**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C** **.
      20549**





**FORM
      10-Q**





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





For
      the
      quarterly period ended June 30, 2006





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
              incorporation
                or organization)
            (I.R.S.
                Employer
              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**





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





Number
      of
      shares of Common Stock of Columbia Laboratories, Inc. issued and outstanding
      as
      of August 3, 2006: 49,667,288








**PART
      1 - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





The
      following unaudited, condensed consolidated financial statements of Columbia
      Laboratories, Inc. (“Columbia” or the “Company”) have been prepared in
      accordance with the instructions to Form 10-Q and, therefore, omit or condense
      certain footnotes and other information normally included in financial
      statements prepared in accordance with generally accepted accounting principles.
      In the opinion of management, all adjustments (consisting only of normal
      recurring accruals) necessary for a fair presentation of the financial
      information for the interim periods reported have been made. Results of
      operations for the three and six months ended June 30, 2006 are not necessarily
      indicative of the results for the year ending December 31, 2006 . It
      is
      suggested that these financial statements be read in conjunction with the
      financial statements and related disclosures for the year ended December 31,
      2005 included in the Company’s Annual Report on Form 10-K filed with the
      Securities and Exchange Commission (the “SEC”).


Page
          2


COLUMBIA
      LABORATORIES, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED BALANCE SHEETS


June
                  30, 2006
              
              December
                    31,2005(Unaudited)ASSETSCurrent
                  assets-Cash
                  and cash equivalents
              
              $
              22,003,677
              
              $
              7,136,854Accounts
                  receivable, net
              
              
              3,794,605
              
              
              4,020,019Inventories
              
              
              1,768,756
              
              
              1,821,433Prepaid
                  expenses and other current assets
              
              
              724,575
              
              
              625,908Total
                  current assets
              
              
              28,291,613
              
              
              13,604,214Property
                  and equipment, net
              
              
              878,884
              
              
              1,002,580Other
                  assets
              
              
              120,204
              
              
              124,756TOTAL
                  ASSETS
              
              $
              29,290,701
              
              $
              14,731,550LIABILITIES
                  AND STOCKHOLDERS' EQUITY (DEFICIENCY)Current
                  liabilities-Current
                  portion of financing agreements
              
              $
              754,611
              
              $
              12,840,161Accounts
                  payable
              
              
              1,763,166
              
              
              1,905,381Accrued
                  expenses
              
              
              2,303,628
              
              
              2,329,475Total
                  current liabilities
              
              
              4,821,405
              
              
              17,075,017Deferred
                  revenue
              
              
              4,535,920
              
              
              4,058,327Long-term
                  portion of financing agreements
              
              
              10,235,635
              
              
              8,747,743TOTAL
                  LIABILITIES
              
              
              19,592,960
              
              
              29,881,087Stockholders'
                  equity (deficiency)-Preferred
                  stock, $.01 par value; 1,000,000 shares authorized:Series
                  B Convertible Preferred Stock, 130 shares issued andoutstanding
                  in 2006 and 2005
              
              
              1
              
              
              1Series
                  C Convertible Preferred Stock, 3,250 shares issuedand
                  outstanding in 2006 and 2005
              
              
              32
              
              
              32Series
                  E Convertible Preferred Stock, 69,000 shares issuedand
                  outstanding in 2006 and 2005
              
              
              690
              
              
              690Common
                  stock, $.01 par value; 100,000,000 authorized;49,653,303
                  and 41,754,784 shares issued and outstanding in2006
                  and 2005, respectively
              
              
              496,533
              
              
              417,548Capital
                  in excess of par value
              
              
              205,308,479
              
              
              175,340,023Accumulated
                  deficit
              
              
              (196,308,891
              )
              
              (191,084,974
              )Accumulated
                  other comprehensive income
              
              
              200,897
              
              
              177,143TOTAL
                  STOCKHOLDERS' EQUITY (DEFICIENCY)
              
              
              9,697,741
              
              
              (15,149,537
              )TOTAL
                  LIABILITIES AND STOCKHOLDERS'EQUITY
                  (DEFICIENