phase
      I
      studies are intended to assess a drug’s safety profile, including the safe
      dosage range. Phase I studies also determine how the drug is absorbed,
      distributed, metabolized, and excreted, as well as the duration of its
      action. **** Phase
      II
      studies involve volunteer patients (people with the disease intended to be
      treated) to assess the drug’s effectiveness. **** Phase
      III
      studies usually involve larger numbers of patients in clinics and hospitals
      to
      confirm the product’s efficacy and identify possible adverse
      events.




7


Following
      the completion of all three phases of clinical trials, the Company analyzes
      all
      of the data and files a New Drug Application (“NDA”) with the FDA if the data
      successfully demonstrate both safety and effectiveness. The NDA contains all
      of
      the scientific information that the Company has gathered. NDAs typically run
      thousands of pages. If the FDA approves the NDA, the new product becomes
      available for physicians to prescribe. The Company must continue to submit
      periodic reports to the FDA, including any cases of adverse reactions and
      appropriate quality-control records. For some medicines, the FDA requires
      additional studies after approval (Phase IV studies) to evaluate long-term
      effects of the drug.




**Prochieve** **®** **8%** **®** **in Preventing Preterm Birth** .
      In
      November 2003, the Company announced the Phase III multi-center, randomized,
      double-blind, placebo-controlled, clinical trial designed to assess the
      efficacy, safety and tolerability of Prochieve ® 8%
      (progesterone gel) in preventing preterm delivery in pregnant women who are
      at
      increased risk for preterm birth. The study protocol defines “at risk” patients
      as pregnant women who have either a history of a spontaneous preterm delivery,
      or who have a cervical length of 2.5 cm or less, as measured by transvaginal
      ultrasound, with the current pregnancy. Patients are randomized to receive
      either Prochieve ® 8% or
      placebo. Treatment is initiated between 18 and 22 weeks of gestation and
      administered daily until delivery, withdrawal from the study, development of
      preterm rupture of the membranes, or until 37 completed weeks of gestation.
      This
      study is designed to enroll 636 patients; 414 patients were enrolled at the
      end
      of February, 2006. From October 2005 through February 2006, enrollment averaged
      35 patients per month, a rate the Company expects to maintain going forward
      through the addition of new study centers and execution of its study-related
      marketing efforts. From October 2005 through February 2006, the Company added
      10
      study centers. The Company had 53 study centers (42 domestic and 11 foreign)
      open at the end of February, 2006, and plans to open up to 10 more in March
      and
      April 2006. The Company projects that enrollment in the preterm study will
      be
      complete by the end of third quarter 2006. The Company expects, if positive
      results are obtained, to file with the FDA for a label indication in mid-2007.
      Because there is no approved treatment for preterm birth, and because of the
      growing incidence, and economic and social impact, of this problem, the Company
      is hopeful that the FDA will grant an expedited review during 2007.





Prior
      studies have found prophylactic progestogen administration to be effective
      in
      reducing the incidence of preterm birth. Two studies published in 2003 renewed
      researchers’ interest in the use of progestogens to prevent preterm labor and
      delivery. Positive results of a trial using weekly intramuscular injections
      of a
      synthetic progesterone derivative were published in *The
      New England Journal of Medicine* .
      Similar
      encouraging findings of a trial using daily administration of
      pharmacy-compounded progesterone vaginal suppositories were published in the *American
      Journal of Obstetrics and Gynecology* .
      The
      American College of Obstetricians and Gynecologists’ (“ACOG”) Committee on
      Obstetric Practice acknowledged the value of this research. The Committee issued
      an opinion stating that progesterone may be used as treatment to help prevent
      preterm birth in women with a history of delivering prematurely. The opinion
      encourages additional research on this topic, particularly related to the ideal
      method of progesterone delivery. The March of Dimes commended ACOG for these
      guidelines and reaffirmed their call for research to better understand how
      women
      can benefit from progesterone in the prevention of preterm birth.





Preterm
      delivery is a significant problem in obstetrics. Despite intense efforts for
      prevention, the delivery rate prior to 37 weeks of gestation increased to 12.3
      percent of live births in the United States in 2003 ( National
      Center for Health Statistics, final natality data, retrieved February 17, 2006,
      from www.marchofdimes.com/peristats ).
      Approximately 20 percent of preterm births are the result of a physician’s
      decision to bring about delivery for maternal and fetal indications. The
      remainder of preterm deliveries is spontaneous, usually following the onset
      of
      premature labor or rupture of the membranes. The current standard of care to
      help prevent premature delivery includes bed rest, intensive prenatal care
      for
      high-risk women and drug therapy, such as tocolytics, to stop uterine
      contractions.


8


**Terbutaline
      Vaginal Gel.** In
      December 2002, the Company announced a development and license agreement with
      Ardana to develop the Company’s terbutaline vaginal gel product for the
      treatment of infertility, dysmenorrhea and endometriosis. The Company received
      a
      payment of $250,000 upon signing of the agreement and will receive an additional
      $250,000 upon completion by Ardana of the Phase II clinical trial and if a
      successful outcome is obtained. Trial completion is expected to occur in 2006.
      Under the terms of the agreement, if the Phase II trial is successful the
      Company can elect to continue to work with Ardana to progress the product
      through further clinical trials and subsequent applications for regulatory
      approvals. In that case, the Company would have the right to market the product
      in North America and Ardana would have rights focused in Europe. The parties
      would share equally in proceeds from licensing and distribution of the product
      in the rest of the world. If the Company elects not to continue working on
      the
      product at the end of the Phase II trial, Ardana can continue to develop the
      product.





**Vaginally
      administered lidocaine** **.** Vaginally administered lidocaine is designed as a potential treatment for
      dysmenorrhea and gynecologic pain. Results from a European clinical trial,
      which
      we announced on February 5, 2004, showed that vaginally administered lidocaine
      reduced the frequency of uterine contractions, as well as the intensity and
      frequency of uterine pain. Subjects were evaluated following vasopressin-induced
      cramping in the late luteal phase of the menstrual cycle, near menses. On
      September 8, 2005, we announced the successful completion of a pharmacokinetics
      study for our vaginally administered lidocaine. The study evaluated both the
      blood levels obtained by, as well as the relative safety from, three doses
      of
      lidocaine formulated with the Company’s patented bioadhesive vaginal gel. Based
      on those results, a Phase II study is planned for the second half of 2006.
      The
      Company believes this product may offer a new and novel approach to treating
      women who suffer from these common and painful conditions.





**Testosterone
      Vaginal Gel and Testosterone Progressive Hydration Vaginal Tablet.** In
      October 2000, the Company completed a Phase I trial of its testosterone
      progressive hydration vaginal tablet for women. The study demonstrated that
      testosterone could be delivered vaginally over a period of days. Vaginal gel
      and
      vaginal tablet forms have been developed. A preliminary clinical plan, with
      a
      focus on reducing uterine fibroids as well as general testosterone replacement,
      is under review by our clinical advisors.





**Peptide
      Delivery System.** The
      Company has completed a program that demonstrates that the BDS can deliver
      therapeutic doses of the peptide, desmopressin, for extended periods of time
      using the Company’s progressive hydration buccal technology. Based on these
      positive results, the Company has initiated partnering discussions related
      to a
      desmopressin buccal tablet.





**Licensing
      and Development Agreements**




In
      May
      1995, the Company entered into a license and supply agreement with American
      Home
      Products Corporation, now Wyeth, (“Wyeth”) for its Wyeth-Ayerst Laboratories
      division to market Crinone ® worldwide. The Company agreed to supply Crinone ® at a
      price equal to 30% of Wyeth’s net selling price. In July 1999, Wyeth assigned
      the license and supply agreement to Serono. In June 2002, the license and supply
      agreement was amended and restated and a marketing sublicense was granted to
      the
      Company. Under
      the terms of the license and sublicense, Serono markets Crinone ® in the
      U.S. to a defined list of fertility specialists. We are free to market
      Prochieve ® to all
      other physicians in the U.S., including obstetricians, gynecologists and primary
      care physicians. Under
      the marketing sublicense, the Company is obligated to pay Serono a royalty
      equal
      to 30% of net sales on
      all
      Prochieve ® sales. The
      Company is obligated to pay Serono an additional 40% royalty on
      all
      Prochieve ® sales
      dispensed to patients of physicians on Serono’s target list of fertility
      specialists. Conversely, Serono is obligated to pay the Company an additional royalty of
      40%
      of Crinone ® net
      sales on
      all Crinone ® sales
      dispensed to patients of physicians outside its target list of fertility
      specialists in the
      U.S.





Among
      other rights it has, Serono may terminate our marketing agreement for
      Prochieve ® by
      sending us written notice if (i) Prochieve ® is
      dispensed to patients of physicians on Serono’s target list of fertility
      specialists in any one calendar quarter at the rate of 10% or more of the amount
      of Crinone ® dispensed to those patients, (ii) Serono notifies us in writing of its intent
      to
      terminate the marketing agreement and (iii) such rate continues to equal or
      exceed 10% during the three month period following such notice or a subsequent
      three month period. If the marketing agreement is terminated and Serono does
      not
      market Crinone ® to the
      physicians we call on, our profitability with respect to Crinone ® /Prochieve ® may be
      reduced significantly.


9


Under
      the
      agreement, the amount of Prochieve ® and Crinone ® dispensed to patients on Serono’s list of fertility specialists is determined by
      Serono from a combination of objective commercially available third party data
      and data collected by Serono directly from pharmacies that are not included
      in
      the commercially available data. For the four quarters ended June 30, 2005,
      Prochieve ® dispensed to patients of Serono’s list of fertility specialists ranged from a
      high of 7.43% in the fourth quarter of 2004, to a low of 5.85% for the second
      quarter of 2005. On June 14, 2005, Serono announced a strategic alliance with
      Priority Healthcare Corporation under which Freedom Drug, its fertility
      specialty pharmacy, became the preferred specialty pharmacy for fulfillment
      of
      Serono fertility products in the U.S. As a result of this alliance, Serono
      no
      longer has a close relationship with a number of the pharmacies from which
      it
      previously obtained data, and therefore such data was not included in the
      calculation of Prochieve ® dispensed to patients of physicians on Serono’s target list for the third
      quarter and fourth quarters of 2005, which Serono reported to us in
      December 2005 and February 2006, respectively. The data reported in
      the most recent quarter approached 8%. We believe this increase resulted from
      the change in the availability of pharmacy data and not from a change in
      dispensing patterns for Prochieve ® and Crinone ® during
      these quarters. We are working with Serono to better understand the change
      in
      the availability of pharmacy data and whether this change in the availability
      of
      data complies with the marketing agreement and are considering possible changes
      in the terms of the agreement relating to these issues. There can be no
      assurance, however, that the amount of Prochieve ® dispensed will not exceed the 10% level described above in the future or that
      we
      will be successful in modifying the agreement with Serono.





In
      March
      1999, the Company entered into a license and supply agreement with Mipharm
      under
      which Mipharm is the exclusive marketer of the Company’s women’s healthcare
      products (other than Crinone ® )
      in
      Italy, Portugal, Greece and Ireland with a right of first refusal for Spain.
      Mipharm currently sells Replens ® in Italy
      and sells RepHresh ® in Italy
      under the name MipHil.




In
      October 2002, the Company and Ardana entered into a license and supply agreement
      under which Ardana will market, distribute and sell Striant ® in 18
      European countries (excluding Italy) as necessary governmental approvals are
      obtained. In exchange for the license, the Company may receive total potential
      payments of $8 million. To date the Company has received $5.2 million under
      this
      agreement, including $4 million in signature and milestone fees received in
      2002, $800,000 received in 2004 upon marketing approval in the U.K and $400,000
      received in 2005 upon marketing approval in Germany. Additional milestone
      payments totaling $800,000 are due upon marketing approvals in other major
      European countries. The Company expects final licenses will be granted in these
      countries in the first half of 2006. In addition, a performance payment of
      $2
      million is due upon achievement of a certain level of sales. Ardana will
      purchase its requirements of product from the Company during the term of the
      agreement. The agreement will continue in each country in the territory until
      the date of expiration or lapse of the last patent covering the product in
      such
      country.





In
      December 2002, the Company and Ardana executed a development and license
      agreement (described above) to develop the Company’s terbutaline vaginal gel
      product.





In
      May
      2003, the Company and Mipharm entered into an agreement under which Mipharm
      will
      market, distribute and sell Striant ® in
      Italy. In exchange for these rights, Mipharm is obligated to pay the Company
      an
      aggregate of $1.4 million upon achievement of certain milestone events,
      including $350,000 that was paid in 2003. We received a payment of $100,000,
      less VAT withholding, in 2004 on account of the UK approval of Striant ® .
      Mipharm
      will provide additional performance payments upon marketing authorization in
      Italy ($150,000) and achievement of certain levels of sales in Italy, and the
      Company will receive a percentage markup on the cost of goods for each unit
      sold. Mipharm is a manufacturer of Striant ® under a
      May 2002 agreement.





In
      June
      2004, the Company and Lil’
Drug
      Store entered into an asset purchase agreement, a five year supply agreement,
      and a 21⁄2 year professional services agreement. Under the agreements, Lil’ Drug
      Store acquired the Company’s over-the-counter women’s healthcare products,
      RepHresh ® Vaginal
      Gel and Advantage-S ® Bioadhesive Contraceptive Gel, and foreign marketing rights for
      Replens ® Vaginal
      Moisturizer. The Company sold the U.S. marketing rights for Replens ® to Lil’
Drug Store in May 2000. Under the **** terms
      of
      the asset purchase agreement, Lil’ Drug Store also purchased the U.S. inventory
      of RepHresh ® and
      Advantage-S ® from the
      Company. The Company will supply RepHresh ® ,
      Advantage-S ® ,
      and
      ex-U.S. requirements for Replens ® under
      the supply agreement. Under the professional services agreement, the Company’s
      sales force will promote Replens ® ,
      RepHresh ® and
      Advantage-S ® to its
      OB/GYN audience through 2006. The Company will be compensated on a per-call
      basis over the duration of that agreement.


10


**Financing
      Agreements**





On
      July
      31, 2002, PharmaBio Development (“PharmaBio”), an affiliate of Quintiles
      Transnational Corp. (“Quintiles”), agreed to pay $4.5 million in four equal
      quarterly installments commencing third quarter 2002 for the right to receive
      a
      5% royalty on net sales of the Company’s women’s healthcare products in the
      United States for five years, beginning in the first quarter of 2003. The
      royalty payments are subject to aggregate minimum ($8 million) and maximum
      ($12
      million) amounts. Because the minimum amount exceeds $4.5 million, the Company
      has recorded the amounts received as liabilities. The excess of the minimum
      ($8
      million) to be paid by the Company over the $4.5 million received by the Company
      is being recognized as interest expense over the five-year term of the
      agreement, assuming an interest rate of 12.51%. To date, the Company has paid
      $3,149,000 in royalties to PharmaBio under this agreement.





On
      March
      5, 2003, the
      Company and PharmaBio
      entered into a second agreement under which PharmaBio paid $15 million to the
      Company over a 15-month period that commenced with the signing of the agreement.
      In return, PharmaBio will receive a 9% royalty on net sales of Striant ® in the
      United States up to agreed annual sales levels, and a 4.5% royalty of net sales
      above those levels. The royalty term is seven years. Royalty payments commenced
      in the 2003 third quarter and are subject to aggregate minimum ($30 million)
      and
      maximum ($55 million) amounts ,
      and
      include a true-up payment, payable in the fourth quarter of 2006, of the
      difference between royalties paid to that date and $13 million . Because
      the minimum amount exceeds the $15 million, the Company has recorded the amounts
      received as liabilities. The excess of the minimum ($30 million) to be paid
      by
      the Company over the $15 million to be received by the Company is being
      recognized as interest expense over the seven-year term of the agreement,
      assuming an interest rate of 10.67%. To date, the Company has paid $712,000
      in
      royalties to PharmaBio under this agreement.





**Patents,
      Trademarks and Proprietary Information**





The
      following table sets forth United States patents granted to the Company since
      2001.




**Year
                  Granted**
              **Nature
                  of Patent**2004
              Compositions
                  and methods for safely preventing or treating premature labor using
                  a
                  beta-adrenergic agonist, such as terbutaline.2004
              Methods
                  of safely treating endometriosis or infertility, and for improving
                  fertility, using a beta-adrenergic agonist.2003
              Use
                  of progestin therapy for maintaining amenorrhea.2003
              Bioadhesive
                  progressive hydration tablet.2002
              Use
                  of certain polycarboxylic acid polymers for vaginal pH buffering
                  to
                  prevent miscarriage and premature labor associated with bacterial
                  vaginosis.2001
              Bioadhesive
                  progressive hydration tablets and methods of making and using the
                  same.2001
              Use
                  of progesterone for maintaining
                  amenorrhea.





The
      Company continues to develop the core BDS and has filed additional patent
      applications. Because
      the Company operates on a worldwide basis, the Company seeks worldwide patent
      protection for its technology and products. We believe our patents are important
      to our business and we intend to continue to protect them, including through
      legal action, when appropriate. While
      patent applications do not ensure the ultimate issuance of a patent,
      and having
      patent protection cannot ensure that competitors will not emerge, this is a
      fundamental step in protecting the Company’s technologies.


11


The
      following table sets forth the expiration dates of the principal United States
      patents for the Company’s marketed products and current development
      projects.





**Subject
                of patent**
            **Year
                of Expiration**
            **Product
                or Project**Progressive
                hydration tablets
            2019
            Striant®
              --
              testosterone
                progressive hydration vaginal tablet
              --
              peptide
                delivery systemFirst
                Uterine Pass EffectTM
            2018
            vaginally
                administered lidocaine
              --
              terbutaline
                vaginal gel
              --
              testosterone
                vaginal gelProgesterone
                delivery
            2013
            Crinone®/Prochieve®Vaginal
                tissue moisturization
            2012
            Replens®Vaginal
                tissue moisturization
            2009
            Replens®Vaginal
                pH
            2009
            RepHresh®





The
      Company owns or is seeking registration of “Crinone ® ”,
      “ Prochieve ® ”
      “ Striant ® ”
and
      “ Striant SR ® ”
as
      trademarks in countries throughout the world. Applications for the registration
      of trademarks do not ensure the ultimate registration of these marks; however,
      the Company believes marks with pending applications will be registered. In
      addition, there can be no assurance that such trademarks will afford the Company
      adequate protection or that the Company will have the financial resources to
      enforce its rights under such trademarks. In 2004, the Company sold the
      trademarks " Replens ® ",
      “Advantage® 24”, “ Advantage-S ® ”,
      “Advantage-LA ® ”,
      “ RepHresh ® ”,
      and
“ RepHresh Vaginal
      Gel ® ”
to
      Lil’
Drug Store. See “Licensing and Development Agreements.”





The
      Company also relies on confidentiality and nondisclosure agreements to protect
      its intellectual property. There can be no assurance that other companies will
      not acquire information that the Company considers to be proprietary. Moreover,
      there can be no assurance that other companies will not independently develop
      know-how comparable, or superior, to that of the Company.





**Sales
      of Products**





From
      1997
      until 2002, we out-licensed almost all marketing rights to our products. In
      June
      2002, we obtained a sublicense from Serono to market our 8% and 4% progesterone
      gel products in the United States under the brand name
      Prochieve ® .
      In July
      2002, we entered into an agreement with Innovex LP (“Innovex”), an affiliate of
      Quintiles, thereby establishing our first sales force in the United States.
      Under the terms of this agreement, Innovex provided a dedicated team of 55
      sales
      representatives on a three-year, fee-for-service basis to commercialize the
      Company’s women’s healthcare products, Prochieve ® 8%,
      Prochieve ® 4%,
      Advantage-S ® ,
      and
      RepHresh ® ,
      in the
      U.S. The sales force was recruited and trained in August and September 2002,
      and
      began in October 2002 to call on a targeted list of approximately 8,000
      obstetricians and gynecologists to encourage prescriptions and product
      recommendations for Prochieve ® 8%,
      Advantage-S ® ,
      and
      RepHresh ® .
      The
      sales force began sales efforts for Prochieve ® 4% in
      April 2003.





In
      March
      2003, we entered into a second agreement with Innovex to commercialize
      Striant ® in
      the
      United States. Under the terms of the agreement, Innovex provided a dedicated
      team of 67 additional sales representatives for a two-and-a-half year term.
      The
      new sales representatives were recruited in June 2003 and were trained on our
      women’s healthcare products and began calling on obstetricians and gynecologists
      in July 2003. The entire sales force of 122 sales representatives and 13
      managers was trained on Striant ® in
      September 2003 and subsequently added endocrinologists, urologists and certain
      primary healthcare doctors to their call lists.


12


In
      January 2004, the Company and Innovex restructured the sales force. The
      restructured sales force was comprised of ten district managers employed by
      the
      Company and 80 sales representatives, divided evenly between the Company and
      Innovex. Under the terms of the restructuring, Innovex transferred
      responsibility for management of the sales force to the Company, but continued
      to provide half of the sales representatives.





On
      February 2, 2005, in order to align better expenses with projected revenues,
      we
      further reduced the size of the sales force to five district managers and 23
      sales representatives, 12 of whom were Innovex employees and 11 of whom were
      Company employees. This
      28-person sales force is focused on territories with potential for growth from
      current products, while preparing the organization for potential near-term
      opportunities from the Company’s clinical research programs. The
      sales
      force calls on OB/GYN’s, endocrinologists, urologists, and certain primary
      healthcare physicians and educates the doctors and other healthcare
      professionals in their offices on the benefits of Striant ® and Prochieve ® .  Columbia
      hired the remaining Innovex sales representatives as Columbia employees on
      November 1, 2005.





We
      receive revenues both from selling our products to licensees, which we refer
      to
      as our “Partnered Products”, and selling our products that we promote through
      our own sales force to wholesalers and other distributors, which we refer to
      as
      our “Promoted Products.”




Partnered
      Products are:


·
            Crinone®sold to Serono on a worldwide
                basis;


·
            Striant®sold to our ex-U.S. marketing
                partners;


·
            Replens®Vaginal Moisturizer sold to Lil’ Drug Store
                ex-U.S.;


·
            RepHresh®Vaginal Gel and Advantage-S®Bioadhesive Contraceptive Gel sold to Lil’ Drug Store on a worldwide
                basis; and


·
            Royalty
                and licensing revenues.





Promoted
      Products are:


·
            Prochieve®8%,Prochieve®4%
                andStriant®in
                the U.S.;


·
            Crinone®prescriptions in the U.S. from our OB/GYN audience, for which Serono
                pays
                us a 40% supplemental royalty; and


·
            Replens®Vaginal Moisturizer,RepHresh®Vaginal Gel andAdvantage-S®Bioadhesive Contraceptive Gel, for which Lil’ Drug Store pays us promotion
                fees for promoting the products to
                OB/GYNs.





**Success
      of Marketing Efforts**





Our
      business is dependent on market acceptance of our products by physicians,
      healthcare payors, patients, and the medical community. Medical doctors’
willingness to prescribe our products depends on many factors,
      including:





§
            Perceived
                efficacy of our products;


§
            Convenience
                and ease of administration;


§
            Prevalence
                and severity of adverse side effects in both clinical trials and
                commercial use;


§
            Availability
                of alternative treatments;


§
            Cost
                effectiveness;


§
            The
                pricing of our products; and


§
            Our
                ability to obtain third-party coverage or reimbursement for our
                products.


13


Even
      though we have received regulatory approval for Prochieve ® and
      Striant ® ,
      and
      even if we receive regulatory approval and satisfy the above criteria for any
      of
      our other investigational indications and product candidates, physicians may
      not
      prescribe our products. We
      promote Prochieve ® and
      Striant ® on our
      own behalf in the U.S. We have entered into agreements with other companies
      for
      the distribution and marketing of Crinone ® ,
      Advantage-S ® ,
      RepHresh ® ,
      and
      Replens ® in the
      U.S. and foreign countries, and of Striant ® in
      foreign countries. Factors
      that could affect our success in marketing our products include:





§
            The
                effectiveness of our production, distribution and marketing
                capabilities;


§
            The
                successful marketing of our products byour
                distribution and marketing
                partners;


§
            The
                success of competing products; and,


§
            The
                availability and extent of reimbursement from third-party
                payors.





If
      any of
      our products or product candidates fail to achieve market acceptance, we or
      our
      marketing partners may be unable to sell the products successfully, which would
      limit our ability to generate revenue and could harm our business.





As
      previously disclosed, in July 2002 and March 2003 we entered into agreements
      with PharmaBio, under which we received upfront money in exchange for royalty
      payments on our women’s healthcare products and Striant ® ,
      respectively. We owe royalty payments to PharmaBio for a fixed period of time.
      These royalty payments are subject to minimum and maximum amounts, and the
      minimum amounts are in excess of the amounts we received from PharmaBio. Our
      failure to successfully market our products could have a material adverse effect
      on our ability to pay the minimum amounts to PharmaBio.





**Competition**





We
      and
      our marketing partners compete against established pharmaceutical and consumer
      product companies which market products addressing similar needs. Further,
      numerous companies are developing, or may develop, enhanced delivery systems
      and
      products that compete with our present and proposed products. It is possible
      that we may not have the resources to withstand these and other competitive
      forces. Some of these competitors possess greater financial, research and
      technical resources than our or our partners. Moreover, these companies may
      possess greater marketing capabilities than our Company or our partners,
      including the resources to implement extensive advertising
      campaigns.





The
      pharmaceutical industry is subject to change as new delivery technologies are
      developed, new products enter the market, generic versions of available drugs
      become available and treatment paradigms evolve to reflect these and other
      medical research discoveries. We face significant competition in all areas
      of
      our business. The rapid pace of change in the pharmaceutical industry
      continually creates new opportunities for existing competitors and start-ups
      and
      can quickly render existing products less valuable. Customer requirements and
      physician and patient preferences continually change as new treatment options
      emerge, are more or less heavily promoted and become less expensive. As a
      result, we may not gain, and may lose, market share.





Crinone ® /Prochieve ® ,
      a
      natural progesterone product, competes in markets with other progestins, both
      synthetic and natural, that may be delivered orally, by injection or by pharmacy
      compounded vaginal suppository. Some of the more successful orally-dosed
      products include Provera® (medroxyprogesterone acetate) marketed by Pfizer Inc.,
      Prometrium® (oral micronized progesterone) marketed by Solvay S.A., Prempro®
(conjugated estrogens/medroxyprogesterone acetate tablets) and Premphase®
(conjugated estrogens/medroxyprogesterone acetate tablets) marketed by Wyeth. Competition
      is based primarily on delivery method and label indications. Crinone ® /Prochieve ® is the
      only progestin product approved by FDA for use in infertility or for use in
      pregnant women.





Striant ® competes
      against other testosterone products that can be delivered by injection,
      transdermal patch and transdermal gel. Some of the more successful testosterone
      products include AndroGel® (testosterone gel) marketed by Unimed
      Pharmaceuticals, Inc., Testim® (testosterone gel) marketed by Auxilium
      Pharmaceuticals Inc., and Androderm® (testosterone transdermal system) marketed
      by Watson Pharma, Inc. Competition is based primarily on delivery method.
      Transdermal testosterone gels currently have the largest market share and
      transdermal testosterone patches have the next largest market share, followed
      by
      injectable products. Striant ® is
      priced comparably to the gels and patches.


14


**Customers**





Our
      customers include trade customers, such as drug wholesalers and chain drug
      stores, and our marketing partners. We utilize two employees to make calls
      on
      the Company’s trade customers for Striant ® and Prochieve ® .
      Our
      practice, in the case of our trade customers, is to ship our products promptly
      upon receipt of purchase orders from customers; consequently, backlog orders
      are
      not significant.  In
      the
      case of our marketing partners, firm purchase orders are received by the Company
      ninety days in advance of the expected shipping date.





**Revenue
      by Product**





The
      following table sets forth the percentage of the Company's consolidated
      revenues, consisting of sales, licensing fees, sales force promotional fees,
      and
      royalty revenues, by revenue source for each product accounting for 3% or more
      of consolidated revenues in any of the three years ended December
      31:


2005
                
                2004
                
                2003Crinone
                
                37%
                
                40%
                
                34%Prochieve
                
                15%
                
                10%
                
                26%RepHresh
                
                12%
                
                4%
                
                3%Royalty
                    income
                
                11%
                
                6%
                
                5%Replens
                
                11%
                
                15%
                
                16%Striant
                
                6%
                
                18%
                
                13%Sales
                    force promotional fees
                
                3%
                
                3%
                
                1%Licensing
                    fees
                
                3%
                
                3%
                
                2%Other
                    products
                
                2%
                
                1%
                
                0%100%
                
                100%
                
                100%


The
      following table presents information about Columbia’s revenues, including
      royalty and license revenue, by customer for each of
      the three years ended December 31:


2005
              
              2004
              
              2003Ares-Serono
              
              $
              9,765,387
              
              $
              8,512,147
              
              $
              8,655,947Lil'
                  Drug Store Products, Inc.
              
              
              6,906,358
              
              
              3,565,760
              
              
              3,281,034Cardinal
                  Healthcare
              
              
              1,773,811
              
              
              1,419,962
              
              
              3,296,865McKesson
              
              
              1,620,188
              
              
              1,218,438
              
              
              2,890,998All
                  others (none over 5%)
              
              
              1,975,098
              
              
              3,144,097
              
              
              4,290,184$
              22,040,842
              
              $
              17,860,404
              
              $
              22,415,028


15


**Sales
      by Geographic Area**





The
      following table sets forth the percentage of the Company's consolidated revenue,
      based on sales by geographic area, for each area accounting for 5% or more
      of
      consolidated revenues in any of the three years ended December 31:


2005
              
              2004
              
              2003United
                  State
              
              $
              10,970,046
              
              $
              11,236,330
              
              $
              13,573,723Europe
              
              
              11,070,796
              
              
              6,624,074
              
              
              8,841,305$
              22,040,842
              
              $
              17,860,404
              
              $
              22,415,028




**Recent
      Developments**





On
      March
      10, 2006, the Company entered into a Securities Purchase Agreement with certain
      investors for the private placement of 7,428,220 shares of the Company’s common
      stock, par value $.01 per share (the “Shares”), at a price of $4.04 per share
      and warrants to purchase 1,857,041 shares of common stock (the “Warrants”). We
      expect gross proceeds from the sale of the Shares will be approximately $30
      million. The Warrants are exercisable for common stock of the Company at $5.39
      per share beginning 180 days from the date they are issued, which is expected
      to
      occur on or about March 15, 2006, and expiring 5 years thereafter. The exercise
      price and number of shares issuable upon exercise are subject to adjustment
      in
      the event of stock split, stock dividend, recapitalization, reclassification,
      combination or exchange of shares, reorganization, liquidation, dissolution,
      consolidation, or merger. Under the terms of the Securities Purchase Agreement,
      the Company has agreed to file, within 30 days, a registration statement with
      the Securities and Exchange Commission to register for resale the Shares and
      the
      shares of common stock issuable upon the exercise of the Warrants, which
      registration statement is required under the Securities Purchase Agreement
      to
      become effective within 120 days following the closing. The Company will be
      required to pay certain cash penalties if it does not meet its registration
      obligations under the Securities Purchase Agreement.




On
      March
      6, 2006, Robert S. Mills was promoted to president and chief executive officer.
      On January 5, 2006, Mr. Mills was elected president and chief operating officer
      and was elected to the Company’s Board of Directors. On February 25, 2005,
      the Company entered into an employment agreement with Mr. Mills defining the
      terms of his employment with the Company. The initial term of Mr. Mills’
employment under the Agreement is through March 31, 2007.





On
      January 5, 2006, Fred
      Wilkinson resigned
      as president
      and chief executive officer of the Company and also resigned from the Company’s
      Board of Directors.





The
      Company continues to explore a range of strategic options to enhance shareholder
      value, including a variety of strategic partnership relationships ranging from
      development projects for third parties, the out-license or sale of one or more
      of the Company’s products, and a possible sale of the Company. Banc of America
      Securities LLC, the Company's long-standing financial advisor, is assisting
      the
      Company in this exploration process. No formal decisions have been made, and
      no
      agreements have been reached. There can be no assurance given that any
      particular alternative will be pursued or that any transaction will occur or
      on
      what terms.


16


**Employees**





As
      of
      March 3, 2006, the Company had 54 employees: 3 in management, 6 in production,
      33 in sales and marketing, and 12 in support functions. Our success is highly
      dependent on our ability to attract and retain qualified employees. Competition
      for employees is intense in the pharmaceutical industry. We believe we have
      been
      successful in our efforts to recruit qualified employees, but we cannot
      guarantee that we will continue to be as successful in the future. None of
      the
      Company's employees are represented by a labor union or are subject to
      collective bargaining agreements. We believe that our relationship with our
      employees is good.





The
      Company has an employment agreement with one employee, Mr. Mills, President
      and
      Chief Executive Officer. See “Executive Compensation--Employment
      Agreements.” The Board of Directors of the Company has adopted an
      Indemnification Agreement for Officers and Directors and an Executive Change
      of
      Control Severance Agreement for Officers.





**Available
      Information**





The
      Company's Internet address is http://www.columbialabs.com. Through a link on
      the
      Investor Relations page of this website, we make available, free of charge,
      our
      annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
      on
      Form 8-K, and any amendments to those reports, as soon as reasonably practicable
      after we electronically file such material with or furnish it to the SEC. In
      addition, we will provide electronic or paper copies of our filings free of
      charge upon request. Information contained on our corporate website or any
      other
      website is not incorporated into this Annual Report and does not constitute
      a
      part of this Annual Report.





In
      addition, the public may read and copy any materials filed by the Company with
      the SEC at the SEC’s Reference Room, which is located at 450 Fifth Street, NW,
      Washington, D.C., 20549. Interested parties may call (800) SEC-0330 for further
      information on the Reference Room. The SEC also maintains a website containing
      reports, proxy materials and information statements, among other information,
      at
      http://www.sec.gov.





**Item
      1A. Risk Factors**





**We
      have a history of losses and we may continue to incur
      losses.**




We
      have
      had a history of losses in each fiscal year since our founding. For the fiscal
      year ended December 31, 2005, we had a net loss of $9.3 million. If we and
      our partners are unable to successfully market our products, and otherwise
      increase sales of our products, and contain our operating expenses, we may
      not
      have sufficient funds to continue operations unless we are able to raise
      additional funds from sales of securities or otherwise. Additional financing
      may
      not be available to us on acceptable terms, if at all.




**Our
      business is heavily dependent on the continued sale of
      Crinone** **®** **,** **** **Replens** **®** **,
      RepHresh** **®** **,
      Advantage-S** **®** **and** **Striant** **®** **by
      our marketing partners** **.
      If revenues from these partnered products fail to increase as anticipated,
      or
      materially decline, our financial condition and results of operations will
      be
      materially harmed.**




Our
      operating results are heavily dependent on the revenues and royalties derived
      from the sale of Crinone ® to
      Serono, the sale of Replens ® ,
      RepHresh ® and
      Advantage-S ® to
      Lil’
Drug Store Products, Inc. and the sale of Striant ® to
      Ardana for sale in Europe. Revenues from sales of these partnered products
      in
      2005 comprised approximately 68% of our total revenues. We do not control the
      amount and timing of marketing resources that our partners devote to our
      products. If Serono fails to effectively market Crinone ® ,  Lil’
Drug
      Store Products fails to effectively market Replens ® ,
      RepHresh ® and
      Advantage-S ® ,
      or
      Ardana fails to effectively market Striant ® in
      Europe, this could have a material adverse effect on our business, financial
      condition and results of operations.




**Our
      Marketing Agreement for Prochieve** ® **may be terminated under certain circumstances.**





We
      market
      Prochieve ® under a
      June 2002 sublicense from Serono under the worldwide license we granted to
      Serono for our progesterone gel. Under the terms of the license and sublicense,
      Serono markets Crinone ® in the
      U.S. to a defined list of fertility specialists. We are free to market
      Prochieve ® to all
      other physicians in the U.S., including obstetricians, gynecologists and primary
      care physicians. Serono receives a 30% royalty on all Prochieve ® sales
      dispensed to patients of physicians outside its target list of fertility
      specialists and an additional 40% royalty on all Prochieve ® sales
      dispensed to patients of physicians on Serono’s target list of fertility
      specialists.


17


Serono
      may terminate our marketing agreement for Prochieve ® by
      sending us written notice if (i) Prochieve ® is
      dispensed to patients of physicians on Serono’s target list of fertility
      specialists in any one calendar quarter at the rate of 10% or more of the amount
      of Crinone ® dispensed to those patients, (ii) Serono notifies us in writing of its intent
      to
      terminate the marketing agreement and (iii) such rate continues to equal or
      exceed 10% during the three month period following such notice or a subsequent
      three month period. If the marketing agreement is terminated and Serono does
      not
      market Crinone ® to the
      physicians we call on, our profitability with respect to Crinone ® /Prochieve ® may be
      reduced significantly.




**Healthcare
      insurers and other payors may not pay for our products or may impose limits
      on
      reimbursement.**




Our
      ability to commercialize our prescription products will depend, in part, on
      the
      extent to which reimbursement for our products is available from third-party
      payors, such as health maintenance organizations, health insurers and other
      public and private payors. If we succeed in bringing new prescription products
      to market, we cannot be assured that third-party payors will pay for such
      products, or establish and maintain price levels sufficient for realization
      of
      an appropriate return on our investment in product development.




Many
      health maintenance organizations and other third-party payors use formularies,
      or lists of drugs for which coverage is provided under a healthcare benefit
      plan, to control the costs of prescription drugs. Each payor that maintains
      a
      drug formulary makes its own determination as to whether a new drug will be
      added to the formulary and whether particular drugs in a therapeutic class
      will
      have preferred status over other drugs in the same class. This determination
      often involves an assessment of the clinical appropriateness of the drug and,
      in
      some cases, the cost of the drug in comparison to alternative products. Our
      current or our future products may not be added to payors’ formularies, our
      products may not have preferred status to alternative therapies, and formulary
      decisions may not be conducted in a timely manner. Once reimbursement at an
      agreed level is approved by a third-party payor, we may lose that reimbursement
      entirely or we may lose the similar or better reimbursement we receive compared
      to competitive products. As reimbursement is often approved for a period of
      time, this risk is greater at the end of the time period, if any, for which
      the
      reimbursement was approved. We may also decide to enter into discount or
      formulary fee arrangements with payors, which could result in us receiving
      lower
      or discounted prices for Prochieve ® and
      Striant ® or
      future products.




**We
      face significant competition from pharmaceutical and consumer product companies,
      which may adversely impact our market share.**




We
      and
      our marketing partners compete against established pharmaceutical and consumer
      product companies that market products addressing similar needs. Further,
      numerous companies are developing, or may develop, enhanced delivery systems
      and
      products that compete with our present and proposed products. It is possible
      that we may not have the resources to withstand these and other competitive
      forces. Some of these competitors may possess greater financial, research and
      technical resources than our company or our partners. Moreover, these companies
      may possess greater marketing capabilities than our company or our partners,
      including the resources to implement extensive advertising
      campaigns.





The
      pharmaceutical industry is subject to change as new delivery technologies are
      developed, new products enter the market, generic versions of available drugs
      become available, and treatment paradigms evolve to reflect these and other
      medical research discoveries. We face significant competition in all areas
      of
      our business. The rapid pace of change in the pharmaceutical industry
      continually creates new opportunities for existing competitors and start-ups,
      and can quickly render existing products less valuable. Customer requirements
      and physician and patient preferences continually change as new treatment
      options emerge, are more or less heavily promoted, and become less expensive.
      As
      a result, we may not gain, and may lose, market share.


18


Crinone ® /Prochieve ® ,
      a
      natural progesterone product, competes in markets with other progestins, both
      synthetic and natural, that may be delivered orally, by injection or by pharmacy
      compounded vaginal suppository. Some of the more successful orally-dosed
      products include Provera® (medroxyprogesterone acetate) marketed by Pfizer Inc.,
      Prometrium® (oral micronized progesterone) marketed by Solvay S.A., Prempro®
(conjugated estrogens/medroxyprogesterone acetate tablets), and Premphase®
(conjugated estrogens/medroxyprogesterone acetate tablets) marketed by
      Wyeth.





Striant ® competes
      against other testosterone products that can be delivered by injection,
      transdermal patch and transdermal gel. Some of the more successful testosterone
      products include AndroGel® (testosterone gel) marketed by Unimed
      Pharmaceuticals, Inc., Testim® (testosterone gel) marketed by Auxilium
      Pharmaceuticals Inc., and Androderm® (testosterone transdermal system) marketed
      by Watson Pharma, Inc. Competition is based primarily on delivery method.
      Transdermal testosterone gels currently have the largest market share and
      transdermal testosterone patches have the next largest market share, followed
      by
      injectable products. Striant ® is
      priced comparably to the gels and patches.





**Our
      products could demonstrate hormone replacement risks.**




In
      the
      past, certain studies of female hormone replacement therapy products, such
      as
      estrogen, have reported an increase in health risks. Progesterone is a natural
      female hormone, present at normal levels in most women through their lifetimes.
      However, some women require progesterone supplementation due to a natural or
      chemical-related progesterone deficiency. It is possible that data suggesting
      risks or problems may come to light in the future which could demonstrate a
      health risk associated with progesterone or progestin supplementation or our
      8%
      and 4% progesterone gels. It is also possible that future study results for
      hormone replacement therapy could be negative and could result in negative
      publicity about the risks and benefits of hormone replacement therapy. As a
      result, physicians and patients may not wish to prescribe or use progestins,
      including our progesterone gels.




Similarly,
      while testosterone is a natural male hormone, present at normal levels in most
      men through their lifetime, some men require testosterone replacement therapy,
      or TRT, to normalize their testosterone levels. It is possible that data
      suggesting risks or problems may come to light in the future which could
      demonstrate a health risk associated with TRT or Striant ® .
      It is
      also possible that future study results for hormone replacement therapy could
      be
      negative and could result in negative publicity about the risks and benefits
      of
      hormone replacement therapy. As a result, physicians and patients may not wish
      to prescribe or use TRT products, including Striant ® .




In
      addition investors may become concerned about these issues and decide to sell
      our common stock. These factors could adversely affect our business and the
      price of our common stock.




**We
      may be exposed to product liability claims.**




We
      could
      be exposed to future product liability claims by consumers. Although we
      presently maintain product liability insurance coverage in the amount of
      $15 million, such insurance may not be sufficient to cover all possible
      liabilities. An award against us in an amount greater than our insurance
      coverage could have a material adverse effect on our operations. Some customers
      require us to have a minimum level of product liability insurance coverage
      before they will purchase or accept our products for distribution. If we fail
      to
      satisfy insurance requirements, our ability to achieve broad distribution of
      our
      products could be limited. This could have a material adverse effect upon our
      business and financial condition.




19


**Steps
      taken by us to protect our proprietary rights might not be adequate, in which
      case competitors may infringe on our rights or develop similar products.** **The
      United States and foreign patents upon which our original** **Bioadhesive
      Delivery System** **was based have expired.**




Our
      success and competitive position are partially dependent on our ability to
      protect our proprietary position for our technology, products and product
      candidates. We rely primarily on a combination of patents, trademarks,
      copyrights, trade secret laws, third-party confidentiality and nondisclosure
      agreements, and other methods to protect our proprietary rights. The steps
      we
      take to protect our proprietary rights, however, may not be adequate. Third
      parties may infringe or misappropriate our patents, copyrights, trademarks,
      and
      similar proprietary rights. Moreover, we may not be able or willing, for
      financial, legal or other reasons, to enforce our rights. To date, we have
      never
      been a party to a proprietary rights action.




Bio-Mimetics,
      Inc. held the patent upon which our original Bioadhesive
      Delivery System, or BDS, was
      based and granted us a license under that patent. Bio-Mimetics’ patent contained
      broad claims covering controlled release products that include a bioadhesive.
      However, this United States patent and its corresponding foreign patents expired
      in November 2003. Based upon the expiration of the original Bio-Mimetics patent,
      other parties will be permitted to make, use or sell products covered by the
      claims of the Bio-Mimetics patent,
      subject to other patents, including those which we hold. We have obtained numerous
      patents with claims covering improved methods of formulating and delivering
      therapeutic compounds using the BDS. We
      cannot
      assure you that any of these patents will enable us to prevent infringement,
      or
      that our competitors will not develop alternative methods of delivering
      compounds, potentially resulting in competitive products outside the protection
      that may be afforded by our patents. O ther
      companies may independently develop or obtain patent or similar rights to
      equivalent or superior technologies or processes. Additionally, although we
      believe that our patented technology has been independently developed and does
      not infringe on the proprietary rights of others, we cannot assure you that
      our
      products do not and will not infringe on the proprietary rights of others.
      In
      the event of infringement, we may be required to modify our technology or
      products, obtain licenses or pay license fees. We may not be able to do so
      in a
      timely manner or upon acceptable terms and conditions. This may have a material
      adverse effect on our operations.




The
      standards that the U.S. Patent and Trademark Office and its foreign counterparts
      use to grant patents are not always applied predictably or uniformly and can
      change. Limitations on patent protection in some countries outside the U.S.,
      and
      the differences in what constitutes patentable subject matter in these
      countries, may limit the protection we seek outside of the U.S. For example,
      methods of treating humans are not patentable subject matter in many countries
      outside of the U.S. In addition, laws of foreign countries may not protect
      our
      intellectual property to the same extent as would laws of the U.S. In
      determining whether or not to seek a patent or to license any patent in a
      particular foreign country, we weigh the relevant costs and benefits, and
      consider, among other things, the market potential of our product candidates
      in
      the jurisdiction and the scope and enforceability of patent protection afforded
      by the law of the jurisdiction.




We
      own or
      are seeking registration of the following as trademarks in countries throughout
      the world: Crinone ® ,
      Prochieve ® ,
      Striant ® ,
      and
      Striant ® SR.
      These trademarks, however, may not afford us adequate protection or we may
      not
      have the financial resources to enforce our rights under these
      trademarks.




20


**We
      are subject to government regulation, which could affect our ability to sell
      products.**




Nearly
      every aspect of the development, manufacture and commercialization of our
      approved pharmaceutical products is subject to time-consuming and costly
      regulation by various governmental entities, including the Food and Drug
      Administration, or FDA, the Drug Enforcement Administration and state agencies,
      as well as regulatory agencies in those foreign countries in which our products
      are manufactured or distributed. The FDA has the power to seize adulterated
      or
      misbranded products and unapproved new drugs, to require their recall from
      the
      market, to enjoin further manufacture or sale, and to publicize certain facts
      concerning a product.




We
      employ
      various quality control measures in our efforts to ensure that our products
      conform to their intended specifications and meet the standards proscribed
      by
      applicable governmental regulations, including FDA’s current Good Manufacturing
      Practices regulations. Notwithstanding our efforts, our products or the
      ingredients we purchase from our suppliers for inclusion in our products may
      contain undetected defects or non-conformities with specifications. Such defects
      or non-conformities could compel us to recall the affected product, make changes
      to or restrict distribution of the product, or take other remedial actions.
      The
      occurrence of such events may harm our relations with or result in the loss
      of
      customers, injure our reputation, impair market acceptance of our products,
      harm
      our financial results, and, in certain circumstances, expose us to product
      liability or other claims.




**The
      development of our pharmaceutical products, including the development of
      Prochieve** **®** **8% for the prevention of preterm birth, is uncertain and subject to a number
      of
      significant risks.**




Some
      of
      our pharmaceutical products are in various stages of development. In the United
      States and most foreign countries, we must complete extensive human clinical
      trials that demonstrate the safety and efficacy of a product in order to apply
      for regulatory approval to market the product.




The
      process of developing product candidates involves a degree of risk and may
      take
      several years. Product candidates that appear promising in the early phases
      of
      development may fail to reach the market for several reasons,
      including:




·
            Clinical
                trials may show our product candidates to be ineffective or to have
                harmful side effects;


·
            Product
                candidates may fail to receive regulatory approvals required to bring
                the
                products to market;


·
            Manufacturing
                costs or other factors may make our product candidates uneconomical;
                and


·
            The
                proprietary rights of others and their competing products and technologies
                may prevent our product candidates from being effectively
                commercialized.





Success
      in early clinical trials does not ensure that large-scale clinical trials will
      be successful. Clinical results are frequently susceptible to varying
      interpretations that may delay, limit or prevent regulatory
      approvals.




The
      length of time necessary to complete clinical trials and to submit an
      application for marketing approval for a final decision by a regulatory
      authority varies significantly and may be difficult to predict. The speed with
      which we can complete clinical trials and applications for marketing approval
      will depend on several factors, including the following:




·
            The
                rate of patient enrollment, which is a function of many factors,
                including
                the size of the patient population, the proximity of patients to
                clinical
                sites, the eligibility criteria for the study, and the nature of
                the study
                protocol;


·
            Institutional
                review board, or IRB, approval of the study protocol and the informed
                consent form;


·
            Prior
                regulatory agency review and
                approval;


·
            Analysis
                of data obtained from clinical activities, which are susceptible
                to
                varying interpretations and which interpretations could delay, limit
                or
                prevent regulatory approval;


·
            Changes
                in the policies of regulatory authorities for drug approval during
                the
                period of product development;
                and


21


·
            The
                availability of skilled and experienced staff to conduct and monitor
                clinical studies and to prepare the appropriate regulatory
                applications.





In
      addition, developing product candidates is very expensive and will continue
      to
      have a significant impact on our ability to generate profits. Factors affecting
      our product development expenses include:




·
            Our
                ability to raise any additional funds that we need to complete our
                trials;


·
            The
                number and outcome of clinical trials conducted by us and/or our
                collaborators;


·
            The
                number of products we may have in clinical
                development;


·
            In-licensing
                or other partnership activities, including the timing and amount
                of
                related development funding, license fees or milestone payments;
                and


·
            Future
                levels of our revenue.





Clinical
      trials are expensive and can take years to complete, and there is no guarantee
      that the clinical trials will demonstrate sufficient safety and/or efficacy
      of
      the products to meet FDA requirements, or those of foreign regulatory
      authorities.




In
      November 2003, the Company announced a Phase III multi-center, randomized,
      double-blind, placebo-controlled, clinical trial designed to assess the
      efficacy, safety and tolerability of Prochieve ® 8%
      (progesterone gel) in preventing preterm delivery in pregnant women who are
      at
      increased risk for preterm birth. The study protocol defines “at risk” patients
      as pregnant women who have either a history of a spontaneous preterm delivery,
      or who have a cervical length of 2.5 cm or less, as measured by transvaginal
      ultrasound, with the current pregnancy. Patients are randomized to receive
      either Prochieve ® 8% or
      placebo. Treatment is initiated between 18 and 22 weeks of gestation and
      administered daily until delivery, withdrawal from the study, development of
      preterm rupture of the membranes, or until 37 completed weeks of gestation.
      This
      study is designed to enroll 636 patients; 414 patients were enrolled at the
      end
      of February, 2006. From October 2005 through February 2006, enrollment averaged
      35 patients per month, a rate the Company expects to maintain going forward
      through the addition of new study centers and execution of its study-related
      marketing efforts. From October 2005 through February 2006, the Company added
      10
      study centers. The Company had 53 study centers (42 domestic and 11 foreign)
      open at the end of February, 2006, and plans to open up to 10 more in March
      and
      April 2006. The Company projects that enrollment in the preterm study will
      be
      complete by the end of third quarter 2006. The Company expects, if positive
      results are obtained, to file with the FDA for a label indication in mid-2007.
      Because there is no approved treatment for preterm birth, and because of the
      growing incidence, and economic and social impact, of this problem, the Company
      is hopeful that the FDA will grant an expedited review during 2007. Enrollment
      of patients may not be completed in a timely manner and the study may not be
      successful. If the study does not demonstrate that Prochieve ® 8%
      (progesterone gel) prevents preterm delivery in pregnant women who are at
      increased risk for preterm birth, our future sales opportunities and
      profitability would be reduced significantly.




**We
      may experience adverse events in clinical trials, which could delay or halt
      our
      product development.**




Our
      product candidates may produce serious adverse events. These adverse events
      could interrupt, delay or halt clinical trials of our product candidates and
      could result in FDA or other regulatory authorities denying approval of our
      product candidates for any or all targeted indications. An IRB or independent
      data safety monitoring board, the FDA, other regulatory authorities, or we
      ourselves may suspend or terminate clinical trials at any time. Our product
      candidates may prove not to be safe for human use.




**Delays
      or failures in obtaining regulatory approvals may delay or prevent marketing
      of
      the products that we are developing.**




Other
      than Prochieve ® ,
      all of
      our product candidates are in clinical development and have not received
      regulatory approval from the FDA or any foreign regulatory authority. The
      regulatory approval process typically is extremely expensive, takes many years,
      and the timing or likelihood of any approval cannot be accurately predicted.
      Delays in obtaining regulatory approval can be extremely costly in terms of
      lost
      sales opportunities and increased clinical trial costs. If we fail to obtain
      regulatory approval for our current or future product candidates or expanded
      indications for currently marketed products, we will be unable to market and
      sell such products and indications and therefore may never be
      profitable.


22


As
      part
      of the regulatory approval process, we must conduct clinical trials for each
      product candidate to demonstrate safety and efficacy. The number of clinical
      trials that will be required varies depending on the product candidate, the
      indication being evaluated, the trial results, and the regulations applicable
      to
      any particular product candidate.




The
      results of initial clinical trials of our product candidates do not necessarily
      predict the results of later-stage clinical trials. Product candidates in later
      stages of clinical trials may fail to show the desired safety and efficacy
      despite having progressed through initial clinical trials. The data collected
      from the clinical trials of our product candidates may not be sufficient to
      support FDA or other regulatory approval. In addition, the continuation of
      a
      particular study after review by an IRB or independent data safety monitoring
      board does not necessarily indicate that our product candidate will achieve
      the
      clinical endpoint.




The
      FDA
      and other regulatory agencies can delay, limit or deny approval for many
      reasons, including:




·
            A
                product candidate may not be deemed to be safe or
                effective;


·
            The
                manufacturing processes or facilities we have selected may not meet
                the
                applicable requirements; and


·
            Changes
                in their approval policies or adoption of new regulations may require
                additional clinical trials or other
                data.





Any
      delay
      in, or failure to receive, approval for any of our product candidates could
      prevent us from growing our revenues or achieving profitability.




**We
      are dependent on a principal supplier, the loss of which could impair our
      ability to manufacture and sell our products.**




Medical
      grade, cross-linked polycarbophil, the polymer used in our BDS-based products
      is
      currently available from only one supplier, Noveon, Inc., or Noveon. We believe
      that Noveon will supply as much of the material as we require because our
      products rank among the highest value-added uses of the polymer. In the event
      that Noveon cannot or will not supply enough of the product to satisfy our
      needs, we will be required to seek alternative sources of polycarbophil. An
      alternative source of polycarbophil may not be available on satisfactory terms
      or at all, which would impair our ability to manufacture and sell our
      products.




**We
      are dependent upon third-party developers and manufacturers, the loss of which
      could result in a loss of revenues.**




We
      rely
      on third parties to develop and manufacture our products. These third parties
      may not be able to satisfy our needs in the future, and we may not be able
      to
      find or obtain FDA approval of alternate developers and manufacturers. Delays
      in
      the development and manufacture of our products could have a material adverse
      effect on our business. This reliance on third parties could have an adverse
      effect on our profit margins. Any interruption in the manufacture of our
      products would impair our ability to deliver our products to customers on a
      timely and competitive basis, and could result in the loss of
      revenues.




**The
      loss of our key executives could have a significant impact on our
      company.**




Our
      success depends in large part upon the abilities and continued service of our
      executive officers and other key employees, particularly Robert S. Mills, our
      President and Chief Executive Officer. We have entered into an employment
      agreement with Mr. Mills, which expires in March 2007. The loss of services
      of our officers and directors could have a material adverse effect on our
      business and prospects.


23


**We
      may be limited in our use of our net operating loss
      carryforwards.**




As
      of
      December 31, 2005, we had certain net operating loss carryforwards of
      approximately $128 million that may be used to reduce our future U.S.
      federal income tax liabilities. Our ability to use these loss carryforwards
      to
      reduce our future U.S. federal income tax liabilities could be lost if we were
      to experience more than a 50% change in ownership within the meaning of Section
      382(g) of the Internal Revenue Code. If we were to lose the benefits of these
      loss carryforwards, our future earnings and cash resources would be materially
      and adversely affected.




**Sales
      of large amounts of common stock may adversely affect our market price.** **The
      issuance of preferred stock may adversely affect rights of common
      stockholders** **.**




On
      March
      10, 2006, we entered into a Securities Purchase Agreement with certain investors
      for the private placement of 7,428,220 shares of our common stock, par value
      $.01 per share (the “Shares”), at a price of $4.04 per share and warrants to
      purchase 1,857,041 shares of common stock (the “Warrants”). We expect gross
      proceeds from the sale of the Shares will be approximately $30 million. The
      Warrants are exercisable for our common stock at $5.39 per share beginning
      180
      days from the date they are issued, which is expected to occur on or about
      March
      15, 2006, and expiring 5 years thereafter. The exercise price and number of
      shares issuable upon exercise are subject to adjustment in the event of stock
      split, stock dividend, recapitalization, reclassification, combination or
      exchange of shares, reorganization, liquidation, dissolution, consolidation,
      or
      merger. Under the terms of the Securities Purchase Agreement, we have agreed
      to
      file, within 30 days, a registration statement with the Securities and Exchange
      Commission to register for resale the Shares and the shares of common stock
      issuable upon the exercise of the Warrants, which registration statement is
      required under the Securities Purchase Agreement to become effective within
      120
      days following the closing. We will be required to pay certain cash penalties
      if
      we do not meet our registration obligations under the Securities Purchase
      Agreement.





As
      of
      March 3, 2006, we had 41,754,784 shares
      of
      common stock outstanding, of which 41,354,784 shares
      were freely tradable. Approximately 400,000 shares of our common stock are
      restricted securities, but may be sold pursuant to Rule 144 under the Securities
      Act of 1933, as amended, or another exemption under the Securities Act. We
      also
      have the following securities outstanding: series B convertible preferred
      stock, series C convertible preferred stock, series E convertible preferred
      stock, warrants and options. If all of these securities are exercised or
      converted, an additional 10,845,895 shares of common stock will be outstanding,
      all of which will have been registered for resale under the Securities Act.
      When
      issued, these registered shares will be freely tradable and restricted shares
      will be saleable under Rule 144 in the future. The exercise and conversion
      of
      these securities is likely to dilute the book value per share of our common
      stock. In addition, the existence of these securities may adversely affect
      the
      terms on which we can obtain additional equity financing.




In
      March
      2002, our Board of Directors authorized shares of series D junior participating
      preferred stock in connection with its adoption of a stockholder rights plan,
      under which we issued rights to purchase series D convertible preferred stock
      to
      holders of our common stock. Upon certain triggering events, such rights become
      exercisable to purchase shares of common stock (or, in the discretion of our
      Board of Directors, series D convertible preferred stock) at a price
      substantially discounted from the then current market price of our common
      stock.




Under
      our
      certificate of incorporation, our Board of Directors has the authority to issue
      up to 1.0 million shares of preferred stock and to determine the price, rights,
      preferences and privileges of those shares without any further vote or action
      by
      our stockholders. The rights of the holders of common stock are subject to,
      and
      may be adversely affected by, the rights of the holders of any shares of
      preferred stock that may be issued in the future. While we have no present
      intention to authorize any additional series of preferred stock, such preferred
      stock, if authorized, may have other rights, including economic rights senior
      to
      the common stock, and, as a result, their issuance could have a material adverse
      effect on the market value of our common stock.




24




**Changes
      in, or interpretations of, accounting principles could result in unfavorable
      accounting charges.**


We
      prepare our consolidated financial statements in conformity with U.S. generally
      accepted accounting principles. These principles are subject to interpretation
      by the SEC and various bodies formed to interpret and create appropriate
      accounting principles. A change in these principles can have a significant
      effect on our reported results and may even retroactively affect previously
      reported transactions. Our accounting principles that recently have been or
      may
      be affected by changes in the accounting principles are as follows:





·
            Revenue
                recognition;


·
            Accounting
                for share-based payments;


·
            Accounting
                for income taxes; and


·
            Accounting
                for business combinations and related
                goodwill.





In
      particular, the FASB recently issued SFAS 123R which requires the
      measurement of all share-based payments to employees, including grants of
      employee stock options, using a fair-value-based method and the recording of
      such expense in our consolidated statements of operations. The accounting
      provisions of SFAS 123R are effective for annual periods beginning after
      June 15, 2005. We are required to adopt SFAS 123R in the first quarter
      of fiscal year 2006. We believe that the adoption of SFAS 123R will have a
      significant adverse effect on our reported financial results and may impact
      the
      way in which we conduct our business. Please refer to the section entitled
      "Recent Accounting Pronouncements" for further information regarding
      SFAS 123R.





**We
      do not intend to pay cash dividends on our common stock. As a result, you will
      not receive any periodic in** **come
      from an investment in our common stock.**




We
      have
      never paid a cash dividend on our common stock and we do not anticipate paying
      cash dividends in the foreseeable future. We intend to retain any earnings
      for
      use in the development and expansion of our business. In addition, applicable
      provisions of Delaware law and our debt instruments may affect our ability
      to
      declare and pay dividends on our common stock and our preferred stock.
      Accordingly, you should not expect to receive any periodic income from owning
      our common stock. Any economic gain on your investment will be solely from
      an
      appreciation, if any, in the price of the stock.




**Anti-takeover
      provisions could impede or discourage a third-party acquisition of our company.
      This could prevent stockholders from receiving a premium over market price
      for
      their stock.**




We
      are a
      Delaware corporation. Anti-takeover provisions of Delaware law impose various
      obstacles to the ability of a third party to acquire control of our company,
      even if a change in control would be beneficial to our existing stockholders.
      In
      addition, our Board of Directors has adopted a stockholder rights plan and
      has
      designated a series of preferred stock that could be used defensively if a
      takeover is threatened. Our incorporation under Delaware law, our stockholder
      rights plan, and our ability to issue additional series of preferred stock,
      could impede a merger, takeover or other business combination involving our
      company or discourage a potential acquiror from making a tender offer for our
      common stock. This could reduce the market value of our common stock if
      investors view these factors as preventing stockholders from receiving a premium
      for their shares.




**We
      are exposed to market risk from foreign currency exchange
      rates.**




With
      two
      operating subsidiaries and third party manufacturers in Europe, economic and
      political developments in the European Union can have a significant impact
      on
      our business. All of our products are currently manufactured in Europe. We
      are
      exposed to currency fluctuations related to payment for the manufacture of
      our
      products in Euros and other currencies and selling them in U.S. dollars and
      other currencies.




**Item
      1B. Unresolved Staff Comments**





None.




25


**Item
      2. Properties**





As
      of
      December 31, 2005, the Company leased the following properties:





AnnualLocation
            Use
            Square
                feet
            Expiration
            RentLivingston,
                NJ
            Corporate
                office
            12,780
            
            July
                2007
            $182,000Paris,
                France
            European
                logistics office
            150
            
            June
                2006
            14,000





**Item
      3. Legal Proceedings**





Claims
      and lawsuits have been filed against the Company and its subsidiaries from
      time
      to time. Although
      the results of pending claims are always uncertain, the Company does not believe
      the results of any such actions, individually or in the aggregate, will have
      a
      material adverse effect on our financial position or results of operation.
      Additionally, the Company believes that it has reserves or insurance coverage
      in
      respect of these claims, but no assurance can be given as to the sufficiency
      of
      such reserves or insurance in the event of any unfavorable outcome resulting
      from these actions.




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





No
      matters were submitted to a vote of security holders during the fourth quarter
      of the fiscal year ended December 31, 2005.





**Executive
      Officers of the Registrant**





Our
      executive officers as of March 6, 2006, were as follows:


Name
              Age
              Position
                  with the CompanyRobert
                  S. Mills
              53
              President
                  and Chief Executive OfficerMichael
                  McGrane
              56
              SeniorVice
                  President, General Counsel and SecretaryDavid
                  L. Weinberg
              60
              Vice
                  President, Finance, Chief Financial Officer and
                  Treasurer





Officers
      serve at the discretion of the Board of Directors. There is no family
      relationship between any of the executive officers or between any of the
      executive officers and the Company’s directors. There is no arrangement or
      understanding between any executive officer and any other person pursuant to
      which the executive officer was selected, except with respect to Mr. Mills’
employment agreements. See “Executive Compensation--Employment
      Agreements.”





Mr.
      Mills
      was promoted to president and chief executive officer on March 6, 2006. On
      January 5, 2006, Mr. Mills was elected president and chief operating officer
      and
      was elected to the Company’s Board of Directors. Mr.
      Mills
      joined Columbia in May 2001 as Senior Vice President, Operations and was named
      Chief Operating Officer in September 2003. Prior to joining the Company, Mr.
      Mills served five years as Senior Vice President, Manufacturing Operations,
      at
      Watson Pharmaceuticals, Inc. from 1996 to 2001. During his 30-year career in
      the
      pharmaceutical industry he also served as Vice President, Operations, at
      Alpharma, Inc. from 1993 to 1996 and held various positions with Aventis SA,
      including Director-Plant Operations. Mr. Mills holds a B.S. degree from Grove
      City College.





Mr.
      McGrane has
      served as Vice President, General Counsel and Secretary since January 2002,
      and
      was named Senior Vice President in January 2006. He joined the Company from
      The
      Liposome Company, Inc., a biotechnology company, where he served as Vice
      President, General Counsel and Secretary from
      1999
      to 2001, prior to
      which he was Vice President, General Counsel and Secretary to Novartis Consumer
      Health, Inc. from
      1997
      to 1998. Previously, Mr. McGrane held various positions, including Associate General
      Counsel, with Novartis Pharmaceuticals Corporation from
      1984 to 1996, and
      was
      Regulatory Counsel to the U.S. Food and Drug Administration from
      1975
      to 1984. Mr.
      McGrane received his J.D. degree from Georgetown University and his B.A. degree
      from Cornell College. He is a member of the New Jersey bar.


26


Mr.
      Weinberg has served as Vice President, Finance, Chief Financial Officer and
      Treasurer since September 1997. From the Company’s inception until June 1991 he
      was Vice President—Finance and Administration, Chief Financial Officer,
      Treasurer and Secretary. From 1991 to 1997, he held positions of increasing
      responsibility at Transmedia Network Inc., ultimately serving as Vice President
      and Chief Financial Officer. Mr. Weinberg was previously with Key
      Pharmaceuticals, Inc., where he served in various capacities, including Vice
      President - Finance, Treasurer and Secretary, from February
      1981 until
      its
      sale to Schering-Plough Corporation in 1986. Mr. Weinberg holds a B.B.A. degree
      in Accounting from Hofstra University.





**Code
      of Ethics**





The
      Board
      of Directors of the Company has adopted a Code of Business Conduct and Ethics
      applicable to all Board members, executive officers and all employees. The
      Code
      of Business Conduct and Ethics is available on the Company’s website, under the
      investor relations tab. We
      will
      provide an electronic or paper copy of this document free of charge upon
      request. If substantial amendments to the Code of Business Conduct and Ethics
      are executed, or if waivers are granted, the Company will post and disclose
      the
      nature of such amendments or waivers on the Company’s website or in a report on
      Form 8-K.


27


**PART
      II**





**Item
      5. Market for the Registrant's Common Equity and Related Stockholder Matters
      and
      Issuer Purchases of Equity Securities**





The
      Company's common stock, par value $.01 per share ("Common Stock"), began
      trading on the NASDAQ National Market System under the symbol CBRX on February
      13, 2004. Prior to that date it traded on the American Stock Exchange under
      the
      symbol COB. The following table sets forth for the periods indicated the high
      and low sales prices of the common stock on the NASDAQ and the American Stock
      Exchange.





High
            LowFiscal
                Year Ended December 31, 2004First
                Quarter
            $8.08
            $4.69Second
                Quarter
            5.40
            2.90Third
                Quarter
            3.59
            1.76Fourth
                Quarter
            3.45
            1.86Fiscal
                Year Ended December 31, 2005First
                Quarter
            $3.08
            $1.52Second
                Quarter
            3.18
            1.70Third
                Quarter
            3.82
            2.42Fourth
                Quarter
            4.91
            3.19





At
      March
      3, 2006, there were approximately 300 shareholders of record of the Company's
      common stock. one shareholder of record of the Company's Series B convertible
      preferred stock (“Series B Preferred Stock”), 12 shareholders of record of the
      Company’s Series C convertible preferred stock (“Series C Preferred Stock”) and
      12 shareholders of record of the Company’s Series E convertible preferred stock
      (“Series E Preferred Stock”). The Company estimates that there were
      approximately 7,500 beneficial owners of its common stock on such
      date.




On
      March
      10, 2006, the Company entered into a Securities Purchase Agreement with certain
      investors for the private placement of 7,428,220 shares of the Company’s common
      stock, par value $.01 per share (the “Shares”), at a price of $4.04 per share
      and warrants to purchase 1,857,041 shares of common stock (the “Warrants”). We
      expect gross proceeds from the sale of the Shares will be approximately $30
      million. The Warrants are exercisable for common stock of the Company at $5.39
      per share beginning 180 days from the date they are issued, which is expected
      to
      occur on or about March 15, 2006, and expiring 5 years thereafter. The exercise
      price and number of shares issuable upon exercise are subject to adjustment
      in
      the event of stock split, stock dividend, recapitalization,
      reclassification, combination or exchange of shares, reorganization,
      liquidation, dissolution, consolidation, or merger. Under the terms of the
      Securities Purchase Agreement, the Company has agreed to file, within 30 days,
      a
      registration statement with the Securities and Exchange Commission to register
      for resale the Shares and the shares of common stock issuable upon the exercise
      of the Warrants, which registration statement is required under the Securities
      Purchase Agreement to become effective within 120 days following the closing.
      The Company will be required to pay certain cash penalties if it does not meet
      its registration obligations under the Securities Purchase
      Agreement.





The
      Series C Preferred Stock was issued and sold by the Company in January 1999
      to
      24 accredited investors, through which the Company raised approximately $6.4
      million, net of expenses. The Series C Preferred Stock has a stated value of
      $1,000 per share, and is convertible into common stock at the lower of: (i)
      $3.50 per share of common stock, and (ii) 100% of the average of the closing
      prices during the three trading days immediately preceding the conversion
      notice. The Series C Preferred Stock pays a 5% dividend, payable quarterly
      in
      arrears on the last day of the quarter.


28


Effective
      as of February 6, 2001, the Company entered into the Amended and Restated common
      stock Purchase Agreement (the “Purchase Agreement”) with Acqua
      Wellington North
      American Equities Fund, Ltd., (“ Acqua
      Wellington”) to sell up to $16.5 million of common stock under the Registration
      Statement, the Prospectus, and the related Prospectus Supplement dated February
      6, 2001 and amended on April 13, 2001. Pursuant to the Purchase Agreement,
      the
      Company was able to issue and sell to Acqua Wellington up to $16.5 million
      of
      common stock and grant Acqua Wellington a call option to purchase additional
      shares of common stock, subject to the overall limit of $16.5
      million.  The
      Company and Acqua Wellington agreed to extend the term of the Purchase Agreement
      until February 6, 2005, at which time it expired. The Company sold Acqua
      Wellington $9.84 million of common stock during the term of the Purchase
      Agreement.





During
      2003, the Company issued 2,764,612 shares of its Common Stock to a group of
      institutional investors, which resulted in the Company receiving $28,805,091
      after expenses. Also in 2003, outstanding options and warrants were exercised
      resulting in the issuance of 1,318,190 shares of Common Stock and the receipt
      of
      $6,994,115 by the Company. Proceeds were used for general corporate
      purposes.





During
      2004, the Company issued 2,000,000 shares of its Common Stock to SJ Strategic
      Investments LLC, a family investment vehicle owned and managed by John M.
      Gregory, the founder and former Chairman and CEO of King Pharmaceuticals, which
      resulted in the Company receiving $6,380,000 after expenses. Proceeds were
      used
      for general corporate purposes.





On
      May
      10, 2005, the Company raised $6.9 million from the issuance and sale of 69,000
      shares of Series E Preferred Stock. The Series E Preferred Stock has a stated
      value of $100 per share. Each share of the Series E Preferred Stock may be
      converted by the holder into 50 shares of common
      stock, subject to adjustment, and will automatically be converted into common
      stock at that rate upon the date that the average of the daily market prices
      of
      the Company’s common stock for the 20 consecutive trading days preceding such
      date exceeds $6.00 per share. The Series E Preferred Stock pays no dividends
      and
      contains voting rights equal to the number of shares of common stock into which
      each share of Series E Preferred Stock is convertible. Upon liquidation of
      the
      Company, the holders of the Series E Preferred Stock are entitled to $100 per
      share.





**Equity
      Compensation Plan Information**





The
      following table sets forth aggregate information for the fiscal year ended
      December 31, 2005, regarding the Company's compensation plans, including
      individual compensation agreements, under which equity securities of the Company
      are authorized for issuance:





Plan
                    Category
                Number
                    of securities to be
                  issued
                    upon exercise of
                  outstanding
                    options,
                  warrants
                    and rights
                Weighted
                    average exercise
                  price
                    of outstanding
                  options,
                    warrants and rights
                Number
                    of securities
                  remaining
                    available for
                  future
                    issuance(a)
                (b)
                (c)Equity
                    compensation plans approved by security holders
                5,953,725
                $7.80
                1,575,300Equity
                    compensation plans not approved by security holders
                725,000
                $6.94
                0Total
                **6,678,725**
                **$7.70**
                **1,575,300**





The
      Company has two, shareholder-approved equity compensation plans under which
      securities may be issued upon exercise. The first is the Columbia Laboratories,
      Inc. 1988 Stock Option Plan, as amended (the "1988 Plan"). All employees,
      officers, directors, and consultants of the Company or any subsidiary were
      eligible to participate in the 1988 Plan. Under the 1988 Plan, a total of
      5,000,000 shares of common stock were authorized for issuance upon exercise
      of
      the options. As of October 1996, no further options were granted pursuant to
      the
      1988 Plan. The second shareholder-approved equity compensation plan is the
      1996
      Long-term Performance Plan (the “1996 Plan”), adopted in October 1996, which
      provides for the grant of stock options, stock appreciation rights and
      restricted stock to certain designated employees of the Company, non-employee
      directors of the Company and certain other persons performing significant
      services for the Company as designated by the Compensation Committee of the
      Board of Directors. Pursuant to the 1996 Plan, an aggregate of 8,000,000 shares
      of common stock have been reserved for issuance.


29


On
      March
      12, 2002, the Company adopted a Stockholder Rights Plan (the “Rights Plan”)
      designed to protect company stockholders in the event of takeover activity
      that
      would deny them the full value of their investment. The Rights Plan was not
      adopted in response to any specific takeover threat. In adopting the Rights
      Plan, the Board declared a dividend distribution of one preferred stock purchase
      right for each outstanding share of common stock of the Company, payable to
      stockholders of record at the close of business on March 22, 2002. The rights
      will become exercisable only in the event, with certain exceptions, a person
      or
      group of affiliated or associated persons acquires 15% or more of the Company’s
      voting stock, or a person or group of affiliated or associated persons commences
      a tender or exchange offer which, if successfully consummated, would result
      in
      such person or group owning 15% or more of the Company’s voting stock. The
      rights will expire on March 12, 2012. Each right, once exercisable, will entitle
      the holder (other than rights owned by an acquiring person or group) to buy
      one
      one-thousandth of a share of a series of the Company’s Series D Junior
      Participating Preferred Stock at a price of $30 per one-thousandth of a share,
      subject to adjustments. In addition, upon the occurrence of certain events,
      holders of the rights (other than rights owned by an acquiring person or group)
      would be entitled to purchase either the Company’s preferred stock or shares in
      an “acquiring entity” at approximately half of market value. Further, at any
      time after a person or group acquires 15% or more (but less than 50%) of the
      Company’s outstanding voting stock, subject to certain exceptions, the Board of
      Directors may, at its option, exchange part or all of the rights (other than
      rights held by an acquiring person or group) for shares of the Company's common
      stock having a fair market value on the date of such acquisition equal to the
      excess of (i) the fair market value of preferred stock issuable upon exercise
      of
      the rights over (ii) the exercise price of the rights. The Company generally
      will be entitled to redeem the rights at $0.01 per right at any time prior
      to
      the close of business on the tenth day after there has been a public
      announcement of the beneficial ownership by any person or group of 15% or more
      of the Company’s voting stock, subject to certain exceptions.





On
      March
      12, 2001, the Company granted to James Apostolakis, a director and former
      executive officer of the Company, warrants to purchase up to an aggregate of
      100,000 shares of common stock at an exercise price of $5.85 per share. On
      March
      12, 2001, the Company granted to Fred Wilkinson, pursuant to an employment
      agreement, warrants to purchase up to an aggregate of 350,000 shares of common
      stock at an exercise price of $8.35 per share.





**Dividend
      Policy**





The
      Company has never paid a cash dividend on its common stock and does not
      anticipate the payment of cash dividends in the foreseeable future. The Company
      intends to retain any earnings for use in the development and expansion of
      its
      business. The Company is required to pay a 5% dividend on its Series C Preferred
      Stock on the last day of each quarter.





Applicable
      provisions of the Delaware General Corporation Law may affect the ability of
      the
      Company to declare and pay dividends on its common stock as well as on its
      Series C Preferred Stock. In particular, pursuant to the Delaware General
      Corporation Law, a company may pay dividends out of its surplus, as defined,
      or
      out of its net profits, for the fiscal year in which the dividend is declared
      and/or the preceding year. Surplus is defined in the Delaware General
      Corporation Law to be the excess of net assets of the company over capital.
      Capital is defined to be the aggregate par value of shares issued unless
      otherwise established by the Board of Directors.





**Item
      6. Selected Financial Data**





The
      following selected financial data (not covered by the auditor’s report) are
      derived from the Company’s audited financial statements and are qualified in
      their entirety by reference to, and should be read in conjunction with, such
      consolidated financial statements and Item 7, “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” of this Annual
      Report. The historical results are not necessarily indicative of the results
      we
      expect for future periods.


30


**Financial
      Highlights**


**For
                  the Years Ended December 31,****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001****Statement
                  of Operations Data: (000's except per share data)****Revenues**
              
              $
              22,041
              
              $
              17,860
              
              $
              22,415
              
              $
              9,419
              
              $
              2,154**Gross
                  profit**
              
              
              13,929
              
              
              10,072
              
              
              12,632
              
              
              4,190
              
              
              (505
              )**Operating
                  expenses**
              
              
              21,160
              
              
              32,044
              
              
              32,214
              
              
              20,050
              
              
              14,941**Interest
                  expense**
              
              
              2,694
              
              
              2,991
              
              
              1,846
              
              
              853
              
              
              755**Net
                  loss**
              
              
              (9,307
              )
              
              (25,130
              )
              
              (21,151
              )
              
              (16,850
              )
              
              (15,846
              )**Loss
                  per common share**
              
              
              (0.23
              )
              
              (0.62
              )
              
              (0.57
              )
              
              (0.50
              )
              
              (0.51
              )**Weighted
                  average number****of
                  common shares outstanding-diluted**
              
              
              41,752
              
              
              40,984
              
              
              37,440
              
              
              34,392
              
              
              31,243**Balance
                  Sheet Data: (000's)****Working
                  capital (deficiency)**
              
              
              ($3,471
              )
              $
              9,303
              
              $
              33,690
              
              $
              4,717
              
              $
              4,622**Total
                  assets**
              
              
              14,732
              
              
              29,268
              
              
              42,755
              
              
              12,902
              
              
              8,662**Note
                  payable**
              
              
              0
              
              
              0
              
              
              10,000
              
              
              10,000
              
              
              10,000**Long-term
                  portion of financing agreements**
              
              
              8,748
              
              
              18,923
              
              
              15,747
              
              
              1,350
              
              
              -**Stockholders'
                  equity (deficiency)**
              
              
              (15,150
              )
              
              (12,531
              )
              
              6,087
              
              
              (8,395
              )
              
              (3,421
              )





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





**Overview**





The
      following Management’s Discussion and Analysis of Financial Condition and
      Results of Operations (“MD&A”) is intended to help the reader understand the
      Company’s financial condition and results of operations. The MD&A is
      provided as a supplement to, and should be read in conjunction with, our
      financial statements and the accompanying notes (“Notes”).





We
      are in
      the business of developing, manufacturing and selling pharmaceutical products
      that treat various medical conditions. Most of our products and developmental
      product candidates address women’s healthcare issues. We have also developed Striant ® ,
      a
      buccal system for the treatment of hypogonadism in men.





Over
      the
      last few years we have laid a foundation for the Company’s long-term growth by
      establishing marketing partnerships and forging alliances with strategic
      partners to create a base business of products that these partners market and
      that provide us with good margins and growth potential. In September 2002,
      we
      developed our own commercial organization to commercialize our women’s
      healthcare products in the United States. We more than doubled the size of
      that
      sales organization in the summer of 2003 upon FDA approval of Striant ® .
      Subsequently, in both January 2004 and February 2005, we restructured our sales
      and marketing organizations and downsized them to reduce costs.





We
      have
      advanced several clinical research initiatives designed to realize additional
      potential from currently marketed Prochieve ® products
      by developing new indications, while simultaneously advancing the development
      of
      new product candidates. Our focus in fiscal 2006 is to build on this foundation
      and execute well in key areas.


31


**Results
      of Operations**





**Summary**




**(In
                  thousands, except percentages)**
              **2005**
              
              **Percentage**
                **inc./
                  (dec.)from prior year**
              
              **2004**
              
              **Percentage**
                **inc./
                  (dec.)from prior year**
              
              **2003**Revenues
              **$22,041**
              
              23.4%
              
              $17,860
              
              (20.3)%
              
              $22,415








Revenues
      increased 23% in 2005 to $22.0 million as compared to $17.9 million in 2004
      and
      $22.4 million in 2003. We receive revenues both from selling our products to
      licensees, which we refer to as our “Partnered Products”, and selling our
      products that we promote through our own sales force to wholesalers and other
      distributors, which we refer to as our “Promoted Products.”





Partnered
      Products are:


·
            Crinone®sold to Serono on a worldwide
                basis;


·
            Striant®sold to our ex-U.S. marketing
                partners;


·
            Replens®Vaginal Moisturizer sold to Lil’ Drug Store
                ex-U.S.;


·
            RepHresh®Vaginal Gel and Advantage-S®Bioadhesive Contraceptive Gel sold to Lil’ Drug Store on a worldwide
                basis; and


·
            Royalty
                and licensing revenues.





Promoted
      Products are:


·
            Prochieve®8%,Prochieve®4%
                andStriant®in
                the U.S.;


·
            Crinone®prescriptions in the U.S. from our OB/GYN audience, for which Serono
                pays
                us a 40% supplemental royalty; and


·
            Replens®Vaginal Moisturizer, RepHresh®Vaginal Gel, and Advantage-S®Bioadhesive Contraceptive Gel, which Lil’ Drug Store pays us promotion
                fees to present to OB/GYNs.





Revenues
      from sales of Crinone ® to
      Serono were $8.1 million in 2005, compared to $7.2 million in 2004 and $7.7
      million in 2003.




Revenues
      from the Prochieve ® line of
      products were $3.2 million in 2005, $1.7 million in 2004 and $5.8 million in
      2003. 2004 revenues reflect a provision for product returns of $3.0 million.
      In
      the 2004 fourth quarter, primarily two customers returned $1.4 million of Prochieve ® that was
      to expire in 2005. The Company re-evaluated its estimate for product returns,
      taking into consideration such factors as
      historical trends, distributor inventory levels and product prescription data and
      booked additional provisions of $1.0 million in 2004 and $0.5 million in 2005.
      2003 results reflect revenue from the initial stocking of Prochieve ® 4%,
      which the Company began selling in the 2003 first quarter.




Revenues
      from Striant ® were
      $1.5 million in 2005, $3.3 million in 2004 and $2.9 million in 2003. 2005
      results reflect a
      provision for product returns of $1.8 million of which $1.3 million occurred
      when we re-evaluated our estimate for product returns to take into consideration
      additional factors related to inventory and return practices of our primary
      trade customers. 2005
      and
      2004 results include the sale of approximately $200,000 of Striant ® to
      Ardana our licensee in 18 countries in Europe. 2003 results reflected initial
      stocking of Striant ® ,
      which
      we began selling in the 2003 third quarter.


32


Revenues
      from the sales of RepHresh ® were
      approximately $2.8 million in 2005, compared to $597,000 in 2004 and $446,000
      in
      2003. In 2004, we sold the worldwide marketing rights to Lil’ Drug Store, who in
      2005 placed orders with us for their launch of the product in the United
      States.




Revenues
      from sales of Replens ® were
      approximately $2.5 million in 2005, compared to $2.7 million and $3.6 million
      in
      2004 and 2003, respectively. After
      the
      first quarter of 2004, Lil’ Drug Store no longer purchased batches of
      Replens ® for sale
      in the U.S. under our 2000 agreement selling U.S. rights to the product. That
      resulted in decreased revenues in 2005 and 2004 .
      In June
      2004, we sold the
      foreign marketing rights for Replens ® to Lil’
Drug Store.




Gross
      profit as a percentage of sales was 63% in 2005 compared to 56% in 2004 and
      2003. The increase in the 2005 gross profit percentage was caused by an overall
      reduction in the provision in product returns and a reduction in the royalty
      paid to Serono caused by product returned in 2005. Cost of goods sold for Prochieve ® includes
      a 30% royalty on net sales paid to Serono.





The
      net
      loss for 2005 was $9.3 million, or $0.23 per share, as compared to a net loss
      of
      $25.1 million, or $0.62 per share, in 2004 and a net loss of $21.2 million,
      or
      $0.57 per share, in 2003 as a result of the following components:




**Selling
      and Distribution**


**(In
                  thousands, except percentages)**
              **2005**
              **Percentage**
                **inc./
                  (dec.)**
                **from
                  prior**
                **year**
              
              **2004**
              
              **Percentage**
                **inc./
                  (dec.)**
                **from
                  prior**
                **year**
              
              **2003**Selling
                  and distribution
              **$8,578**
              (54.9)%
              
              $19,007
              
              (15.8)%
              
              $22,570As
                  a percentage of revenue
              **38.9%**
              (67.5)
                  pp
              
              106.4%
              
              5.7
                  pp
              
              100.7%




*Note:
      PP - percentage points*





Selling
      and distribution expenses include payroll, employee benefits, equity
      compensation and other personnel-related costs associated with sales and
      marketing personnel, and advertising, promotions, tradeshows, seminars, and
      other marketing-related programs.  Selling
      and distribution expenses were approximately $8.6 million, $19.0 million and
      $22.6 million in 2005, 2004 and 2003, respectively. Selling and distribution
      expenses decreased by approximately 55% in 2005 compared to 2004, and by
      approximately 16% in 2004 compared to 2003. The Company commenced
      commercialization efforts in September 2002 under the previously discussed
      Innovex agreement, which accounts for the 2003 level of spending. The decreases
      from 2003 to 2004 and from 2004 to 2005 reflect the restructuring of the sales
      force in January 2004 and February 2005, as previously discussed.





Included
      in the 2005 expenses were sales force costs of approximately $4.8 million,
      product marketing expenses of approximately $1.5 million and salary costs of
      approximately $1.3 million. Expenses in 2004 included approximately $10.9
      million in sales force costs, approximately $4.8 million in product marketing
      expenses and approximately $1.2 million in salary costs. Expenses in 2003
      included approximately $11.8 million in sales force costs, approximately $7.8
      million in product marketing expenses and approximately $0.7 million in salary
      costs.


33


**General
      and Administrative**


**(In
                  thousands, except percentages)**
              **2005**
              **Percentage**
                **inc./
                  (dec.)**
                **from
                  prior year**
              
              **2004**
              
              **Percentage**
                **inc./
                  (dec.)**
                **from
                  prior year**
              
              **2003**General
                  and administrative
              **$6,825**
              (10.1)%
              
              $7,588
              
              19.0%
              
              $6,376As
                  a percentage of revenue
              **31.0%**
              (11.5)
                  pp
              
              42.5%
              
              14.1
                  pp
              
              28.4%




General
      and administrative costs include payroll, employee benefits, equity
      compensation, and other personnel -related
      costs associated with the finance, legal, regulatory affairs, information
      technology, facilities, certain human resources, and other administrative personnel ,
      as well
      as legal costs and other administrative fees. General and administrative
      expenses decreased by approximately $763,000, or 10%, to approximately $6.8
      million in 2005 from approximately $7.6 million in 2004. The decrease resulted
      primarily from lower insurance costs ($690,000). General and administrative
      expenses increased by approximately $1.2 million, or 19%, to approximately
      $7.6
      million in 2004 from approximately $6.4 million in 2003. The increase resulted
      from higher insurance costs ($358,000), salary expense, including the hiring
      of
      additional administrative personnel ($415,000) and an increase in the cost
      of
      non-legal consultants which included compliance with the provisions of the
      Sarbanes-Oxley Act of 2002 ($339,000).





**Research
      and Development**


**(In
                  thousands, except percentages)**
              **2005**
              **Percentage**
                **inc./
                  (dec.)**
                **from
                  prior**
                **year**
              
              **2004**
              
              **Percentage**
                **inc./
                  (dec.)**
                **from
                  prior**
                **year**
              
              **2003**Research
                  and development
              **$5,757**
              5.7%
              
              $5,449
              
              66.7%
              
              $3,268As
                  a percentage of revenue
              **26.1%**
              (4.4)
                  pp
              
              30.5%
              
              15.9
                  pp
              
              14.6%





Research
      and development expenses include payroll, employee benefits, equity compensation
      and other personnel -related
      costs associated with product development, as well as the cost of conducting
      and
      administering clinical studies and the cost of regulatory filings for our
      products.  Research
      and development expenses increased to approximately $5.8 million in 2005 from
      approximately $5.4 million in 2004. This increase primarily reflects costs
      associated with
      the
      Company’s Phase III clinical trial of Prochieve ® 8% in
      preventing preterm birth. 2005 costs associated with this study increased by
      approximately $1.5 million over 2004. Partially offsetting this increase was
      the
      reduction in payments
      related to the Mutual Recognition Process (“MRP”) for obtaining regulatory
      approval of Striant ® in
      European countries, a one-time event which culminated in October 2004 with
      the
      approval of Striant ® in 14
      European countries ($396,000) and a reduction of costs associated with the continuation studies
      associated with Striant ® ($441,000). Research and development expenses increased to approximately $5.4
      million in 2004 from approximately $3.3 million in 2003. This increase primarily
      reflects costs associated with
      the
      Company’s Phase III clinical trial of Prochieve ® 8% in
      preventing preterm birth. 2004 costs also included payments
      related to the Mutual Recognition Process (“MRP”), a one-time event as
      previously discussed.


34


**Other
      Income (Expense)**





Interest
      expense amounted to approximately $2.7 million, $3.0 million and $1.8 million
      in
      2005, 2004 and 2003, respectively. 2005, 2004 and 2003 interest expense included
      approximately $2.5 million, $2.2 million and $1.1 million, respectively, as
      the
      result of amortizing as interest expense over the term of the agreements the
      difference between the minimum amounts to be paid to PharmaBio and the amounts
      received. Interest expense related to the Company’s convertible subordinated
      note payable totaled approximately $156,000 in 2005 and $713,000 in each of
      2004
      and 2003. The note was paid in full on March 15, 2005. Other net income in
      2005
      reflects the receipt of approximately $451,000 from the sale of New Jersey
      state
      net operating losses.





The
      Company recorded a loss of $577,917 in 2004 on sale of intangible assets when
      we
      sold our intangible assets associated with sale of our over-the-counter products
      to Lil’ Drug Store. See “Business - Licensing
      and Development Agreements”.





**Contractual
      Obligations**





As
      previously disclosed, in July 2002 and March 2003, the Company entered into
      agreements with PharmaBio, under which we received upfront money in exchange
      for
      royalty payments on our women’s healthcare products and Striant ® ,
      respectively. We owe royalty payments to PharmaBio for a fixed period of time.
      These royalty payments are subject to minimum and maximum amounts. In addition,
      the Company enters into operating leases for many of our facility and equipment
      needs. These leases allow us to conserve cash by paying a monthly lease rental
      fee for the use of, rather than purchasing, facilities and equipment. At the
      end
      of the lease, we have no further obligation to the lessor. Our future
      contractual obligations include the following:


For
                  the Fiscal Years Ended December 31,Total
              
              2006
              
              2007
              
              2008
              
              2009
              
              Beyond(in
                  thousands)PharmaBio
                  women's healthcare finance agreement
              
              
              4,915
              
              
              527
              
              
              1,000
              
              
              3,388
              
              
              —
              
              
              —PharmaBio
                  Striant finance agreement
              
              
              29,313
              
              
              12,313
              
              
              564
              
              
              662
              
              
              828
              
              
              14,946Operating
                  lease obligations
              
              
              378
              
              
              221
              
              
              140
              
              
              17
              
              
              —
              
              
              —Total
              
              $
              34,606
              
              $
              13,061
              
              $
              1,704
              
              $
              4,067
              
              $
              828
              
              $
              14,946




**Recent
      Accounting Pronouncements**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 123R (Revised 2004),
      Share-Based Payment ("SFAS No. 123R"), which requires that the compensation
      cost
      relating to share-based payment transactions be recognized in financial
      statements based on the fair value of the equity or liability instruments
      issued. The Company has disclosed pro forma compensation expense quarterly
      and
      annually by calculating the stock option grants' fair value using the
      Black-Scholes model and disclosing the impact on net loss and net loss per
      share
      in the Consolidated Financial Statements. After 2005 pro forma disclosure will
      no longer be an alternative. SFAS No. 123R also requires the benefits of tax
      deductions in excess of recognized compensation cost to be reported as a
      financing cash flow rather than as an operating cash flow as required under
      current literature. This requirement will reduce net operating cash flows and
      increase net financing cash flows after 2005. As of December 31, 2005, the
      amount of compensation to be recognized as expense in future periods
      for non-vested stock options previously granted to employees is
      approximately $1,779,000. Assuming no terminations or resignations and no
      additional option grants, expense amounting to $765,000, $596,000, $332,000
      and
      $86,000 will be recognized in 2006, 2007, 2008 and 2009 respectively. The
      Company will begin to apply SFAS No. 123R using the most appropriate fair value
      model as of the interim reporting period ending March 31, 2006.


35


The
      Company does not believe that any other recently issued, but not yet effective,
      accounting standards would have a material effect on the Company’s consolidated
      financial position, results of operations or cash flows.





**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet arrangements that have, or are reasonably likely
      to
      have, a current or future material effect on our financial condition, changes
      in
      financial condition, revenue or expenses, results of operations, liquidity,
      capital expenditures or capital resources.








**Impact
      of Inflation**





Sales
      revenues, manufacturing costs, selling and distribution expenses, general and
      administrative expenses, and research and development costs tend to reflect
      the
      general inflationary trends.





**Liquidity
      and Capital Resources**





Cash
      and
      cash equivalents decreased from approximately $19.8 million at
      December 31, 2004 to approximately $7.1 million at
      December 31, 2005. During 2005, the Company received approximately
      $6.9 million ,
      net of
      expenses, from the sale of 69,000 shares of its Series E Preferred Stock and
      approximately $8,000 from the exercise of options. During 2005, the Company
      used
      approximately $6.6 million of cash
      for operating activities, $10 million to pay off a note, approximately
      $2.6 million for
      royalty payments to PharmaBio, approximately $163,000 for dividends on the
      Series C Preferred Stock, and approximately $83,000 for fixed asset additions.
      The effect of exchange rate changes decreased cash by approximately
      $65,000.





On
      March
      10, 2006, the Company entered into a Securities Purchase Agreement with certain
      investors for the private placement of 7,428,220 shares of the Company’s common
      stock, par value $.01 per share (the “Shares”), at a price of $4.04 per share
      and warrants to purchase 1,857,041 shares of common stock (the “Warrants”). We
      expect gross proceeds from the sale of the Shares will be approximately $30
      million. The Warrants are exercisable for common stock of the Company at $5.39
      per share beginning 180 days from the date they are issued, which is expected
      to
      occur on or about March 15, 2006, and expiring 5 years thereafter. The exercise
      price and number of shares issuable upon exercise are subject to adjustment
      in
      the event of stock split, stock dividend, recapitalization, reclassification,
      combination or exchange of shares, reorganization, liquidation, dissolution,
      consolidation, or merger. Under the terms of the Securities Purchase Agreement,
      the Company has agreed to file, within 30 days, a registration statement with
      the Securities and Exchange Commission to register for resale the Shares and
      the
      shares of common stock issuable upon the exercise of the Warrants, which
      registration statement is required under the Securities Purchase Agreement
      to
      become effective within 120 days following the closing. The Company will be
      required to pay certain cash penalties if it does not meet its registration
      obligations under the Securities Purchase Agreement.





Cash
      and
      cash equivalents decreased from approximately $31.0 million at
      December 31, 2003 to approximately $19.8 million at
      December 31, 2004. During 2004, the Company received approximately
      $6.4 million ,
      net of
      expenses, from the sale of 2,000,000 shares of its common stock,
      $3.0 million in
      proceeds from the PharmaBio agreements, $0.3 million from the
      sale of intangibles, and approximately $0.2 million from the
      exercise of warrants. During 2004, the Company used approximately
      $19.9 million of cash
      for operating activities, approximately $0.5 million for
      royalty payments to PharmaBio, approximately $0.2 million for
      dividends on the Series C Preferred Stock, and approximately $0.6 million for
      fixed asset additions. The effect of exchange rate changes increased cash by
      approximately $50,000.


36


As
      previously discussed, on July 31, 2002, we entered into an investment and
      royalty agreement with PharmaBio under which we received $4.5 million in return
      for a 5% royalty to PharmaBio on net sales of the Company’s women’s healthcare
      products in the United States for five years, beginning in the first quarter
      of
      2003. The royalty payments are subject to aggregate minimum ($8 million) and
      maximum ($12 million) amounts, including a true-up payment due February 28,
      2005
      for the difference between royalties paid to that date and $2.75 million. We
      made the required true-up payment of approximately $1.9 million on February
      28,
      2005, and have paid $3.15 million to date.





Also,
      as
      previously discussed, on March 5, 2003, we
      entered into a second investment
      and royalty agreement with
      PharmaBio under which we received $15 million in return for a 9% royalty to
      PharmaBio on net sales of Striant ® in the
      United States up to agreed annual sales revenues, and a 4.5% royalty of net
      sales above those levels. The royalty term is seven years. Royalty payments
      commenced in the 2003 third quarter and are subject to aggregate minimum ($30
      million) and maximum ($55 million) amounts, including a true-up payment due on November 14, 2006 for the difference between
      royalties paid to that period and $13,000,000 . We
      have
      paid $712,000 to date.





T he
      Company has an effective registration statement that we filed with the
      Securities and Exchange Commission (the “SEC”) using a shelf registration
      process. Under the shelf registration process, we may offer from time to time
      shares of our common stock up to an aggregate amount of $75,000,000. To date
      the
      Company has sold approximately $56,400,000 in common stock under the
      registration statement. We cannot be certain that additional funding will be
      available on acceptable terms, or at all. To the extent that we raise additional
      funds by issuing equity securities, our stockholders may experience significant
      dilution. Any debt financing, if available, may involve restrictive covenants
      that impact our ability to conduct our business. If we are unable to raise
      additional capital when required or on acceptable terms, we may have to
      significantly delay, scale back or discontinue the marketing of one or more
      of
      our products and the development and/or commercialization
      of one or more of our product candidates.





Effective
      as of February 6, 2001, the Company entered into a Purchase Agreement with
      Acqua
      Wellington to sell up to $16.5 million of the common stock, as previously
      discussed. The
      Company and Acqua Wellington agreed to extend the term of the Agreement until
      February 6, 2005, at which time it expired. The Company sold Acqua Wellington
      $9.84 million of common stock during the term of the Purchase
      Agreement.





In
      connection with the 1989 purchase of the assets of Bio-Mimetics, which assets
      consisted of the patents underlying the Company's BDS, other patent applications
      and related technology, the Company pays Bio-Mimetics a royalty equal to two
      percent of the net sales of products based on the BDS up to an aggregate of
      $7.5
      million or until the last of the relevant patents expire. The Company is
      required to prepay 25% of the remaining royalty obligation, in cash or stock
      at
      the option of the Company, if the closing price of the Company’s common stock is
      $20 or more on March 2, or within 30 days after that date, of any year. To
      date,
      the Company has paid approximately $3.3 million in royalty
      payments.





Significant
      operating expenditures anticipated by the Company in the near future are
      concentrated on equipment. The Company anticipates it will spend approximately
      $100,000 on equipment in 2006.





As
      of
      December 31, 2005, the Company had available net operating loss carryforwards
      of
      approximately $128 million to offset its potential future U.S. taxable income.
      There can be no assurance that the Company will have sufficient income to
      utilize the net operating loss carryforwards or that the net operating loss
      carryforwards will be available at that time.





In
      accordance with Statement of Financial Accounting Standards No. 109, as of
      December 31, 2005 and 2004, other assets in the accompanying consolidated
      balance sheet include deferred tax assets of approximately $45 million and
      $41
      million, respectively, (comprised primarily of a net operating loss
      carryforward) for which a valuation allowance has been recorded since the
      realizability of the deferred tax assets are not determinable.


37


**Critical
      Accounting Policies and Estimates**





Our
      financial statements and accompanying notes are prepared in accordance with
      U.S.
      Generally Accepted Accounting Principles (“GAAP”). The preparation of financial
      statements requires management to make estimates and assumptions that affect
      the
      reported amount of assets and liabilities, disclosure of contingent assets
      and
      liabilities at the date of the financial statements, and the reported amounts
      of
      revenues and expenses during the reporting period. There can be no assurance
      that actual results will not differ from those estimates. These estimates and
      assumptions are affected by management’s application of accounting policies.
      Critical accounting policies for us include revenue recognition, impairment
      of
      intangible assets, and accounting for the agreements with PharmaBio. For a
      detailed discussion on the application of these and other accounting policies,
      see Note 1 of the consolidated financial statements included in Item 15 of
      this
      Annual Report on Form 10-K.





*Revenue
      recognition.* The
      Company’s revenue recognition is significant because revenue is a key component
      of our results of operations. In addition, revenue recognition determines the
      timing of certain expenses, such as commissions and royalties. Revenue results
      are difficult to predict, and any shortfall in revenue or delay in recognizing
      revenue could cause operating results to vary significantly from quarter to
      quarter. Revenues
      from the sale of products are recorded at the time goods are shipped to
      customers. Provisions for returns, rebates and other allowances are estimated
      based on a percentage of sales, using such factors as historical trends,
      distributor inventory levels and product prescription data, and are recorded
      in
      the same period the related sales are recognized. Royalties
      and additional monies owed to the Company based on the strategic alliance
      partners’ sales are recorded as revenue as those sales are made by the strategic
      alliance partners. License fees are recognized in net sales over the term of
      the
      license.





*Accounting
      For PharmaBio Agreements.* In
      July
      2002 and March 2003, the Company entered into agreements with PharmaBio under
      which the Company received upfront money paid in quarterly installments in
      exchange for royalty payments on certain of the Company’s products to be paid to
      PharmaBio for a fixed period of time. The
      royalty payments are subject to minimum and maximum amounts. Because the minimum
      amounts exceed the amount received by the Company, the Company has recorded
      the
      monies received as liabilities. We are recording the excess of the minimum
      to be
      paid by the Company over the amount received by the Company as interest expense
      over the terms of the agreements.




**Forward-Looking
      Statements**





This
      Annual Report on Form 10-K contains statements that are forward-looking. These
      statements are made pursuant to the safe harbor provisions of the Private
      Securities Litigation Reform Act of 1995. Such statements include, without
      limitation, the Company’s expectations regarding sales, earnings or other future
      financial performance and liquidity, completion of clinical studies, product
      introductions, entry into new geographic regions, and general optimism about
      future operations or operating results. Some of these statements can be
      identified by the use of forward-looking terminology such as "prospects,"
      "outlook," "believes," "estimates," "intends," "may," "will," "should,"
      "anticipates," "expects, or "plans," or the negative or other variation of
      these
      or similar words, or by discussion of trends and conditions, strategy or risks
      and uncertainties.





These
      forward looking expectations are based on current assumptions within the bounds
      of management’s knowledge of our business and operations and which management
      believes are reasonable. These assumptions are subject to risks and
      uncertainties, and actual results could differ materially from expectations
      because of issues and uncertainties such as those listed in “Risk Factors” and
      elsewhere in this Annual Report, which, among others, should be considered
      in
      evaluating our future financial performance.  All
      subsequent written and oral forward-looking statements attributable to the
      Company or persons acting on behalf of the Company are expressly qualified
      in
      their entirety by the cautionary statements in this Annual Report. Readers
      are
      advised to consult any further disclosures the Company may make on related
      subjects in subsequent reports filed with the SEC.








38


**Item
      7A. Quantitative and Qualitative Disclosures About Market
      Risks**





The
      Company does not believe that it has material exposure to market rate risk.
      The
      Company may, however, require additional financing to fund future obligations
      and no assurance can be given that the terms of future sources of financing
      will
      not expose the Company to material market risk.





**Item
      8. Financial Statements and Supplementary Data**





The
      financial statements and supplementary data required by this item are set forth
      at the pages indicated in Item 15, set forth in this annual report.





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





None





**Item
      9 A. Controls and Procedures**




**Evaluation
      of Disclosure Controls and Procedures**




The Company
      maintains disclosure controls and procedures designed to ensure that the
      information the Company must disclose in its filings with the SEC is recorded,
      processed, summarized and reported on a timely basis. The Company ’s
      management, under the supervision and with the participation of the Chief
      Executive Officer and the Chief Financial Officer, evaluated the effectiveness
      of the Company’s disclosure controls and procedures (as defined in Rules
      13a-15(e) and
      15d-15(e) under
      the
      Securities Exchange Act of 1934, as amended) as of December 31, 2005. Based on
      this evaluation, the Chief Executive Officer and Chief Financial Officer
      concluded that, as of December 31, 2005, the Company’s disclosure controls and
      procedures were effective.





**Management’s
      Annual Report on** **Internal Control** **Over** **Financial Reporting**





The
      Company’s management is responsible for establishing and maintaining an adequate
      system of internal control over financial reporting. Internal control over
      financial reporting is a process designed to provide reasonable assurance
      regarding the reliability of financial reporting and the preparation of
      financial statements for external purposes in accordance with generally accepted
      accounting principles. A company’s internal control over financial reporting
      includes those policies and procedures that (i) pertain to the maintenance
      of
      records that, in reasonable detail, accurately and fairly reflect the
      transactions and dispositions of the assets of the company; (ii) provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (iii) provide reasonable assurance regarding prevention or
      timely detection of unauthorized acquisition, use or disposition of the
      company’s assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, a system of internal control over financial
      reporting can provide only reasonable assurance and may not prevent or detect
      misstatements. Therefore, even those systems determined to be effective can
      provide only reasonable assurance with respect to financial statement
      preparation and presentation. Further, because of changes in conditions,
      effectiveness of internal control over financial reporting may vary over
      time.





Management
      of the
      Company conducted an evaluation of the effectiveness,
      as of December
      31, 2005, of
      the
      Company’s internal control over financial reporting based on the Internal
      Control-Integrated Framework issued by the Committee of Sponsoring Organizations
      of the Treadway Commission (the “COSO Framework”). Based on its evaluation under
      the COSO Framework, management has concluded that the
      Company’s internal control over financial reporting  was
      effective as of December 31, 2005.


39


Goldstein
      Golub Kessler LLP, an independent registered public accounting firm, has issued
      an attestation report on management’s assessment of the effectiveness of the
      Company’s internal control over financial reporting (see Report of Independent
      Registered Public Accounting Firm).


**Report
        of Independent Registered Public Accounting Firm**
  The
        Board
        of Directors and Stockholders
 Columbia
        Laboratories, Inc.:
  We
        have
        audited management's assessment, included in the accompanying Management's
        Report on Internal Control over Financial Reporting, that Columbia Laboratories,
        Inc. maintained effective internal control over financial reporting as of
        December 31, 2005, based on criteria established in Internal Control—Integrated
        Framework issued by the Committee of Sponsoring Organizations of the Treadway
        Commission (COSO). Columbia Laboratories, Inc.'s management is responsible
        for
        maintaining effective internal control over financial reporting and for its
        assessment of the effectiveness of internal control over financial reporting.
        Our responsibility is to express an opinion on management's assessment and
        an
        opinion on the effectiveness of the company's internal control over financial
        reporting based on our audit.
  We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management's assessment, testing and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides a reasonable basis for our opinion.
  A
        company's internal control over financial reporting is a process designed
        to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles. A company's internal control
        over
        financial reporting includes those policies and procedures that (1) pertain
        to the maintenance of records that, in reasonable detail, accurately and
        fairly
        reflect the transactions and dispositions of the assets of the company;
        (2) provide reasonable assurance that transactions are recorded as
        necessary to permit preparation of financial statements in accordance with
        generally accepted accounting principles, and that receipts and expenditures
        of
        the company are being made only in accordance with authorizations of management
        and directors of the company; and (3) provide reasonable assurance
        regarding prevention or timely detection of unauthorized acquisition, use,
        or
        disposition of the company's assets that could have a material effect on
        the
        financial statements.
  Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements. Also, projections of any evaluation of
        effectiveness to future periods are subject to the risk that controls may
        become
        inadequate because of changes in conditions, or that the degree of compliance
        with the policies or procedures may deteriorate.
  In
        our
        opinion, management's assessment that Columbia Laboratories, Inc. maintained
        effective internal control over financial reporting as of December 31, 2005,
        is
        fairly stated, in all material respects, based on criteria established in
        Internal Control—Integrated Framework issued by the Committee of Sponsoring
        Organizations of the Treadway Commission (COSO). Also, in our opinion, Columbia
        Laboratories, Inc. maintained, in all material respects, effective internal
        control over financial reporting as of December 31, 2005, based on criteria
        established in Internal Control—Integrated Framework issued by the Committee of
        Sponsoring Organizations of the Treadway Commission (COSO).
  We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the December 31, 2005 consolidated financial
        statements of Columbia Laboratories, Inc. and our report dated February 24,
        2006, except for the Liquidity paragraph of Note 1 and Note 11, as to which
        the
        date is March 10, 2006, expressed an unqualified opinion on those financial
        statements.
  **GOLDSTEIN
        GOLUB KESSLER LLP**
 New
        York,
        New York
 February
        24, 2006





**Item
      9 B. Other Information**





In
      the
      fourth quarter of 2005 the Company reported all required disclosures on Form
      8-K.





40




On
        March
        10, 2006, the Company entered into a Securities Purchase Agreement with certain
        investors for the private placement of 7,428,220 shares of the Company’s common
        stock, par value $.01 per share (the “Shares”), at a price of $4.04 per share
        and warrants to purchase 1,857,041 shares of common stock (the “Warrants”). We
        expect gross proceeds from the sale of the Shares will be approximately $30
        million. The Warrants are exercisable for common stock of the Company at
        $5.39
        per share beginning 180 days from the date they are issued, which is expected
        to
        occur on or about March 15, 2006, and expiring 5 years thereafter. The exercise
        price and number of shares issuable upon exercise are subject to adjustment
        in
        the event of stock split, stock dividend, recapitalization, reclassification,
        combination or exchange of shares, reorganization, liquidation, dissolution,
        consolidation, or merger. Under the terms of the Securities Purchase Agreement,
        the Company has agreed to file, within 30 days, a registration statement
        with
        the Securities and Exchange Commission to register for resale the Shares
        and the
        shares of common stock issuable
        upon the exercise of the Warrants, which registration statement is required
        under the Securities Purchase Agreement to become effective within 120 days
        following the closing. The Company will be required to pay certain cash
        penalties if it does not meet its registration obligations under the Securities
        Purchase Agreement.






**PART
      III**








**Item
      10. Directors and Executive Officers of the Company**





The
      information concerning directors and all audit committee financial experts
      required by Item 10 is incorporated herein by reference to Columbia’s Proxy
      Statement for its 2006 Annual Meeting of Shareholders. The information
      concerning compliance with Section 16(a) of the Exchange Act is incorporated
      herein by reference to Columbia’s Proxy Statement for its 2006 Annual Meeting of
      Shareholders. The information concerning executive officers required by Item
      10
      is contained in the discussion entitled Executive Officers of the Registrant
      in
      Part I hereof.





**Item
      11. Executive Compensation**





The
      information required by Item 11 is incorporated herein by reference to
      Columbia’s Proxy Statement for its 2006 Annual Meeting of Shareholders under the
      heading “ Executive
      Compensation ”.





**Item
      12. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters**





The
      information required by Item 12 is incorporated herein by reference to
      Columbia’s Proxy Statement for its 2006 Annual Meeting of Shareholders under the
      heading “ Ownership
      of the Company ”.





**Item
      13. Certain Relationships and Related Transactions**





The
      information required by Item 13 is incorporated herein by reference to
      Columbia’s Proxy Statement for its 2006 Annual Meeting of Shareholders under the
      heading “Certain Relationships and Related Transactions”.





**Item
      14. Principal Accountant Fees and Services**





The
      information required by Item 14 is incorporated herein by reference to
      Columbia’s Proxy Statement for its 2006 Annual Meeting of Shareholders under the
      heading “Relationship with Independent Auditors”.








41


**PART
      IV**




**Item
      15. Exhibits and Financial Statement Schedules**





**(a)(1)(2)
      Financial Statements and Financial Statement Schedules**





Indexes
      to financial statements and financial statement schedules appear on F-1 and
      F-26, respectively.




**(b)
      Exhibits**   3.1
              --
              Restated
                  Certificate of Incorporation of the Company, as amended33/3.2
              --
              Amended
                  and Restated By-laws of Company10/4.1
              --
              Certificate
                  of Designations, Preferences and Rights of Series C Convertible
                  Preferred
                  Stock of the Company, dated as of January 7, 199910/4.2
              --
              Securities
                  Purchase Agreement, dated as of January 7, 1999, between the Company
                  and
                  each of the purchasers named on the signature pages thereto10/4.3
              --
              Securities
                  Purchase Agreement, dated as of January 19, 1999, among the Company,
                  David
                  M. Knott and Knott Partners, L.P.10/4.4
              --
              Securities
                  Purchase Agreement, dated as of February 1, 1999, between the Company
                  and
                  Windsor Partners, L.P.10/4.5
              --
              Registration
                  Rights Agreement, dated as of January 7, 1999, between the Company
                  and
                  each of the purchasers named on the signature pages thereto10/4.6
              --
              Form
                  of Warrant to Purchase common stock10/4.7
              --
              Warrant
                  to Purchase common stock granted to James J. Apostolakis on September
                  23,
                  19994.8
              --
              Certificate
                  of Designations of Series E Convertible Preferred Stock, filed
                  May 10,
                  2005 with the Delaware Secretary of State30/10.1
              --
              Employment
                  Agreement dated as of January 1, 1996, between the Company and
                  Norman M.
                  Meier6/*10.2
              --
              Employment
                  Agreement dated as of January 1, 1996, between the Company and
                  William J.
                  Bologna6/*10.3
              --
              1988
                  Stock Option Plan, as amended, of the Company4/10.4
              --
              1996
                  Long-term Performance Plan, as amended, of the Company7/10.5
              --
              License
                  and Supply Agreement between Warner-Lambert Company and the Company
                  dated
                  December 5, 19913/10.6
              --
              Asset
                  Purchase, License and Option Agreement, dated November 22,
                  19891/10.7
              --
              Employment
                  Agreement dated as of April 15, 1997, between the Company and Nicholas
                  A.
                  Buoniconti8/*10.8
              --
              License
                  and Supply Agreement for Crinone®between Columbia Laboratories, Inc. (Bermuda) Ltd. and American
                  Home
                  Products dated as of May 21, 19955/10.9
              --
              Addendum
                  to Employment Agreement dated as of September 1, 1997, between
                  the Company
                  and Norman M. Meier8/*10.10
              --
              Addendum
                  to Employment Agreement dated as of September 1, 1997, between
                  the Company
                  and William J. Bologna8/*10.11
              --
              Addendum
                  to Employment Agreement dated as of September 1, 1997, between
                  the Company
                  and Nicholas A. Buoniconti8/*10.12
              --
              Convertible
                  Note Purchase Agreement, 7 1/8% Convertible Subordinated Note due
                  March
                  15, 2005 and Registration Rights Agreement all dated as of March
                  16, 1998
                  between the Company and SBC Warburg Dillon Read Inc.9/10.13
              --
              Termination
                  Agreement dated as of April 1, 1998 between the Company and the
                  Warner-Lambert Company9/10.14
              --
              Addendum
                  to Employment Agreement dated as of October 8, 1998, between the
                  Company
                  and Nicholas A. Buoniconti.10/*
  42
  10.15
              --
              Agreement
                  dated as of December 14, 1998, by and among Columbia Laboratories,
                  Inc.,
                  William J. Bologna, Norman M. Meier, James J. Apostolakis, David
                  Ray,
                  Bernard Marden, Anthony R. Campbell, David M. Knott and Knott Partners,
                  L.P.10/10.16A
              --
              License
                  and Supply Agreement by an between the Company and Mipharm S.p.A.
                  dated
                  March 5, 199911/10.16B
              --
              License
                  and Supply Agreement forCrinone®between Columbia Laboratories (Bermuda) Limited and Ares Trading
                  S.A.
                  dated as of May 20, 199912/10.17
              --
              Addendum
                  to Employment Agreement dated as of January 1, 2000 between the
                  Company
                  and Norman M. Meier12/*10.18
              --
              Addendum
                  to Employment Agreement dated as of January 1, 2000 between the
                  Company
                  and William J. Bologna12/*10.19
              --
              Employment
                  Agreement dated as of January 1, 2000 between the Company and James
                  J.
                  Apostolakis12/*10.20
              --
              Employment
                  Agreement dated December 30, 1999 between the Company and Dominique
                  de
                  Ziegler12/*10.21
              --
              Settlement
                  Agreement and Release dated as of March 16, 2000 between Columbia
                  Laboratories (Bermuda) Ltd. and Lake Consumer Products, Inc.12/10.22
              --
              Replens®Purchase and License Agreement dated April 18, 2000, between the
                  Company
                  and Lil’ Drug Store Products, Inc.13/10.23
              --
              License
                  Agreement dated April 18, 2000, between the Company and Lil’ Drug Store
                  Products, Inc.13/10.24
              --
              Distribution
                  Agreement dated April 18, 2000, between the Company and Lil’ Drug Store
                  Products, Inc.13/10.25
              --
              Stock
                  Purchase Agreement, dated January 31, 2001, between the Company
                  and
                  Ridgeway Investment Limited14/10.26
              --
              Amended
                  and Restated common stock Purchase Agreement by and between the
                  Company
                  and Acqua Wellington North American Equities Fund, Ltd., effective
                  as of
                  February 6, 2001.15/10.27
              --
              Employment
                  Agreement dated March 16, 2001 between the Company and G. Frederick
                  Wilkinson16/*10.28
              --
              Stock
                  Purchase Agreement, dated May 10, 2001, between the Company and
                  Ridgeway
                  Investment Limited17/10.29
              --
              Stock
                  Purchase Agreement, dated July 23, 2001, between the Company and
                  Ridgeway
                  Investment Limited18/10.30
              --
              Rights
                  Agreement dated as of March 13, 2002, by and between Columbia
                  Laboratories, Inc. and First Union National Bank, as Rights
                  Agent19/10.31†
              --
              Semi-Exclusive
                  Supply Agreement dated May 7, 2002 between the Company and Mipharm
                  S.p.A.20/10.32†
              --
              Amended
                  and Restated License and Supply Agreement dated June 4, 2002 between
                  theCompany and Ares Trading S.A.20/10.33†
              --
              Marketing
                  License Agreement dated June 4, 2002 between the Company and Ares
                  Trading
                  S.A. and Serono, Inc.20/10.34†
              --
              Master
                  Services Agreement dated July 31, 2002 between the Company and
                  Innovex
                  LP20/10.35†
              --
              Stock
                  Purchase Agreement dated July 31, 2002 By and Between Columbia
                  Laboratories, Inc. and PharmaBio Development Inc.20/10.36†
              --
              Investment
                  and Royalty Agreement dated July 31, 2002 between the Company and
                  PharmaBio Development Inc.20/10.37†
              --
              License
                  and Supply Agreement dated October 16, 2002 between the Company
                  and Ardana
                  Bioscience Limited21/10.38†
              --
              Development
                  and License Agreement dated December 26, 2002 between the Company
                  and
                  Ardana Bioscience Limited21/10.39
              --
              Amendment
                  No. 1 to the Amended and Restated common stock Purchase Agreement
                  by and
                  between the Company and Acqua Wellington North American Equities
                  Fund,
                  Ltd., effective as of January 31, 200321/
  43
  10.40†
              --
              Investment
                  and Royalty Agreement dated March 5, 2003 between the Company and
                  PharmaBio Development Inc.21/10.41†
              --
              Sales
                  Force Work Order #8872 pursuant to the Master Services Agreement
                  having an
                  Effective Date of July 31, 2002, between the Company and Innovex
                  LP21/10.42
              --
              Separation
                  and Consulting Agreement dated April 15, 2003 between the Company
                  and
                  William J. Bologna22/10.43†
              --
              License
                  and Supply Agreement Dated May 27, 2003 between the Company and
                  Mipharm
                  S.p.A.23/10.44
              --
              Standstill
                  Agreement dated December 1, 2003 between the Company and Perry
                  Corp.24/10.45†
              --
              Amended
                  and Restated Sales Force Work Order #8795 And Termination of Work
                  Order
                  #8872 pursuant to the Master Services Agreement having an effective
                  date
                  of January 26, 2004 between the Company and Innovex25/10.46
              --
              Form
                  of Indemnification Agreement for Officers and Directors25/10.47
              --
              Form
                  of Executive Change of Control Severance Agreement25/10.48
              --
              Employment
                  Agreement dated as of March 16, 2004 between the Company and G.
                  Frederick
                  Wilkinson26/*10.49†
              --
              Asset
                  Purchase Agreement Dated June 29, 2004, between the Company and
                  Lil’ Drug
                  Store Products, Inc.27/10.50†
              --
              Supply
                  Agreement dated June 29, 2004, between the Company and Lil’ Drug Store
                  Products, Inc.27/10.51†
              --
              Professional
                  Promotion Agreement dated June 29, 2004, between the Company and
                  Lil’ Drug
                  Store Products, Inc.27/10.52
              --
              Letter
                  Agreement and General Release of Claims, effective as of December
                  31,
                  2004, between Columbia Laboratories, Inc. and James J.
                  Apostolakis28/10.53
              --
              Employment
                  Agreement dated as of February 25, 2005 between the Company and
                  Robert S.
                  Mills29/*10.54
              --
              Columbia
                  Laboratories Inc. Incentive Plan, 200429/*10.55
              --
              Description
                  of the Registrant’s compensation and reimbursement practices for
                  non-employee directors31/10.56
              --
              Preferred
                  Stock Purchase Agreement, dated as of May 10, 2005, among Columbia
                  Laboratories,Inc., Perry Partners L.P. and Perry Partners International,
                  Inc.30/10.57
              --
              Columbia
                  Laboratories Inc. Incentive Plan32/10.58
              --
              2005
                  base salaries and incentive bonus targets for the Registrant’s executive
                  officers32/14
              --
              Code
                  of Ethics of the Company25/21
              --
              Subsidiaries
                  of the Company33/23
              --
              Consent
                  of Goldstein Golub Kessler LLP33/31(i).1
              --
              Certification
                  of Chief Executive Officer of the Company33/31(i).2
              --
              Certification
                  of Chief Financial Officer of the Company33/32.1
              --
              Certification
                  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.33/32.2
              --
              Certification
                  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.33/99.1
              --
              Schedule
                  Identifying Series E Convertible Preferred Stock Purchase agreements
                  Omitted30/*
              
              Management
                  contract or compensatory plan or arrangement required to be filed
                  as an
                  exhibit to this form pursuant to item 601 of Regulation
                  S-K.†
              
              Confidential
                  treatment has been requested with respect to certain portions of
                  this
                  exhibit. Omitted portions have been filed separately with the
                  SEC.1/
              
              Incorporated
                  by reference to the Registrant's Registration Statement on Form
                  S-1 (File
                  No. 33-31962) declared effective on May 14,
                  1990.
  44
  2/
              
              Incorporated
                  by reference to the Registrant's Annual Report on Form 10-K for
                  the year
                  ended December 31, 1990.3/
              
              Incorporated
                  by reference to the Registrant's Current Report on Form 8-K, filed
                  on
                  January 2, 1992.4/
              
              Incorporated
                  by reference to the Registrant's Annual Report on Form 10-K for
                  the year
                  ended December 31, 1993.5/
              
              Incorporated
                  by reference to the Registrant's Registration Statement on Form
                  S-1 (File
                  No. 33-60123) declared effective August 28, 1995.6/
              
              Incorporated
                  by reference to the Registrant's Annual Report on Form 10-K for
                  the year
                  ended December 31, 1995.7/
              
              Incorporated
                  by reference to the Registrant's Proxy Statement dated May 10,
                  2000.8/
              
              Incorporated
                  by reference to the Registrant’s Annual Report on Form 10-K for the year
                  ended December 31, 1997.9/
              
              Incorporated
                  by reference to the Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended March 31, 1998.10/
              
              Incorporated
                  by reference to the Registrant’s Annual Report on Form 10-K for the year
                  ended December 31, 1998.11/
              
              Incorporated
                  by reference to the Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended March 31, 1999.12/
              
              Incorporated
                  by reference to the Registrant’s Annual Report on Form 10-K for the year
                  ended December 31, 199913/
              
              Incorporated
                  by reference to the Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended June 30, 2000.14/
              
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K, dated January
                  31, 2001.15/
              
              Incorporated
                  by reference to the Registrant’s Registration Statement on Form S-3 (File
                  No. 333-38230) declared effective May 7, 2001.16/
              
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K, dated March
                  16, 2001.17/
              
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K, dated May 10,
                  2001.18/
              
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K, dated July
                  23, 2001.19/
              
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K, dated March
                  12, 2002.20/
              
              Incorporated
                  by reference to the registrant’s Quarterly Report on Form 10-Q dated
                  August 14, 2002.21/
              
              Incorporated
                  by reference to the Registrant’s Annual Report on Form 10-K for the year
                  ended December 31, 200222/
              
              Incorporated
                  by reference to the registrant’s Quarterly Report on Form 10-Q dated May
                  14, 2003.
  45
  23/
              
              Incorporated
                  by reference to the registrant’s Quarterly Report on Form 10-Q dated
                  August 14, 2003.24/
              
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K, dated
                  December 1, 2003.25/
              
              Incorporated
                  by reference to the Registrant’s Annual Report on Form 10-K for the year
                  ended December 31, 200326/
              
              Incorporated
                  by reference to the Registrant’s Quarterly Report on Form 10-Q dated May
                  10, 2004.27/
              
              Incorporated
                  by reference to the Registrant’s Quarterly Report on Form 10-Q dated
                  August 4, 2004.28/
              
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K, dated January
                  3, 2005.29/
              
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K, dated March
                  1, 2005.30/
              
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K, dated May 12,
                  2005.31/
              
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K, dated April
                  11, 2005.32/
              
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K, dated May 20,
                  2005.33/
              
              Filed
                  herewith.




46




**SIGNATURES**




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




COLUMBIA
              LABORATORIES, INC.Date: March
              10, 2006
            By:
            /s/ David
              L.
              WeinbergDavid
              L. Weinberg, Vice President





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








/s/
                Robert Mills
            
            President
                and Chief Executive Officer
            
            March
                10, 2006Robert
                Mills
            
            (Principal
                Executive Officer)/s/
                David L. Weinberg
            
            Vice
                President-Finance, Chief
            
            March
                10, 2006David
                L. Weinberg
            
            Financial
                Officer and Treasurer(Principal
                Financial and AccountingOfficer)/s/
                Valerie Andrews
            
            Director
            
            March
                10, 2006Valerie
                Andrews/s/
                Edward A. Blechschmidt
            
            Vice
                Chairman of the Board of Directors
            
            March
                10, 2006Edward
                A. Blechschmidt/s/
                James Crofton
            
            Director
            
            March
                10, 2006James
                Crofton/s/
                Stephen G. Kasnet
            
            Chairman
                of the Board of Directors
            
            March
                10, 2006Stephen
                G. Kasnet/s/
                Denis M. O’Donnell
            
            Director
            
            March
                10, 2006Denis
                M. O’Donnell/s/
                Selwyn P. Oskowitz
            
            Director
            
            March
                10, 2006Selwyn
                P. Oskowitz





47




COLUMBIA
        LABORATORIES, INC. AND SUBSIDIARIES
 
 INDEX
        TO FINANCIAL STATEMENTS
 
 PageReport
                  of Independent Registered Accounting Firm
              F-2Consolidated
                  Balance Sheets as of December 31, 2005 and 2004
              F-3Consolidated
                  Statements of Operations for the Three Years Ended December 31,
                  2005
              F-5Consolidated
                  Statements of Comprehensive Operations for the Three Years Ended
                  December
                  31, 2005
              F-6Consolidated
                  Statements of Stockholders' Equity (Deficiency) for the Three Years
                  Ended
                  December 31, 2005
              F-7Consolidated
                  Statements of Cash Flows for the Three Years Ended December 31,
                  2005
              F-9Notes
                  to Consolidated Financial Statements
              F-11
   F-1
  REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To
        the
        Board of Directors and Stockholders
 of
        Columbia Laboratories, Inc.:
 
 
 We
        have
        audited the accompanying consolidated balance sheets of Columbia Laboratories,
        Inc. (a Delaware corporation) and Subsidiaries as of December 31, 2005 and
        2004,
        and the related consolidated statements of operations, comprehensive operations,
        stockholders' equity (deficiency) and cash flows for each of the three years
        in
        the period ended December 31, 2005. These financial statements are the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion on these financial statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Columbia Laboratories, Inc.
        and
        Subsidiaries as of December 31, 2005 and 2004, and the results of their
        operations and their cash flows for each of the three years in the period
        ended
        December 31, 2005 in conformity with United States generally accepted accounting
        principles.
 
 We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of the Company’s internal
        control over financial reporting as of December 31, 2005, based on the criteria
        established in Internal Control—Integrated Framework issued by the Committee of
        Sponsoring Organizations of the Treadway Commission (COSO), and our report
        dated
        February 24, 2006 expressed an unqualified opinion thereon.
 
 
 GOLDSTEIN
        GOLUB KESSLER LLP
 New
        York,
        New York
 February
        24, 2006, except for the Liquidity paragraph of Note 1 and
 Note
        11,
        as to which the date
 is
        March
        10, 2006
  F-2
  COLUMBIA
        LABORATORIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        BALANCE SHEETS
 
 AS
        OF
        DECEMBER 31, 2005 AND 2004
 
 
 ASSETS
 2005
                  
                  2004CURRENT
                      ASSETS:Cash
                      and cash equivalents, of which $6,414,674 is interest-bearing
                      as of
                      December 31, 2005
                  
                  $
                  7,136,854
                  
                  $
                  19,781,591Accounts
                      receivable, net of allowance for doubtful accounts of $50,000
                      and $86,114
                      in 2005 and 2004, respectively
                  
                  
                  4,020,019
                  
                  
                  4,260,379Inventories
                  
                  
                  1,821,433
                  
                  
                  2,742,544Prepaid
                      expenses and other current assets
                  
                  
                  625,908
                  
                  
                  1,155,673Total
                      current assets
                  
                  
                  13,604,214
                  
                  
                  27,940,187PROPERTY
                      AND EQUIPMENT:Machinery
                      and equipment
                  
                  
                  2,680,099
                  
                  
                  2,672,189Computer
                      software
                  
                  
                  442,785
                  
                  
                  437,180Office
                      equipment and furniture and fixtures
                  
                  
                  660,437
                  
                  
                  590,5853,783,321
                  
                  
                  3,699,954Less-accumulated
                      depreciation and amortization
                  
                  
                  (2,780,741
                  )
                  
                  (2,492,913
                  )1,002,580
                  
                  
                  1,207,041OTHER
                      ASSETS
                  
                  
                  124,756
                  
                  
                  121,140TOTAL
                      ASSETS
                  
                  $
                  14,731,550
                  
                  $
                  29,268,368
  (Continued)
  F-3
  COLUMBIA
        LABORATORIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        BALANCE SHEETS
 
 AS
        OF
        DECEMBER 31, 2005 AND 2004
  (Continued)
 
 
 LIABILITIES
        AND STOCKHOLDERS' EQUITY (DEFICIENCY)
 2005
                  
                  2004CURRENT
                      LIABILITIES:Note
                      payable - short-term
                  
                  $
                  —
                  
                  $
                  10,000,000Current
                      portion of financing agreements
                  
                  
                  12,840,161
                  
                  
                  2,753,486Accounts
                      payable
                  
                  
                  1,905,381
                  
                  
                  2,772,107Accrued
                      expenses
                  
                  
                  2,329,475
                  
                  
                  3,111,198Total
                      current liabilities
                  
                  
                  17,075,017
                  
                  
                  18,636,791DEFERRED
                      REVENUE
                  
                  
                  4,058,327
                  
                  
                  4,239,060LONG-TERM
                      PORTION OF FINANCING AGREEMENTS
                  
                  
                  8,747,743
                  
                  
                  18,923,440TOTAL
                      LIABILITIES
                  
                  
                  29,881,087
                  
                  
                  41,799,291COMMITMENTS
                      AND CONTINGENCIES (Note 7)STOCKHOLDERS'
                      EQUITY (DEFICIENCY):Preferred
                      stock, $.01 par value; 1,000,000 shares authorized:Series
                      B Convertible Preferred Stock, 130 shares issuedand
                      outstanding in 2005 and 2004(liquidation
                      preference of $13,000 at December 31, 2005)
                  
                  
                  1
                  
                  
                  1Series
                      C Convertible Preferred Stock, 3,250 sharesissued
                      and outstanding in 2005 and 2004
                  
                  
                  32
                  
                  
                  32(liquidation
                      preference of $3,250,000 at December 31, 2005)Series
                      E Convertible Preferred Stock, 69,000 sharesissued
                      and outstanding in 2005
                  
                  
                  690
                  
                  
                  —(liquidation
                      preference of $6,900,000 at December 31, 2005)Common
                      stock, $.01 par value; 100,000,000 sharesauthorized;
                      41,754,784 and 41,751,934 shares issued andoutstanding
                      in 2005 and 2004, respectively
                  
                  
                  417,548
                  
                  
                  417,519Capital
                      in excess of par value
                  
                  
                  175,340,023
                  
                  
                  168,587,536Accumulated
                      deficit
                  
                  
                  (191,084,974
                  )
                  
                  (181,777,838
                  )Accumulated
                      other comprehensive income
                  
                  
                  177,143
                  
                  
                  241,827Stockholders'
                      equity (deficiency)
                  
                  
                  (15,149,537
                  )
                  
                  (12,530,923
                  )TOTAL
                      LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
                  
                  $
                  14,731,550
                  
                  $
                  29,268,368
 
 The
        accompanying notes to consolidated financial statements
 are
        an
        integral part of these statements.
  F-4
  
 COLUMBIA
        LABORATORIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 
 FOR
        THE THREE YEARS ENDED DECEMBER 31, 2005
 2005
                
                2004
                
                2003REVENUES
                
                $
                22,040,842
                
                $
                17,860,404
                
                $
                22,415,028COST
                    OF GOODS SOLD
                
                
                8,111,497
                
                
                7,788,601
                
                
                9,782,784Gross
                    profit
                
                
                13,929,345
                
                
                10,071,803
                
                
                12,632,244OPERATING
                    EXPENSES:Selling
                    and distribution
                
                
                8,578,022
                
                
                19,006,585
                
                
                22,570,177General
                    and administrative
                
                
                6,825,148
                
                
                7,588,437
                
                
                6,376,274Reseach
                    and development
                
                
                5,756,856
                
                
                5,448,685
                
                
                3,267,966Total
                    operating expenses
                
                
                21,160,026
                
                
                32,043,707
                
                
                32,214,417Loss
                    from operations
                
                
                (7,230,681
                )
                
                (21,971,904
                )
                
                (19,582,173
                )OTHER
                    INCOME (EXPENSE):Interest
                    income
                
                
                165,886
                
                
                241,342
                
                
                134,387Interest
                    expense
                
                
                (2,694,041
                )
                
                (2,991,136
                )
                
                (1,846,281
                )Loss
                    on sale of intangible assets
                
                
                —
                
                
                (577,917
                )
                
                —Other,
                    net
                
                
                451,700
                
                
                169,991
                
                
                143,048(2,076,455
                )
                
                (3,157,720
                )
                
                (1,568,846
                )Net
                    loss
                
                $
                (9,307,136
                )
                $
                (25,129,624
                )
                $
                (21,151,019
                )LOSS
                    PER COMMONSHARE
                    - BASIC AND DILUTED
                
                $
                (0.23
                )
                $
                (0.62
                )
                $
                (0.57
                )WEIGHED-AVERAGE
                    NUMBER OFCOMMON
                    SHARES OUTSTANDING:BASIC
                    AND DILUTED
                
                
                41,752,422
                
                
                40,984,083
                
                
                37,440,270
 
  The
        accompanying notes to consolidated financial statements
 are
        an
        integral part of these statements.
  F-5
  COLUMBIA
        LABORATORIES, INC. AND SUBSIDIARIES
 
 
 CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE OPERATIONS
 
 FOR
        THE THREE YEARS ENDED DECEMBER 31, 2005
 2005
                
                2004
                
                2003NET
                    LOSS
                
                $
                (9,307,136
                )
                $
                (25,129,624
                )
                $
                (21,151,019
                )Other
                    comprehensive income (loss):Foreign
                    curency translation, net of tax
                
                
                (64,684
                )
                
                50,458
                
                
                108,508Comprehensive
                    loss
                
                $
                (9,371,820
                )
                $
                (25,079,166
                )
                $
                (21,042,511
                )
 
 
 
 
 
 
 The
        accompanying notes to consolidated financial statements
 are
        an
        integral part of these statements.
  F-6
  COLUMBIA
        LABORATORIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
 
 
 FOR
        THE THREE YEARS ENDED DECEMBER 31, 2005
 Series
                      B Convertible
                  
                  Series
                      C Convertible
                  
                  Series
                      E ConvertiblePreferred
                      Stock
                  
                  Preferred
                      Stock
                  
                  Preferred
                      Stock
                  
                  Common
                      Stock
                  
                  Capital
                      in
                  
                  
                  
                  Accumulated
                      OtherNumber
                      of
                  
                  
                  
                  Number
                      of
                  
                  
                  
                  Number
                      of
                  
                  
                  
                  Number
                      of
                  
                  
                  
                  Excess
                      of
                  
                  Accumulated
                  
                  ComprehensiveShares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Par
                      Value
                  
                  Deficit
                  
                  Income
                      (Loss)
                  
                  TotalBalance,
                      January 1, 2003
                  
                  
                  1,130
                  
                  $
                  11
                  
                  
                  3,750
                  
                  $
                  38
                  
                  
                  
                  
                  
                  
                  
                  
                  35,453,722
                  
                  $
                  354,537
                  
                  $
                  126,664,805
                  
                  $
                  (135,497,195
                  )
                  $
                  82,861
                  
                  $
                  (8,394,943
                  )Issuance
                      of common stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  2,764,612
                  
                  
                  27,646
                  
                  
                  28,777,445
                  
                  
                  —
                  
                  
                  —
                  
                  
                  28,805,091Options
                      exercised
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  1,260,268
                  
                  
                  12,603
                  
                  
                  6,781,574
                  
                  
                  —
                  
                  
                  —
                  
                  
                  6,794,177Warrants
                      exercised
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  57,922
                  
                  
                  579
                  
                  
                  199,359
                  
                  
                  —
                  
                  
                  —
                  
                  
                  199,938Fair
                      market value of optionsgranted
                      to non-employees
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  96,152
                  
                  
                  —
                  
                  
                  —
                  
                  
                  96,152Dividends
                      on preferred stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (178,125
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (178,125
                  )Translation
                      adjustment
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  108,508
                  
                  
                  108,508Conversion
                      of preferred stock
                  
                  
                  (1,000
                  )
                  
                  (10
                  )
                  
                  (500
                  )
                  
                  (6
                  )
                  
                  
                  
                  
                  
                  
                  
                  163,427
                  
                  
                  1,634
                  
                  
                  (1,619
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (1
                  )Payment
                      of related party loan
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (20,570
                  )
                  
                  (205
                  )
                  
                  (193,030
                  )
                  
                  
                  
                  
                  
                  
                  
                  (193,235
                  )Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (21,151,019
                  )
                  
                  —
                  
                  
                  (21,151,019
                  )Balance,
                      December 31, 2003
                  
                  
                  130
                  
                  
                  1
                  
                  
                  3,250
                  
                  
                  32
                  
                  
                  
                  
                  
                  
                  
                  
                  39,679,381
                  
                  
                  396,794
                  
                  
                  162,146,561
                  
                  
                  (156,648,214
                  )
                  
                  191,369
                  
                  
                  6,086,543Issuance
                      of common stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  2,000,000
                  
                  
                  20,000
                  
                  
                  6,360,000
                  
                  
                  —
                  
                  
                  —
                  
                  
                  6,380,000Warrants
                      exercised
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  72,553
                  
                  
                  725
                  
                  
                  228,961
                  
                  
                  
                  
                  
                  
                  
                  
                  229,686Fair
                      market value of optionsgranted
                      to non-employees
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  14,514
                  
                  
                  —
                  
                  
                  —
                  
                  
                  14,514Dividends
                      on preferred stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (162,500
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (162,500
                  )Translation
                      adjustment
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  50,458
                  
                  
                  50,458Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (25,129,624
                  )
                  
                  —
                  
                  
                  (25,129,624
                  )Balance,
                      December 31, 2004
                  
                  
                  130
                  
                  $
                  1
                  
                  
                  3,250
                  
                  $
                  32
                  
                  
                  
                  
                  
                  
                  
                  
                  41,751,934
                  
                  $
                  417,519
                  
                  $
                  168,587,536
                  
                  $
                  (181,777,838
                  )
                  $
                  241,827
                  
                  $
                  (12,530,923
                  )
  (Continued)
  F-7
   COLUMBIA
        LABORATORIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
 
 FOR
        THE THREE YEARS ENDED DECEMBER 31, 2005
 Series
                      B Convertible
                  
                  Series
                      C Convertible
                  
                  Series
                      E ConvertiblePreferred
                      Stock
                  
                  Preferred
                      Stock
                  
                  Preferred
                      Stock
                  
                  Common
                      Stock
                  
                  Capital
                      in
                  
                  
                  
                  Accumulated
                      OtherNumber
                      of
                  
                  
                  
                  Number
                      of
                  
                  
                  
                  Number
                      of
                  
                  
                  
                  Number
                      of
                  
                  
                  
                  Excess
                      of
                  
                  Accumulated
                  
                  ComprehensiveShares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Shares
                  
                  Amount
                  
                  Par
                      Value
                  
                  Deficit
                  
                  Income
                      (Loss)
                  
                  TotalBalance,
                      December 31, 2004
                  
                  
                  130
                  
                  $
                  1
                  
                  
                  3,250
                  
                  $
                  32
                  
                  
                  
                  
                  
                  
                  
                  
                  41,751,934
                  
                  $
                  417,519
                  
                  $
                  168,587,536
                  
                  $
                  (181,777,838
                  )
                  $
                  241,827
                  
                  $
                  (12,530,923
                  )Issuance
                      of preferred stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  69,000
                  
                  $
                  690
                  
                  
                  —
                  
                  
                  —
                  
                  
                  6,899,310
                  
                  
                  —
                  
                  
                  —
                  
                  
                  6,900,000Options
                      exercised
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  2,850
                  
                  
                  29
                  
                  
                  8,224
                  
                  
                  —
                  
                  
                  —
                  
                  
                  8,253Fair
                      market value of options
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  —granted
                      to non-employees
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  7,453
                  
                  
                  —
                  
                  
                  —
                  
                  
                  7,453Dividends
                      on preferred stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (162,500
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (162,500
                  )Translation
                      adjustment
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (64,684
                  )
                  
                  (64,684
                  )Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (9,307,136
                  )
                  
                  —
                  
                  
                  (9,307,136
                  )Balance,
                      December 31, 2005
                  
                  
                  130
                  
                  $
                  1
                  
                  
                  3,250
                  
                  $
                  32
                  
                  
                  69,000
                  
                  $
                  690
                  
                  
                  41,754,784
                  
                  $
                  417,548
                  
                  
                  175,340,023
                  
                  $
                  (191,084,974
                  )
                  $
                  177,143
                  
                  $
                  (15,149,537
                  )
 
 
 The
        accompanying notes to consolidated financial statements are an integral part
        of
        these statements.
 F-8
  COLUMBIA
        LABORATORIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 FOR
        THE THREE YEARS ENDED DECEMBER 31, 2005
  2005
                
                2004
                
                2003CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    loss
                
                $
                (9,307,136
                )
                $
                (25,129,624
                )
                $
                (21,151,019
                )Adjustments
                    to reconcile net loss to netcash
                    used in operating activities -Depreciation
                    and amortization
                
                
                287,741
                
                
                379,855
                
                
                513,109Provision
                    for doubtful accounts
                
                
                187,962
                
                
                48,917
                
                
                133,509Provision
                    for sales returns
                
                
                2,431,823
                
                
                3,336,339
                
                
                406,000Write-down
                    of inventories
                
                
                1,036,136
                
                
                1,018,677
                
                
                461,648Interest
                    expense on financing agreements
                
                
                2,538,461
                
                
                2,235,777
                
                
                1,085,073Loss
                    on sale of intangible assets
                
                
                —
                
                
                577,917
                
                
                —Issuance
                    of options for services
                
                
                7,453
                
                
                14,514
                
                
                96,152Changes
                    in assets and liabilities -(Increase)
                    decrease in:Accounts
                    receivable
                
                
                52,398
                
                
                (872,704
                )
                
                (2,716,249
                )Inventories
                
                
                (115,025
                )
                
                (1,291,997
                )
                
                (605,662
                )Prepaid
                    expenses and other current assets
                
                
                529,765
                
                
                1,085,247
                
                
                (1,415,087
                )Other
                    assets
                
                
                (3,615
                )
                
                19,514
                
                
                29,053Increase
                    (decrease) in:Accounts
                    payable
                
                
                (866,726
                )
                
                (34,129
                )
                
                (682,882
                )Accrued
                    expenses
                
                
                (3,213,546
                )
                
                (1,612,504
                )
                
                1,440,086Deferred
                    revenue
                
                
                (180,733
                )
                
                359,442
                
                
                (70,241
                )Net
                    cash used in operating activities
                
                
                (6,615,042
                )
                
                (19,864,759
                )
                
                (22,476,510
                )
  (Continued)
  F-9
  COLUMBIA
        LABORATORIES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 FOR
        THE THREE YEARS ENDED DECEMBER 31, 2005
 
 (Continued)
 2005
                
                2004
                
                2003CASH
                    FLOWS FROM INVESTING ACTIVITIES:Purchase
                    of property and equipment
                
                $
                (83,367
                )
                $
                (582,367
                )
                $
                (357,993
                )Sale
                    of intangible assets
                
                
                —
                
                
                300,000
                
                
                —Net
                    cash provided by (used in) investing activities
                
                
                (83,367
                )
                
                (282,367
                )
                
                (357,993
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Net
                    proceeds from issuance of preferred stock
                
                
                6,900,000
                
                
                —
                
                
                —Net
                    proceeds from issuance of common stock
                
                
                —
                
                
                6,380,000
                
                
                28,805,091Payment
                    of note payable
                
                
                (10,000,000
                )
                
                —
                
                
                (586,667
                )Proceeds
                    from exercise of options and warrants
                
                
                8,253
                
                
                229,686
                
                
                6,994,115Proceeds
                    from financing agreements
                
                
                —
                
                
                3,000,000
                
                
                14,250,000Payments
                    pursuant to financing agreements
                
                
                (2,627,483
                )
                
                (534,412
                )
                
                (609,513
                )Dividends
                    paid
                
                
                (162,500
                )
                
                (162,500
                )
                
                (178,125
                )Net
                    cash provided by financing activities
                
                
                (5,881,730
                )
                
                8,912,774
                
                
                48,674,901EFFECT
                    OF EXCHANGE RATE CHANGES ON CASH
                
                
                (64,598
                )
                
                50,426
                
                
                106,754NET
                    INCREASE (DECREASE) IN CASH ANDCASH
                    EQUIVALENTS
                
                
                (12,644,737
                )
                
                (11,183,926
                )
                
                25,947,152CASH
                    AND CASH EQUIVALENTS,Beginning
                    of year
                
                
                19,781,591
                
                
                30,965,517
                
                
                5,018,365CASH
                    AND CASH EQUIVALENTS,End
                    of year
                
                $
                7,136,854
                
                $
                19,781,591
                
                $
                30,965,517SUPPLEMENTAL
                    DISCLOSURES OF CASH FLOWINFORMATIONInterest
                    paid
                
                $
                356,250
                
                $
                712,500
                
                $
                761,208Taxes
                    paid
                
                $
                6,800
                
                $
                110,700
                
                $
                24,800NON-CASH
                    INVESTING AND FINANCINGACTIVITIESRelated
                    party loan repaid with common stock
                
                $
                —
                
                $
                —
                
                $
                193,325
  The
        accompanying notes to consolidated financial statements
 are
        an
        integral part of these statements.
  F-10
 COLUMBIA
        LABORATORIES, INC. AND SUBSIDIARIES
 
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
  (1)
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES :
 
 Organization -
 
 Columbia
        Laboratories, Inc. (the "Company") was incorporated as a Delaware corporation
        in
        December 1986. The Company is primarily dedicated to research, development,
        and
        commercialization of women’s healthcare and endocrinology products, including
        those intended to treat infertility, endometriosis and hormonal deficiencies.
        The Company is also developing a buccal delivery system for peptides. The
        Company’s products primarily utilize its patented Bioadhesive Delivery System
        technology.
 
 Principles
        of Consolidation -
 
 The
        consolidated financial statements include the accounts of the Company and
        its
        subsidiaries. All significant intercompany balances and transactions have
        been
        eliminated in consolidation.
 
 Liquidity -
 
 As
        shown
        in the financial statements, the Company has had recurring losses from
        operations and has a stockholders' deficiency. On March 10, 2006, the Company
        entered into a Securities Purchase Agreement with certain investors for the
        private placement of 7,428,220 shares of the Company’s common stock, par value
        $.01 per share (the “Shares”), at a price of $4.04 per share and warrants to
        purchase 1,857,041 shares of common stock (the “Warrants”) (see footnote 11 to
        the consolidated financial statements). Gross proceeds to the company are
        expected to be $30 million before applicable expenses. Management believes
        this additional cash, along with the approximately $7.1 million on hand at
        December 31, 2005, will allow the Company to sustain its
        operations.
 
 Accounting
        Estimates -
 
 The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reporting period.
        Actual results could differ from those estimates in the near term.
 
 Foreign
        Currency -
 
 The
        assets and liabilities of the Company's foreign subsidiaries are translated
        into
        U.S. dollars at current exchange rates and revenue and expense items are
        translated at average rates of exchange prevailing during the period. Resulting
        translation adjustments are accumulated as a separate component of stockholders'
        equity.
 
 Accounts
        Receivable-
 
 Accounts
        receivable are reported at their outstanding unpaid principal balances reduced
        by allowances for doubtful accounts. The Company estimates doubtful accounts
        based on historical bad debts, factors related to specific customers’ ability to
        pay and current economic trends. The Company writes off accounts receivable
        against the allowance when a balance is determined to be uncollectible.
  F-11
  Inventories -
 
 Inventories
        are stated at the lower of cost (first-in, first-out) or market. Components
        of
        inventory cost include materials, labor and manufacturing overhead. Inventories
        consist of the following:
 December
                    31,2005
                
                2004Finished
                    goods
                
                $
                1,165,413
                
                $
                1,993,190Raw
                    materials
                
                
                656,020
                
                
                749,354$
                1,821,433
                
                $
                2,742,544
  Shipping
        costs are included in selling and distribution expenses and amounted to
        approximately $74,000, $63,000 and $93,000 in 2005, 2004 and 2003
        respectively.
  Property
        and Equipment -
 
 Property
        and equipment is stated at cost less accumulated depreciation. Leasehold
        improvements are amortized over the term of the respective leases. Depreciation
        is computed on the straight-line basis over the estimated useful lives of
        the
        respective assets, as follows:
 
 YearsSoftware
              3Machinery
                  and equipment
              5-10Furniture
                  and fixtures
              5
 
 Costs
        of
        major additions and improvements are capitalized and expenditures for
        maintenance and repairs that do not extend the term of the assets are expensed.
        Upon sale or disposition of property and equipment, the cost and related
        accumulated depreciation are eliminated from the accounts and any resultant
        gain
        or loss is credited or charged to operations.
 
 Depreciation
        expense amounted to approximately $288,000, $337,000 and $270,000 in 2005,
        2004
        and 2003, respectively.
 
 Concentration
        of Risk-
 
 The
        Company sells its products to customers worldwide. The Company performs ongoing
        credit evaluations of its customers and generally does not require collateral.
        See Note 9 for customer concentrations.
  The
        Company depends on one supplier for a key
        ingredient used in its products.
  F-12
  Intangible
                    Assets-Intangible
                    assets consist of the following:December
                    31,2005
                
                2004Patents
                
                $
                2,600,000
                
                $
                2,600,000Trademarks
                
                
                341,000
                
                
                341,000Licensing
                    rights
                
                
                100,000
                
                
                100,0003,041,000
                
                
                3,041,000Less
                    accumulated amortization
                
                
                (3,041,000
                )
                
                (3,041,000
                )$
                —
                
                $
                —
  Patents
        were being amortized on a straight-line basis over their remaining lives
        (through 2003). Trademarks were being amortized on a straight-line basis
        over
        ten years to fifteen years. Licensing rights were being amortized over a
        period
        of five years.
 
 On
        March
        16, 2000, the Company acquired the U.S. rights for the product
        Advantage-S ® .
        The
        cost of the acquisition was $1,225,000 (in cash and Company common stock)
        which
        was being amortized over a 15-year period. The U.S. rights were sold on June
        29,
        2004. The Company recorded a loss of $577,917 on the sale.
 
 Amortization
        expense amounted to $0, $42,500 and $242,924 in 2005, 2004 and 2003,
        respectively.
 
 Long-lived
        Assets -
 
 Following
        the acquisition of any long-lived assets, the Company continually evaluates
        whether later events and circumstances have occurred that indicate the remaining
        estimated useful life of the long-lived asset may warrant revision or that
        the
        remaining balance of the long-lived asset may not be recoverable. When factors
        indicate that a long-lived asset may be impaired, the Company uses an estimate
        of the underlying product's future cash flows, including amounts to be received
        over the remaining life of the long-lived asset from license fees, royalty
        income, and related deferred revenue, in measuring whether the long-lived
        asset
        is recoverable. Unrecoverable amounts are charged to operations.
 
 Accrued
        Expenses -
 
 Accrued
        expenses consist of the following:
 2005
                
                2004Sales
                    returns
                
                $
                745,882
                
                $
                1,992,010Salaries
                
                
                684,286
                
                
                434,045Royalties
                
                
                369,303
                
                
                222,335Interest
                
                
                —
                
                
                207,812Professional
                    fees
                
                
                284,914
                
                
                182,574Other
                
                
                245,090
                
                
                72,422$
                2,329,475
                
                $
                3,111,198
  F-13
  Income
        Taxes -
  The
        reconciliation of the effective income tax rate to the federal statutory
        rate is
        as follows:
 2005
                
                2004
                
                2003Federal
                    income tax rate
                
                
                (34.0
                )%
                
                
                (34.0
                )%
                
                
                (34.0
                )%Increase
                    in valuation allowance
                
                
                34.0
                
                
                
                34.0
                
                
                
                34.0Effective
                    income tax rate
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                0.0
                %
 
 As
        of
        December 31, 2005, the Company has U.S. tax net operating loss carryforwards
        of
        approximately $128 million which expire through 2025. The Company also has
        unused tax credits of approximately $1.6 million which expire at various
        dates
        through 2025. Utilization of net operating loss carryforwards may be limited
        in
        any year due to limitations in the Internal Revenue Code. As of December
        31,
        2005 and 2004, other assets in the accompanying consolidated balance sheets
        include deferred tax assets of approximately $45 million and $41 million,
        respectively (comprised primarily of a net operating loss carryforward),
        for
        which a 100% valuation allowance has been recorded since the realizability
        of
        the deferred tax assets is not determinable.
 
 Revenue
        Recognition -
 
 Revenue
        from sales of products is recognized at the time title of goods passes to
        the
        buyer and the buyer assumes the risks and rewards of ownership. This is at
        the
        time products are shipped to the customer. Provisions for returns, rebates
        and
        other allowances are estimated based on a percentage of sales, using such
        factors as historical trends, distributor inventory levels and product
        prescription data, and are recorded in the same period the related sales
        are
        recognized. Royalties
        and additional monies owed to the Company based on the Company’s strategic
        alliance partners’ sales are included in revenues as sales are recognized by the
        strategic alliance partners.
 
 In
        the
        2004 fourth quarter, primarily two customers of the Company returned $1,362,000
        of one of the Company’s products, Prochieve ® 8%,
        which was going to expire in 2005. Prochieve ® 8% was
        introduced to the trade in the second half of 2002. As a result, the Company
        increased its estimate for product returns and recorded an additional provision
        of approximately $886,000 for Prochieve ® 8%
        returns in the fourth quarter.
 
 The
        total
        provisions for returns during the years ended December 31, 2005, 2004 and
        2003
        were $2,431,823, $3,336,339 and $406,000, respectively, and were recorded
        as a
        reduction of sales.
 
 License
        Fees -
 
 License
        revenue consists of up-front, milestone and similar payments under license
        agreements and is recognized when earned under the terms of the applicable
        agreements. Milestone payments represent payments for the occurrence of
        contract-specified events and coincide with the achievement of a substantive
        element in a multi-element arrangement (See Note 2). License revenue, including
        milestone payments, is deferred and recognized in revenues over the estimated
        product life cycle or the length of relevant patents, whichever is
        shorter.
  F-14
  Advertising
        Expense -
 
 All
        costs
        associated with advertising and promoting products are expensed in the year
        incurred. Advertising and promotion expense was approximately $1,491,000
        in
        2005, $4,576,000 in 2004 and $6,800,000 in 2003, and is included in selling
        and
        distribution expense.
 
 Research
        and Development Costs-
 
 Company-sponsored
        research and development costs related to future products are expensed as
        incurred.
 
 Loss
        per Share -
 
 Basic
        loss per share is computed by dividing the net loss plus preferred dividends
        by
        the weighted-average number of shares of common stock outstanding during
        the
        period. Diluted earnings per share gives effect to dilutive options, warrants
        and other potential common stock outstanding during the year. Shares to be
        issued upon the exercise of the outstanding options and warrants or the
        conversion of the preferred stock are not included in the computation of
        diluted
        loss per share as their effect is anti-dilutive. Outstanding options and
        warrants excluded from the calculation amounted to 6,678,725, 6,204,400 and
        6,944,911 at December 31, 2005, 2004 and 2003, respectively.
 
 Statements
        of Cash Flows -
 
 For
        purposes of the statements of cash flows, the Company considers all investments
        purchased with an original maturity of three months or less to be cash
        equivalents.
  Stock-based
        Compensation -
 
 The
        Company applies the intrinsic method permitted under Accounting Principles
        Board
        Opinion No. 25 and related interpretations in accounting for its plans.
        Accordingly, no compensation cost has been recognized for the stock option
        plans
        and warrants issued to employees. Had compensation cost been determined based
        on
        the fair value at the grant dates for those awards consistent with the method
        of
        Statement of Financial Accounting Standard No. 123, the Company’s net loss per
        share would have been increased to the pro forma amounts indicated
        below.
 2005
                
                2004
                
                2003Net
                    loss, as reported
                
                $
                (9,307,136
                )
                $
                (25,129,624
                )
                $
                (21,151,019
                )Deduct:
                    Total stock-basedemployee
                    compensation expensedetermined
                    under-fair-value basedmethods
                    for all awards
                
                
                (1,407,286
                )
                
                (1,918,022
                )
                
                (1,707,678
                )Pro
                    forma net loss
                
                $
                (10,714,422
                )
                $
                (27,047,646
                )
                $
                (22,858,697
                )Loss
                    per share: As reported
                
                $
                (0.23
                )
                $
                (0.62
                )
                $
                (0.57
                )Pro
                    forma
                
                $
                (0.26
                )
                $
                (0.66
                )
                $
                (0.62
                )
 
 The
        estimated grant date fair value reflected in the above table is determined
        using
        the Black-Scholes model. The material assumptions and adjustments incorporated
        in the Black-Scholes model in estimating the value of the options reflected
        in
        the above table include the following: (i) an exercise price equal to the
        fair
        market value of the underlying stock on the dates of grant, (ii) an option
        life
        of 6.67 years in 2005 and five years in 2004 and 2003, (iii) a risk-free
        rate of
        4.03% in 2005, 3.01% in 2004 and 4.25% in 2003 and which represents the interest
        rate on a U.S. Treasury security with a maturity date corresponding to that
        of
        the option term, (iv) volatility of 81.9% in 2005, 54.0% for 2004 and 59.2%
        for
        2003 and (v) no annualized dividends paid with respect to a share of common
        stock at the date of grant. The ultimate values of the options will depend
        on
        the future price of the Company's common stock, which cannot be forecasted
        with
        reasonable accuracy. The actual value, if any, an optionee will realize upon
        exercise of an option will depend on the excess of the market value of the
        Company's common stock over the exercise price on the date the option is
        exercised.
 F-15
 
 The
        weighted-average fair value of options and warrants granted to employees
        during
        2005, 2004 and 2003 was $1.52, $2.20 and $3.33, respectively.
 
 Recent
        Accounting Pronouncements -
  In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
        123R (Revised 2004), Share-Based Payment ("SFAS No. 123R"), which requires
        that
        the compensation cost relating to share-based payment transactions be recognized
        in financial statements based on the fair value of the equity or liability
        instruments issued. The Company currently discloses pro forma compensation
        expense quarterly and annually by calculating the stock option grants' fair
        value using the Black-Scholes model and disclosing the impact on net loss
        and
        net loss per share in the Consolidated Financial Statements. Upon adoption,
        pro forma disclosure will no longer be an alternative. SFAS No. 123R also
        requires the benefits of tax deductions in excess of recognized compensation
        cost to be reported as a financing cash flow rather than as an operating
        cash
        flow as required under current literature. This requirement will reduce net
        operating cash flows and increase net financing cash flows in periods after
        adoption. As of December 31, 2005, the amount of compensation to be recognized
        as expense in future periods for non-vested stock options granted to
        employees is approximately $1,779,000. Notwithstanding additional grants
        in
        periods after December 31, 2005, and assuming no terminations or resignations,
        expense amounting to $765,000, $596,000, $332,000 and $86,000 will be recognized
        in 2006, 2007, 2008 and 2009 respectively. The Company will begin to apply
        SFAS
        No. 123R using the most appropriate fair value model as of the interim reporting
        period ending March 31, 2006.
 
 The
        Company does not believe that any other recently issued, but not yet effective,
        accounting standards would have a material effect on the Company’s consolidated
        financial position, results of operations or cash flows.
  (2)
        STRATEGIC ALLIANCE AGREEMENTS :
 
 In
        May
        1995, the Company entered into a worldwide license and supply agreement,
        except
        for South Africa, with American Home Products Corporation (“AHP”) under which
        the Wyeth-Ayerst Laboratories division of AHP marketed Crinone ® .
        The
        Company supplied Crinone ® to AHP
        at a price equal to 30% of AHP’s net selling price. On July 2, 1999, AHP
        assigned the license and supply agreement to Ares-Serono, a Swiss pharmaceutical
        company. The Company supplies Crinone ® to Ares
        Trading S.A. (“Serono”) under the same terms as in the agreement with
        AHP.  In
        June
        2002, as part of the settlement of litigation between the two companies,
        the
        Company acquired
        the right to market a second brand of its 8% and 4% progesterone gel products
        under the trade name “Prochieve ® ”
to
        obstetricians, gynecologists and all other physicians in the United States
        that
        are not on Serono’s target list of fertility specialists. Under this agreement
        the Company is required to pay a 30% royalty to Serono based on net sales
        of the
        product and an
        additional royalty of 40% of Prochieve ® ’s
        net
        sales to the infertility specialist market. The
        Company paid approximately $698,835, $863,889 and $1,685,852 to Serono in
        accordance with this agreement for the years 2005, 2004 and 2003,
        respectively.
 
 In
        March
        1999, the Company entered into a license and supply agreement with Mipharm
        SpA
        under which Mipharm SpA will be the exclusive marketer of the Company’s
        previously unlicensed women’s healthcare products in Italy, Portugal, Greece and
        Ireland with a right of first refusal for Spain. Under the terms of the
        agreement, the Company has received $540,000, net of expenses, and expects
        to
        receive future milestone payments as products are made available by the
        Company.
 
 Effective
        May 5, 2000, the Company sold various tangible and intangible assets related
        to
        the U.S. rights for Replens ® ,
        to Lil’
Drug Store Products Inc. for a total of $4.5 million cash. Additionally,
        the
        purchaser agreed to pay future royalties of up to $2 million equal to 10%
        of
        future U.S. sales of Replens ® .
        The
        royalties were fully paid in October 2005. Additionally, effective May 5,
        2000,
        the Company licensed its Legatrin ® PM brand
        to the same purchaser mentioned above. Under the terms of this agreement,
        the
        Company receives license fees equal to 20% of the licensee’s net sales of
        Legatrin ® PM. This
        agreement has a five-year term with provisions for renewal and contains an
        option that allows the licensee to acquire this brand from the
        Company.
 F-16
 
 On
        July
        31, 2002, the Company and Quintiles Transnational Corp. (“Quintiles”) entered
        into an agreement to commercialize the Company’s portfolio of women’s healthcare
        products in the United States. Under the terms of this agreement, Quintiles’
commercialization unit, Innovex, provided a dedicated team of 55 sales
        representatives on a three-year, fee-for-service basis, to commercialize
        the
        Company’s women’s healthcare products. On March 5, 2003, the Company and
        Quintiles Transnational Corp. announced an agreement to commercialize the
        Company’s Striant ® testosterone buccal bioadhesive product in the United States. Under the terms
        of
        the agreement, Quintiles’ commercialization unit, Innovex, provided a dedicated
        team of approximately 75 sales representatives for two-and-a-half years.
        In
        January 2004, the Company and Innovex restructured the sales force dedicated
        to
        exclusively promoting the Company’s women’s healthcare products and
        Striant ® .
        The
        restructured sales force was made up of nine Company district managers as
        well
        as 80 sales representatives divided evenly between the Company and Innovex.
        Under the terms of this restructuring, Innovex accelerated the transfer of
        responsibility for management of the sales force to the Company, but continued
        to provide half the sales representatives. In February 2005, the Company
        and
        Innovex reduced the sales force to 28 individuals which included 23 sales
        representatives divided evenly between the Company and Innovex. The Company
        also
        took responsibility for all sales force support. Columbia hired the remaining
        Innovex sales representatives as Columbia employees on November 1,
        2005.
 On
        October 16, 2002, the Company and Ardana Bioscience, Ltd. (“Ardana”) entered
        into a license and supply agreement for the Company’s Striant ® testosterone buccal mucoadhesive product in 18 European countries (excluding
        Italy). Under the terms of the agreement, Ardana markets, distributes and
        sells
        Striant ® .
        In
        exchange for the license, the Company will receive total payments of $8 million,
        including $4 million in signature and milestone fees received in the fourth
        quarter of 2002. Initial regulatory approval of the U.K. application, which
        was
        received in the first quarter of 2004, was the basis for mutual recognition
        applications filed in the rest of Europe. Additional milestone payments totaling
        $2 million (of which $400,000 and $800,000 was received in 2005 and 2004,
        respectively) are due upon marketing approvals in major European countries
        included in the agreement. A performance payment of $2 million is also due
        upon
        achievement of a certain level of sales. Ardana is obligated to purchase
        its
        requirements of product from the Company during the term of the agreement.
        The
        agreement shall continue for a period of the later of 10 years from the first
        commercial sale of the finished product by Ardana or the date of expiration
        or
        lapse of the last to expire or lapse Company’s patent rights in the territory,
        determined on a country by country basis. The Company is recognizing the
        license
        revenue on this agreement over a 10-year period and accordingly has recognized
        revenue of $541,307, $478,603 and $401,681 in 2005, 2004 and 2003, respectively.
        The remaining $3,728,268 is shown as deferred revenue in the accompanying
        consolidated balance sheets.
 
 In
        May
        2003, the Company and Mipharm S.p.A. entered into an agreement, under which
        Mipharm will market, distribute and sell Striant ® in
        Italy. In exchange for these rights, the Company will receive payments of
        $1.4
        million, including the immediate reimbursement of $350,000 in development
        costs,
        which was paid in 2003. An additional $76,048, net of VAT, was received in
        2004.
        A mutual recognition application for marketing in Italy was filed based on
        initial regulatory approval of the pending application in the United Kingdom.
        Mipharm will provide additional performance payments upon achievement of
        certain
        levels of sales in Italy, and the Company will receive a percentage markup
        on
        the cost of goods for each unit sold. Mipharm is the Company’s manufacturer for
        Striant ® under a
        May 2002 agreement. The Company is recognizing revenue on this agreement
        over a
        132-month period and accordingly has recognized revenue of 41,573, $38,003
        and
        $18,560 in 2005, 2004 and 2003, respectively. The remaining $330,059 is shown
        as
        deferred revenue in the accompanying consolidated balance sheets,
        respectively.
 
 In
        June
        2004, the Company sold the worldwide rights to its over-the-counter products
        Advantage-S ® Contraceptive Gel and RepHresh ® Vaginal
        Gel and the foreign rights to Replens ® Vaginal
        Moisturizer to Lil’ Drug Store Products, Inc. The Company also sold its existing
        finished goods inventory of these products to Lil’ Drug Store Products.
        Additionally, the companies executed a five year supply agreement and a two
        and
        one-half year agreement for the Company’s sales force to continue to promote
        these products to obstetricians and gynecologists in the United States. Upon
        closing, the Company received payments amounting to $832,000, which were
        paid in
        2004, from the sale of the rights and inventory. In June 2004, the Company
        recorded a loss of $577,917 on the loss of the sale of the intangibles assets
        associated with the products. The Company will receive revenues from the
        manufacture and sale of product to Lil’ Drug Store Products, promotional fees
        under a professional services agreement and royalties on sales of products
        manufactured by third parties.
 F-17
 
 (3)
        NOTE PAYABLE:
  On
        March
        16, 1998, the Company issued to an institutional investor a $10 million
        convertible subordinated note due March 15, 2005. The note was subordinate
        to
        other senior securities of the Company and bore interest at 7.125% which
        was
        payable semiannually on March 15 and September 15. The note was paid in full
        on
        March 15, 2005.
  (4)
        FINANCING AGREEMENTS:
 
 In
        an
        agreement dated July 31, 2002, Quintiles’ strategic investment group, PharmaBio
        Development, agreed to pay $4.5 million, to be paid in four equal quarterly
        installments commencing third quarter 2002 for the right to receive a 5%
        royalty
        on the net sales of the Company’s women’s healthcare products in the United
        States for five years beginning in the first quarter of 2003. The royalty
        payments are subject to minimum ($8 million) and maximum ($12 million) amounts
        and because the minimum amount exceeds $4.5 million, the Company has recorded
        the amounts received as liabilities. The excess of the minimum ($8 million)
        to
        be paid by the Company over the $4.5 million received by the Company is being
        recognized as interest expense over the five-year term of the agreement,
        assuming an interest rate of 12.51%. $703,522, $625,295 and $498,369 were
        recorded as interest expense for the years 2005, 2004 and 2003, respectively.
        The agreement called for a true-up payment, if by February 28, 2005, the
        Company
        had not made $2,750,000 in royalty payments to PharmaBio. The amounts paid
        to
        PharmaBio were $2,290,662 (which included the $1,891,944 true-up) for 2005,
        $423,137 for 2004 and $434,919 for 2003.
 
 In
        an
        agreement dated March 5, 2003, Quintiles’ strategic investment group, PharmaBio
        Development, agreed to pay $15
        million, to be paid in five quarterly installments commencing with the signing
        of this agreement. In return, Quintiles will receive a 9% royalty on net
        sales
        of Striant ® in the
        United States up to agreed annual sales revenues, and a 4.5% royalty of net
        sales above those levels. The royalty term is seven years. Royalty payments
        commenced for the 2003 third quarter and are subject to minimum ($30 million)
        and maximum ($55 million) amounts. Because
        the minimum amount exceeds the $15 million to be received, the Company has
        recorded the amounts received as liabilities. The excess of the minimum ($30
        million) to be paid by the Company over the $15 million to be received by
        the
        Company is being recognized as interest expense over the seven-year term
        of the
        agreement, assuming an interest rate of 10.67%. $1,834,939, $1,610,482 and
        $586,704 were recorded as interest expense in 2005, 2004 and 2003,
        respectively . The
        agreement calls for a true-up payment on November 14, 2006. The true-up payment
        is equal to the difference between the royalties paid through and for the
        third
        quarter of 2006, and $13 million. The amounts paid to PharmaBio were $130,896
        for 2005, $314,792 for 2004 and $266,658 for 2003.
 
 F-18
 
 Liabilities
        from financing agreements consist of the following:
 December
                    31,2005
                
                2004July
                    31, 2002 financing agreement
                
                $
                3,242,607
                
                $
                4,932,548March
                    5, 2003 financing agreement
                
                
                18,345,297
                
                
                16,744,37821,587,904
                
                
                21,676,926Less:
                    current portion
                
                
                12,840,161
                
                
                2,753,486$
                8,747,743
                
                $
                18,923,440
  Because
        of their terms, the fair value of the future value of the financial agreements
        cannot be determined.
  (5)
        STOCKHOLDERS' EQUITY (DEFICIENCY) :
 
 Preferred
        Stock -
 
 In
        August
        1991, the Company completed a private placement of 150,000 shares of Series
        B
        Convertible Preferred Stock ("Series B Preferred Stock"). Each share of Series
        B
        Preferred Stock is convertible into 20.57 shares of common stock.
 
 Upon
        liquidation of the Company, the holders of the Series B Preferred Stock are
        entitled to $100 per share. The Series B Preferred Stock will be automatically
        converted into common stock upon the occurrence of certain events. Holders
        of
        the Series B Preferred Stock are entitled to one vote for each share of common
        stock into which the preferred stock is convertible.
 
 In
        June
        2003, 1,000 shares of the Series B Preferred Stock were converted into 20,570
        shares of the common stock.
 
 In
        January 1999, the Company raised approximately $6.4 million, net of expenses
        from the issuance and sale of Series C Convertible Preferred Stock (“Series C
        Preferred Stock”). The Series C Preferred Stock, sold to 24 accredited
        investors, has a stated value of $1,000 per share. The Series C Preferred
        Stock
        is convertible into common stock at the lower of: (i) $3.50 per common share
        or
        (ii) 100% of the average of the closing prices during the three trading days
        immediately preceding the conversion notice. The Series C Preferred Stock
        pays a
        5% dividend, payable quarterly in arrears on the last day of the quarter.
        In
        2003, 500 shares of the Series C Preferred Stock were converted into 142,857
        shares of the common stock.
 
 On
        March
        12, 2002, the Company adopted a Stockholder Rights Plan (“Rights Plan”) designed
        to protect company stockholders in the event of takeover activity that would
        deny them the full value of their investment. The Rights Plan was not adopted
        in
        response to any specific takeover threat. In adopting the Rights Plan, the
        Board
        declared a dividend distribution of one preferred stock purchase right for
        each
        outstanding share of common stock of the Company, payable to stockholders
        of
        record at the close of business on March 22, 2002. The rights will become
        exercisable only in the event, with certain exceptions, a person or group
        of
        affiliated or associated persons acquires 15% or more of the Company’s voting
        stock, or a person or group of affiliated or associated persons commences
        a
        tender or exchange offer, which if successfully consummated, would result
        in
        such person or group owning 15% or more of the Company’s voting stock. The
        rights will expire on March 12, 2012. Each right, once exercisable, will
        entitle
        the holder (other than rights owned by an acquiring person or group) to buy
        one
        one-thousandth of a share of a series of the Company’s Series D Junior
        Participating Preferred Stock at a price of $30 per one-thousandth of a share,
        subject to adjustments. In addition, upon the occurrence of certain events,
        holders of the rights (other than rights owned by an acquiring person or
        group)
        would be entitled to purchase either the Company’s preferred stock or shares in
        an “acquiring entity” at approximately half of market value. Further, at any
        time after a person or group acquires 15% or more (but less than 50%) of
        the
        Company’s outstanding voting stock, subject to certain exceptions, the Board of
        Directors may, at its option, exchange part or all of the rights (other than
        rights held by an acquiring person or group) for shares of the Company's
        common
        stock having a fair market value on the date of such acquisition equal to
        the
        excess of (i) the fair market value of preferred stock issuable upon exercise
        of
        the rights over (ii) the exercise price of the rights. The Company generally
        will be entitled to redeem the rights at $0.01 per right at any time prior
        to
        the close of business on the tenth day after there has been a public
        announcement of the beneficial ownership by any person or group of 15% or
        more
        of the Company’s voting stock, subject to certain exceptions. These rights are
        deemed to have no value and accordingly have not been recorded in the
        accompanying financial statements.
 F-19
 
 On
        May
        10, 2005, the Company raised $6.9 million from the issuance and sale of 69,000
        shares of Series E Convertible Preferred Stock ("Series E Preferred Stock").
        The
        Series E Preferred Stock has a stated value of $100 per share. Each share
        of the
        Series E Preferred Stock may be converted by the holder into 50 shares of
        common
        stock, subject to adjustment, and will automatically be converted into common
        stock at that rate upon the date that the average of the daily market prices
        of
        the Company’s common stock for the 20 consecutive trading days preceding such
        date exceeds $6.00 per share. The Series E Preferred Stock pays no dividends
        and
        contains voting rights equal to the number of shares of common stock into
        which
        each share of Series E Preferred Stock is convertible. Upon liquidation of
        the
        Company, the holders of the Series E Preferred Stock are entitled to $100
        per
        share.
  Common
        Stock-
 
 During
        2003, the Company issued 2,764,612 shares of its common stock to a group
        of
        institutional investors, which resulted in the Company receiving $28,805,091
        after expenses. Also in 2003, outstanding options and warrants were exercised
        resulting in the issuance of 1,318,190 shares of common stock and the receipt
        of
        $6,994,115 by the Company.
 
 During
        2004, the Company issued 2,000,000 shares of its common stock to an
        institutional investor, which resulted in the Company receiving $6,380,000
        after
        expenses. Also in 2004, outstanding warrants were exercised resulting in
        the
        issuance of 72,553 shares of common stock and the receipt of $229,688 by
        the
        Company.
 
 Warrants -
 
 As
        of
        December 31, 2005, the Company had warrants outstanding for the purchase
        of
        725,000 shares of common stock. Information on outstanding warrants is as
        follows:
 
 Exercise
                Price4.81
              
              
              200,0005.85
              
              
              100,0007.50
              
              
              75,0008.35
              
              
              350,000725,000
 
 
 During
        2001, a warrant to purchase 350,000 shares of common stock at an exercise
        price
        of $8.35 was issued pursuant to an employment agreement with the Company’s
        President and Chief Executive Officer. A warrant to purchase 100,000
        shares of common stock at an exercise price of $5.85 per share were issued
        to an
        officer and director of the Company. As of December 31, 2005, 725,000 warrants
        were exercisable.
  F-20
  Stock
        Option Plans -
 
 All
        employees, officers, directors and consultants of the Company or any subsidiary
        were eligible to participate in the Columbia Laboratories, Inc. 1988 Stock
        Option Plan, as amended (the "Plan"). Under the Plan, a total of 5,000,000
        shares of common stock were authorized for issuance upon exercise of the
        options. As of October 1996, no further options were granted pursuant to
        this
        Plan.
 
 In
        October 1996, the Company adopted the 1996 Long-term Performance Plan
        (“Performance Plan”) which provides for the grant of stock options, stock
        appreciation rights and restricted stock to certain designated employees
        of the
        Company, non-employee directors of the Company and certain other persons
        performing significant services for the Company as designated by the
        Compensation/Stock Option Committee of the Board of Directors. The
        stock
        options have a maximum term of ten years after the date of grant and generally
        vest fully after four years. Pursuant
        to the Performance Plan, an aggregate of 8,000,000 shares of common stock
        have
        been reserved for issuance.
  A
        summary
        of the status of the Company’s two stock option plans as of December 31, 2005,
        2004 and 2003 and changes during the years ending on those dates is presented
        below:
 2005
                
                2004
                
                2003Weighted-
                
                
                
                Weighted-
                
                
                
                Weighted-Average
                
                
                
                Average
                
                
                
                AverageExercise
                
                
                
                Exercise
                
                
                
                ExerciseShares
                
                Price
                
                Shares
                
                Price
                
                Shares
                
                PriceOutstanding
                    at beginning of year
                
                
                5,479,400
                
                $
                8.73
                
                
                6,087,050
                
                $
                8.57
                
                
                6,783,143
                
                $
                8.23Granted
                
                
                969,880
                
                
                2.56
                
                
                852,400
                
                
                4.51
                
                
                667,175
                
                
                6.04Exercised
                
                
                (2,850
                )
                
                2.90
                
                
                —
                
                
                —
                
                
                (1,260,268
                )
                
                5.39Forfeited
                
                
                (492,705
                )
                
                7.89
                
                
                (1,460,050
                )
                
                5.60
                
                
                (103,000
                )
                
                8.47Outstanding
                    at end of year
                
                
                5,953,725
                
                
                7.80
                
                
                5,479,400
                
                
                8.73
                
                
                6,087,050
                
                
                8.57Options
                    exercisable at year end
                
                
                4,645,938
                
                
                
                
                
                4,141,314
                
                
                
                
                
                4,628,000
 
 F-21
 The
        following table summarizes information about stock options outstanding at
        December 31, 2005:
 Options
                      Outstanding
                  
                  Options
                      ExercisableWeighted-Average
                  Weighted-
                  
                  
                  Weighted-Range
                      of
                  
                  Number
                  Remaining
                  Average
                  
                  Number
                  AverageExercise
                  
                  Outstanding
                  Contractual
                  Exercise
                  
                  Exercisable
                  ExercisePrices
                  
                  at
                      December 31, 2005
                  Life
                      (Years)
                  Price
                  
                  at
                      December 31, 2005
                  Price$1.91
                      - $3.83
                  
                  1,613,750
                  7.95
                  $2.84
                  
                  754,125
                  $2.99$4.05
                      - $7.90
                  
                  1,915,475
                  6.20
                  5.51
                  
                  1,482,313
                  5.74$8.06
                      - $12.13
                  
                  1,334,500
                  2.40
                  11.02
                  
                  1,319,500
                  11.02$14.00
                      - $18.63
                  
                  1,090,000
                  1.18
                  15.22
                  
                  1,090,000
                  15.22$1.91
                      - $18.63
                  
                  5,953,725
                  4.90
                  7.80
                  
                  4,645,938
                  9.02
 
 (6)
        LOSS PER COMMON AND POTENTIAL COMMON SHARE:
 
 The
        calculation of basic and diluted loss per common and potential common share
        is
        as follows:
 2005
                
                2004
                
                2003Net
                    loss
                
                $
                (9,307,136
                )
                $
                (25,129,624
                )
                $
                (21,151,019
                )Less:
                    Preferred stock dividends
                
                
                (162,500
                )
                
                (162,500
                )
                
                (178,125
                )Net
                    loss applicable tocommon
                    stock
                
                $
                (9,469,636
                )
                $
                (25,292,124
                )
                $
                (21,329,144
                )Basic
                    and dilutedWeighted-average
                    number ofcommon
                    shares outstanding
                
                
                41,752,422
                
                
                40,984,083
                
                
                37,440,270Basic
                    and diluted net loss percommon
                    share
                
                $
                (0.23
                )
                $
                (0.62
                )
                $
                (0.57
                )
  7)
        COMMITMENTS AND CONTINGENCIES:
 
 Cash
        and cash equivalents-
 
 The
        Company maintains its cash in bank deposit accounts which, at times, may
        exceed
        federally insured limits. The Company believes that there is no credit risk
        with
        respect to these accounts.
 F-22
 
 Leases -
 
 The
        Company leases office space, apartments and office equipment under noncancelable
        operating leases. Lease expense for each of the three years ended December
        31,
        2005, 2004 and 2003 totaled $265,620, $355,055 and $392,222, respectively.
        Future minimum lease payments as of December 31, 2005 are as
        follows:
 
 2006
              
              $
              221,0912007
              
              
              139,5862008
              
              
              16,753$
              377,430
 
 Royalties -
 
 In
        1989,
        the Company purchased the assets of Bio-Mimetics, Inc. which consisted of
        the
        patents underlying the Company's Bioadhesive Delivery System, other patent
        applications and related technology, for $2,600,000, in the form of 9%
        convertible debentures which were converted into 500,000 shares of common
        stock
        during 1991, and $100,000 in cash. In addition, Bio-Mimetics, Inc. receives
        a
        royalty equal to 2% of the net sales of products based on the Bioadhesive
        Delivery System up to an aggregate amount of $7,500,000. The royalty payments
        are payable over the life of the patent(s) which are specific to each product
        or
        fifteen years, whichever is longer. In addition, beginning in March 1995,
        the
        Company agreed to prepay a portion of the remaining royalty obligation if
        certain conditions are met. The Company may not assign the patents underlying
        the Bioadhesive Delivery System without the prior written consent of
        Bio-Mimetics, Inc. until the aggregate royalties have been paid. Royalty
        expense
        under this agreement amounted to $405,798, $339,706 and $444,933 in 2005,
        2004
        and 2003, respectively.
 
 In
        June
        2002, as part of the settlement of litigation between Serono and the Company,
        the Company acquired the right to market a second brand of its 8% and 4%
        progesterone gel products under the trade name “Prochieve ® ”
to
        obstetricians, gynecologists and all other physicians in the United States
        that
        are not on Serono’s list of fertility specialists. Under this agreement the
        Company is required to pay a 30% royalty to Serono based on net sales of
        the
        products and an additional royalty of 40% of Prochieve ® net
        sales to the infertility specialist market.
 
 Geographic
        Area of Operations-
 
 Included
        in the Company’s Consolidated Balance sheet at December 31, 2005 and 2004 are
        the net assets of the Company’s subsidiaries located in Bermuda, France and the
        United Kingdom that total approximately $9.3 million and $15.1 million,
        respectively.
 
 Employment
        Agreements -
 
 In
        March
        2001, the Company entered into a three-year employment agreement with an
        individual to serve as President and Chief Executive Officer of the Company.
        Pursuant to his employment agreement, the employee is entitled to a base
        salary
        of $450,000 per year plus a minimum 10% bonus. Additionally, the employee
        was
        granted options to purchase 500,000 shares of the Company’s common stock at an
        exercise price of $5.85 per share and a warrant to purchase 350,000 shares
        of
        the Company’s common stock at an exercise price of $8.35 per share. The options
        and warrants vest ratably over a four-year period. In March 2004, the Company
        entered into a new three-year employment agreement with the employee to serve
        as
        President and Chief Executive Officer of the Company. Pursuant to his employment
        agreement, the employee is entitled to a base salary of $500,000 per year
        plus a
        target fifty percent bonus. Additionally, the employee was granted options
        to
        purchase 50,000 shares of the Company’s common stock at an exercise price of
        $4.05 per share. On January 5, 2006, the employee resigned his position as
        of
        February 4, 2006.
 F-23
 
 In
        February 2005, the Company entered into a two-year employment agreement with
        an
        individual to serve as Senior Vice President-Operations and Chief Operating
        Officer of the Company. Pursuant to his employment agreement, the employee
        is
        entitled to a base salary of $300,000 per year plus a target 40% bonus. In
        addition, the employee was granted a signing bonus and is entitled to certain
        payments upon the completion of certain milestones. Additionally, the employee
        was granted options to purchase 175,000 shares of the Company’s common stock at
        an exercise price of $2.05 per share. The options vest ratably over a four-year
        period. On January 5, 2006, the employee was promoted to President and Chief
        Operating Officer, and on March 6, 2006, he was promoted to President and
        Chief
        Executive Officer.
  Legal
        Proceedings -
 
 In
        August
        2001, Ares Trading S.A. (“Serono”) filed a lawsuit in the Supreme Court of the
        State of New York (the “Action”) naming the Company as defendant. The Action set
        forth claims for an alleged breach of contract for failure to supply
        Crinone ® in
        accordance with the supply agreement between the parties. In November 2001,
        the
        Company filed counterclaims against Serono. In June 2002, the Company reached
        a
        settlement with Serono. The
        companies agreed to release all claims against each other in Serono’s suit
        against the Company and the Company’s counterclaims against Serono. Under the
        terms of the settlement, Columbia has rights to market a second brand of
        its 8%
        and 4% progesterone gel products under the trade name “Prochieve ® to
        obstetricians, gynecologists and all other physicians in the United States
        that
        are not on Serono’s list of fertility specialists. As part of the settlement,
        Columbia gave Ares a note for $3.96 million, which was paid in full in March
        2003.
 
 Claims
        and lawsuits have been filed against the Company from time to time. Although
        the results of pending claims are always uncertain, the Company does not
        believe
        the results of any such actions, individually or in the aggregate, will have
        a
        material adverse effect on the Company’s financial position or results of
        operation. Additionally, the Company believes that it has adequate reserves
        or
        adequate insurance coverage in respect of these claims, but no assurance
        can be
        given as to the sufficiency of such reserves or insurance in the event of
        any
        unfavorable outcome resulting from these actions. It is the policy of management
        to disclose the amount or range of reasonably possible losses in excess of
        recorded amounts.
  
 (8)
        RELATED PARTY TRANSACTIONS :
 
 During
        1993, the Company loaned an individual, who was an officer, director and
        stockholder of the Company, an aggregate of $110,350. These notes, bearing
        interest at 10% per annum and due on or before December 7, 1997, were
        subsequently extended through December 7, 1999. On June 30, 2003, the notes
        and
        accrued interest totaling $216,637 were paid in full by transferring, to
        the
        Company, Columbia stock valued at $193,235 and $23,402 in cash.
 F-24
 
 (9)
        GEOGRAPHIC INFORMATION AND CUSTOMER CONCENTRATION:
 
 Geographic
        Information-
 
 The
        Company and its subsidiaries are engaged in one line of business, the
        development, licensing and sale of pharmaceutical products. The following
        table
        shows selected information by geographic area:
 (Loss)
                    profit from
                
                IdentifiableRevenues
                
                Operations
                
                AssetsAs
                    of and for the yearended
                    December 31, 2005-United
                    States
                
                $
                10,970,046
                
                $
                (12,528,650
                )
                $
                5,426,684Europe
                
                
                11,070,796
                
                
                5,297,969
                
                
                9,304,866$
                22,040,842
                
                $
                (7,230,681
                )
                $
                14,731,550As
                    of and for the yearended
                    December 31, 2004-United
                    States
                
                $
                11,236,330
                
                $
                (22,733,040
                )
                $
                14,207,833Europe
                
                
                6,624,074
                
                
                761,136
                
                
                15,060,535$
                17,860,404
                
                $
                (21,971,904
                )
                $
                29,268,368As
                    of and for the yearended
                    December 31, 2003-United
                    States
                
                $
                13,573,723
                
                $
                (20,156,126
                )
                $
                33,196,720Europe
                
                
                8,841,305
                
                
                573,953
                
                
                9,557,929$
                22,415,028
                
                $
                (19,582,173
                )
                $
                42,754,649
  F-25
  Customer
        Concentration-
 
 The
        following table presents information about Columbia’s revenues by customer,
        including royalty and license revenue:
 2005
                
                2004
                
                2003Ares-Serono
                
                $
                9,765,387
                
                $
                8,512,147
                
                $
                8,655,947Lil'
                    Drug Store Products, Inc.
                
                
                6,906,358
                
                
                3,565,760
                
                
                3,281,034Cardinal
                    Healthcare
                
                
                1,773,811
                
                
                1,419,962
                
                
                3,296,865McKesson
                
                
                1,620,188
                
                
                1,218,438
                
                
                2,890,998All
                    others (none over 5%)
                
                
                1,975,098
                
                
                3,144,097
                
                
                4,290,184$
                22,040,842
                
                $
                17,860,404
                
                $
                22,415,028
  (10)
        QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
 
 The
        following table summarizes selected quarterly data for the years ended December
        31, 2005 and 2004:
 
 First
              
              Second
              
              Third
              
              Fourth
              
              FullQuarter
              
              Quarter
              
              Quarter
              
              Quarter
              
              Year2005Net
                  sales
              
              $
              3,354,172
              
              $
              5,320,388
              
              $
              5,504,230
              
              $
              4,051,218
              
              $
              18,230,008Fee
                  income and other income
              
              
              926,405
              
              
              1,013,457
              
              
              1,029,712
              
              
              841,260
              
              
              3,810,834Gross
                  profit
              
              
              2,463,572
              
              
              4,088,410
              
              
              4,143,828
              
              
              3,233,535
              
              
              13,929,345Loss
                  from operations
              
              
              (3,553,014
              )
              
              (958,944
              )
              
              (649,653
              )
              
              (2,069,070
              )
              
              (7,230,681
              )Net
                  loss
              
              
              (4,214,707
              )
              
              (1,590,036
              )
              
              (1,281,942
              )
              
              (2,220,451
              )
              
              (9,307,136
              )Basic
                  and diluted lossper
                  common share
              
              
              (0.10
              )
              
              (0.04
              )
              
              (0.03
              )
              
              (0.05
              )
              
              (0.23
              )2004Net
                  sales
              
              $
              3,910,450
              
              $
              3,703,056
              
              $
              4,129,864
              
              $
              2,595,833
              
              $
              14,339,203Fee
                  income and other income
              
              
              629,229
              
              
              960,902
              
              
              962,955
              
              
              968,115
              
              
              3,521,201Gross
                  profit
              
              
              2,854,483
              
              
              2,846,283
              
              
              2,910,679
              
              
              1,460,358
              
              
              10,071,803Loss
                  from operations
              
              
              (5,562,880
              )
              
              (5,323,902
              )
              
              (5,219,876
              )
              
              (5,865,246
              )
              
              (21,971,904
              )Net
                  loss
              
              
              (6,254,829
              )
              
              (6,603,280
              )
              
              (5,981,839
              )
              
              (6,289,676
              )
              
              (25,129,624
              )Basic
                  and diluted lossper
                  common share
              
              
              (0.16
              )
              
              (0.16
              )
              
              (0.14
              )
              
              (0.15
              )
              
              (0.62
              )
  (1)
        2005
        second quarter net sales reflect a provision for product returns amounting
        to
        $1.6 million.
 F-26
 
 (2)
        2004
        fourth quarter net sales include sales returns for Prochieve ® 8% of
        $1.4 million plus an additional provision for returns of approximately
        $900,000.
 
 
 (11)
        SUBSEQUENT EVENT:
 
 On
        March
        10, 2006, the Company entered into a Securities Purchase Agreement, with
        certain
        investors for the private placement of 7,428,220 shares of the Company’s common
        stock, par value $.01 per share (the “Shares”), at a price of $4.04 per share
        and warrants to purchase 1,857,041 shares of common stock (the “Warrants”). The
        Company expects gross proceeds from the sale of the Shares will be
        approximately $30 million. The Warrants are exercisable for common stock
        of the
        Company at $5.39 per share beginning 180 days from the date they are issued,
        which is expected to occur on or about March 15, 2006, and expiring 5 years
        thereafter. The exercise price and number of shares issuable upon exercise
        are
        subject to adjustment in the event of stock split, stock dividend,
        recapitalization, reclassification, combination or exchange of shares,
        reorganization, liquidation, dissolution, consolidation, or merger. Under
        the
        terms of the Securities Purchase Agreement, the Company has agreed to file,
        within 30 days, a registration statement with the Securities and Exchange
        Commission to register for resale the Shares and the shares of common stock
        issuable upon the exercise of the Warrants, which registration statement
        is
        required under the Securities Purchase Agreement to become effective within
        120
        days following the closing. The Company will be required to pay certain cash
        penalties if it does not meet its registration obligations under the Securities
        Purchase Agreement.
 
 
  F-27
  
 COLUMBIA
        LABORATORIES, INC. AND SUBSIDIARIES
 
 
 INDEX
        TO FINANCIAL STATEMENT SCHEDULE
 
 
 PageReport
                  of Independent Registered Accounting Firm
              F-29Schedule
                  II-Valuation and Qualifying Accounts
              F-30
 
 
  F-28
  REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  
 To
        the
        Board of Directors and Stockholders
 of
        Columbia Laboratories, Inc.:
  We
        have
        audited in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the financial statements of Columbia
        Laboratories, Inc. and Subsidiaries for each of the three years in the period
        ended December 31, 2005 included in this Form 10-K and have issued our report
        thereon dated February 24, 2006, except for the Liquidity paragraph of Note
        1
        and Note 11, as to which the date is March 10, 2006. Our audits were made
        for
        the purpose of forming an opinion on the basic financial statements taken
        as a
        whole. Schedule II is the responsibility of the Company's management and
        is
        presented for purposes of complying with the Securities and Exchange
        Commission's rules and is not part of the basic financial statements. This
        schedule has been subjected to the auditing procedures applied in the audits
        of
        the basic financial statements and, in our opinion, fairly states in all
        material respects the financial data required to be set forth therein in
        relation to the basic financial statements taken as a whole.
 
 
 
 
 
 GOLDSTEIN
        GOLUB KESSLER LLP
 
 New
        York,
        New York
 February
        24, 2006
  F-29
  COLUMBIA
        LABORATORIES, INC. AND SUBSIDIARIES
 
 SCHEDULE
        II - VALUATION AND QUALIFYING ACCOUNTS
 
 FOR
        THE THREE YEARS ENDED DECEMBER 31, 2005
 Charged
                    toBalance
                    at
                
                (credited
                    to)
                
                
                
                Balancebeginning
                
                costs
                    and
                
                
                
                at
                    endDescription
                
                of
                    year
                
                expenses
                
                Deductions
                    (A)
                
                of
                    yearYEAR
                  ENDED DECEMBER 31, 2005:Allowance
                    for doubtful accounts
                
                $
                86,114
                
                $
                187,962
                
                $
                224,076
                
                $
                50,000YEAR
                    ENDED DECEMBER 31, 2004:Allowance
                    for doubtful accounts
                
                $
                120,000
                
                $
                48,917
                
                $
                82,803
                
                $
                86,114YEAR
                    ENDED DECEMBER 31, 2003:Allowance
                    for doubtful accounts
                
                $
                30,000
                
                $
                133,509
                
                $
                43,509
                
                $
                120,000
     (A)
          Deductions represent the write-off of uncollectible accounts
  F-30
  **EXHIBIT
        INDEX**
 **Exhibit
        Numbers**
 3.1
                --
                Restated
                    Certificate of Incorporation of the Company, as amended33/3.2
                --
                Amended
                    and Restated By-laws of Company10/4.1
                --
                Certificate
                    of Designations, Preferences and Rights of Series C Convertible
                    Preferred
                    Stock of the Company, dated as of January 7, 199910/4.2
                --
                Securities
                    Purchase Agreement, dated as of January 7, 1999, between the
                    Company and
                    each of the purchasers named on the signature pages thereto10/4.3
                --
                Securities
                    Purchase Agreement, dated as of January 19, 1999, among the Company,
                    David
                    M. Knott and Knott Partners, L.P.10/4.4
                --
                Securities
                    Purchase Agreement, dated as of February 1, 1999, between the
                    Company and
                    Windsor Partners, L.P.10/4.5
                --
                Registration
                    Rights Agreement, dated as of January 7, 1999, between the Company
                    and
                    each of the purchasers named on the signature pages thereto10/4.6
                --
                Form
                    of Warrant to Purchase common stock10/4.7
                --
                Warrant
                    to Purchase common stock granted to James J. Apostolakis on September
                    23,
                    19994.8
                --
                Certificate
                    of Designations of Series E Convertible Preferred Stock, filed
                    May 10,
                    2005 with the Delaware Secretary of State30/10.1
                --
                Employment
                    Agreement dated as of January 1, 1996, between the Company and
                    Norman M.
                    Meier6/*10.2
                --
                Employment
                    Agreement dated as of January 1, 1996, between the Company and
                    William J.
                    Bologna6/*10.3
                --
                1988
                    Stock Option Plan, as amended, of the Company4/10.4
                --
                1996
                    Long-term Performance Plan, as amended, of the Company7/10.5
                --
                License
                    and Supply Agreement between Warner-Lambert Company and the Company
                    dated
                    December 5, 19913/10.6
                --
                Asset
                    Purchase, License and Option Agreement, dated November 22,
                    19891/10.7
                --
                Employment
                    Agreement dated as of April 15, 1997, between the Company and
                    Nicholas A.
                    Buoniconti8/*10.8
                --
                License
                    and Supply Agreement for Crinone®between Columbia Laboratories, Inc. (Bermuda) Ltd. and American
                    Home
                    Products dated as of May 21, 19955/10.9
                --
                Addendum
                    to Employment Agreement dated as of September 1, 1997, between
                    the Company
                    and Norman M. Meier8/*10.10
                --
                Addendum
                    to Employment Agreement dated as of September 1, 1997, between
                    the Company
                    and William J. Bologna8/*10.11
                --
                Addendum
                    to Employment Agreement dated as of September 1, 1997, between
                    the Company
                    and Nicholas A. Buoniconti8/*10.12
                --
                Convertible
                    Note Purchase Agreement, 7 1/8% Convertible Subordinated Note
                    due March
                    15, 2005 and Registration Rights Agreement all dated as of March
                    16, 1998
                    between the Company and SBC Warburg Dillon Read Inc.9/10.13
                --
                Termination
                    Agreement dated as of April 1, 1998 between the Company and the
                    Warner-Lambert Company9/10.14
                --
                Addendum
                    to Employment Agreement dated as of October 8, 1998, between
                    the Company
                    and Nicholas A. Buoniconti.10/*
 10.15
                --
                Agreement
                    dated as of December 14, 1998, by and among Columbia Laboratories,
                    Inc.,
                    William J. Bologna, Norman M. Meier, James J. Apostolakis, David
                    Ray,
                    Bernard Marden, Anthony R. Campbell, David M. Knott and Knott
                    Partners,
                    L.P.10/10.16A
                --
                License
                    and Supply Agreement by an between the Company and Mipharm S.p.A.
                    dated
                    March 5, 199911/10.16B
                --
                License
                    and Supply Agreement forCrinone®between Columbia Laboratories (Bermuda) Limited and Ares Trading
                    S.A.
                    dated as of May 20, 199912/10.17
                --
                Addendum
                    to Employment Agreement dated as of January 1, 2000 between the
                    Company
                    and Norman M. Meier12/*10.18
                --
                Addendum
                    to Employment Agreement dated as of January 1, 2000 between the
                    Company
                    and William J. Bologna12/*10.19
                --
                Employment
                    Agreement dated as of January 1, 2000 between the Company and
                    James J.
                    Apostolakis12/*10.20
                --
                Employment
                    Agreement dated December 30, 1999 between the Company and Dominique
                    de
                    Ziegler12/*
  
  10.21
                --
                Settlement
                    Agreement and Release dated as of March 16, 2000 between Columbia
                    Laboratories (Bermuda) Ltd. and Lake Consumer Products, Inc.12/10.22
                --
                Replens®Purchase and License Agreement dated April 18, 2000, between
                    the Company
                    and Lil’ Drug Store Products, Inc.13/10.23
                --
                License
                    Agreement dated April 18, 2000, between the Company and Lil’ Drug Store
                    Products, Inc.13/10.24
                --
                Distribution
                    Agreement dated April 18, 2000, between the Company and Lil’ Drug Store
                    Products, Inc.13/10.25
                --
                Stock
                    Purchase Agreement, dated January 31, 2001, between the Company
                    and
                    Ridgeway Investment Limited14/10.26
                --
                Amended
                    and Restated common stock Purchase Agreement by and between the
                    Company
                    and Acqua Wellington North American Equities Fund, Ltd., effective
                    as of
                    February 6, 2001.15/10.27
                --
                Employment
                    Agreement dated March 16, 2001 between the Company and G. Frederick
                    Wilkinson16/*10.28
                --
                Stock
                    Purchase Agreement, dated May 10, 2001, between the Company and
                    Ridgeway
                    Investment Limited17/10.29
                --
                Stock
                    Purchase Agreement, dated July 23, 2001, between the Company
                    and Ridgeway
                    Investment Limited18/10.30
                --
                Rights
                    Agreement dated as of March 13, 2002, by and between Columbia
                    Laboratories, Inc. and First Union National Bank, as Rights
                    Agent19/10.31†
                --
                Semi-Exclusive
                    Supply Agreement dated May 7, 2002 between the Company and Mipharm
                    S.p.A.20/10.32†
                --
                Amended
                    and Restated License and Supply Agreement dated June 4, 2002
                    between
                    theCompany and Ares Trading S.A.20/10.33†
                --
                Marketing
                    License Agreement dated June 4, 2002 between the Company and
                    Ares Trading
                    S.A. and Serono, Inc.20/10.34†
                --
                Master
                    Services Agreement dated July 31, 2002 between the Company and
                    Innovex
                    LP20/10.35†
                --
                Stock
                    Purchase Agreement dated July 31, 2002 By and Between Columbia
                    Laboratories, Inc. and PharmaBio Development Inc.20/10.36†
                --
                Investment
                    and Royalty Agreement dated July 31, 2002 between the Company
                    and
                    PharmaBio Development Inc.20/10.37†
                --
                License
                    and Supply Agreement dated October 16, 2002 between the Company
                    and Ardana
                    Bioscience Limited21/10.38†
                --
                Development
                    and License Agreement dated December 26, 2002 between the Company
                    and
                    Ardana Bioscience Limited21/10.39
                --
                Amendment
                    No. 1 to the Amended and Restated common stock Purchase Agreement
                    by and
                    between the Company and Acqua Wellington North American Equities
                    Fund,
                    Ltd., effective as of January 31, 200321/
 10.40†
                --
                Investment
                    and Royalty Agreement dated March 5, 2003 between the Company
                    and
                    PharmaBio Development Inc.21/10.41†
                --
                Sales
                    Force Work Order #8872 pursuant to the Master Services Agreement
                    having an
                    Effective Date of July 31, 2002, between the Company and Innovex
                    LP21/10.42
                --
                Separation
                    and Consulting Agreement dated April 15, 2003 between the Company
                    and
                    William J. Bologna22/10.43†
                --
                License
                    and Supply Agreement Dated May 27, 2003 between the Company and
                    Mipharm
                    S.p.A.23/10.44
                --
                Standstill
                    Agreement dated December 1, 2003 between the Company and Perry
                    Corp.24/10.45†
                --
                Amended
                    and Restated Sales Force Work Order #8795 And Termination of
                    Work Order
                    #8872 pursuant to the Master Services Agreement having an effective
                    date
                    of January 26, 2004 between the Company and Innovex25/10.46
                --
                Form
                    of Indemnification Agreement for Officers and Directors25/10.47
                --
                Form
                    of Executive Change of Control Severance Agreement25/10.48
                --
                Employment
                    Agreement dated as of March 16, 2004 between the Company and
                    G. Frederick
                    Wilkinson26/*10.49†
                --
                Asset
                    Purchase Agreement Dated June 29, 2004, between the Company and
                    Lil’ Drug
                    Store Products, Inc.27/10.50†
                --
                Supply
                    Agreement dated June 29, 2004, between the Company and Lil’ Drug Store
                    Products, Inc.27/10.51†
                --
                Professional
                    Promotion Agreement dated June 29, 2004, between the Company
                    and Lil’ Drug
                    Store Products, Inc.27/10.52
                --
                Letter
                    Agreement and General Release of Claims, effective as of December
                    31,
                    2004, between Columbia Laboratories, Inc. and James J.
                    Apostolakis28/10.53
                --
                Employment
                    Agreement dated as of February 25, 2005 between the Company and
                    Robert S.
                    Mills29/*10.54
                --
                Columbia
                    Laboratories Inc. Incentive Plan, 200429/*10.55
                --
                Description
                    of the Registrant’s compensation and reimbursement practices for
                    non-employee directors31/10.56
                --
                Preferred
                    Stock Purchase Agreement, dated as of May 10, 2005, among Columbia
                    Laboratories,Inc., Perry Partners L.P. and Perry Partners International,
                    Inc.30/
  
  10.57
                --
                Columbia
                    Laboratories Inc. Incentive Plan32/10.58
                --
                2005
                    base salaries and incentive bonus targets for the Registrant’s executive
                    officers32/14
                --
                Code
                    of Ethics of the Company25/21
                --
                Subsidiaries
                    of the Company33/23
                --
                Consent
                    of Goldstein Golub Kessler LLP33/31(i).1
                --
                Certification
                    of Chief Executive Officer of the Company33/31(i).2
                --
                Certification
                    of Chief Financial Officer of the Company33/32.1
                --
                Certification
                    of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                    as adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.33/32.2
                --
                Certification
                    of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                    as adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.33/99.1
                --
                Schedule
                    Identifying Series E Convertible Preferred Stock Purchase agreements
                    Omitted30/*
                
                Management
                    contract or compensatory plan or arrangement required to be filed
                    as an
                    exhibit to this form pursuant to item 601 of Regulation
                    S-K.†
                
                Confidential
                    treatment has been requested with respect to certain portions
                    of this
                    exhibit. Omitted portions have been filed separately with the
                    SEC.1/
                
                Incorporated
                    by reference to the Registrant's Registration Statement on Form
                    S-1 (File
                    No. 33-31962) declared effective on May 14,
                    1990.
  2/
                
                Incorporated
                    by reference to the Registrant's Annual Report on Form 10-K for
                    the year
                    ended December 31, 1990.3/
                
                Incorporated
                    by reference to the Registrant's Current Report on Form 8-K,
                    filed on
                    January 2, 1992.4/
                
                Incorporated
                    by reference to the Registrant's Annual Report on Form 10-K for
                    the year
                    ended December 31, 1993.5/
                
                Incorporated
                    by reference to the Registrant's Registration Statement on Form
                    S-1 (File
                    No. 33-60123) declared effective August 28, 1995.6/
                
                Incorporated
                    by reference to the Registrant's Annual Report on Form 10-K for
                    the year
                    ended December 31, 1995.7/
                
                Incorporated
                    by reference to the Registrant's Proxy Statement dated May 10,
                    2000.8/
                
                Incorporated
                    by reference to the Registrant’s Annual Report on Form 10-K for the year
                    ended December 31, 1997.9/
                
                Incorporated
                    by reference to the Registrant’s Quarterly Report on Form 10-Q for the
                    quarter ended March 31, 1998.10/
                
                Incorporated
                    by reference to the Registrant’s Annual Report on Form 10-K for the year
                    ended December 31, 1998.11/
                
                Incorporated
                    by reference to the Registrant’s Quarterly Report on Form 10-Q for the
                    quarter ended March 31, 1999.12/
                
                Incorporated
                    by reference to the Registrant’s Annual Report on Form 10-K for the year
                    ended December 31, 199913/
                
                Incorporated
                    by reference to the Registrant’s Quarterly Report on Form 10-Q for the
                    quarter ended June 30, 2000.
  
  14/
                
                Incorporated
                    by reference to the Registrant’s Current Report on Form 8-K, dated January
                    31, 2001.15/
                
                Incorporated
                    by reference to the Registrant’s Registration Statement on Form S-3 (File
                    No. 333-38230) declared effective May 7, 2001.16/
                
                Incorporated
                    by reference to the Registrant’s Current Report on Form 8-K, dated March
                    16, 2001.17/
                
                Incorporated
                    by reference to the Registrant’s Current Report on Form 8-K, dated May 10,
                    2001.18/
                
                Incorporated
                    by reference to the Registrant’s Current Report on Form 8-K, dated July
                    23, 2001.19/
                
                Incorporated
                    by reference to the Registrant’s Current Report on Form 8-K, dated March
                    12, 2002.20/
                
                Incorporated
                    by reference to the registrant’s Quarterly Report on Form 10-Q dated
                    August 14, 2002.21/
                
                Incorporated
                    by reference to the Registrant’s Annual Report on Form 10-K for the year
                    ended December 31, 200222/
                
                Incorporated
                    by reference to the registrant’s Quarterly Report on Form 10-Q dated May
                    14, 2003.
  23/
                
                Incorporated
                    by reference to the registrant’s Quarterly Report on Form 10-Q dated
                    August 14, 2003.24/
                
                Incorporated
                    by reference to the Registrant’s Current Report on Form 8-K, dated
                    December 1, 2003.25/
                
                Incorporated
                    by reference to the Registrant’s Annual Report on Form 10-K for the year
                    ended December 31, 200326/
                
                Incorporated
                    by reference to the Registrant’s Quarterly Report on Form 10-Q dated May
                    10, 2004.27/
                
                Incorporated
                    by reference to the Registrant’s Quarterly Report on Form 10-Q dated
                    August 4, 2004.28/
                
                Incorporated
                    by reference to the Registrant’s Current Report on Form 8-K, dated January
                    3, 2005.29/
                
                Incorporated
                    by reference to the Registrant’s Current Report on Form 8-K, dated March
                    1, 2005.30/
                
                Incorporated
                    by reference to the Registrant’s Current Report on Form 8-K, dated May 12,
                    2005.31/
                
                Incorporated
                    by reference to the Registrant’s Current Report on Form 8-K, dated April
                    11, 2005.32/
                
                Incorporated
                    by reference to the Registrant’s Current Report on Form 8-K, dated May 20,
                    2005.33/
                
                Filed
                    herewith.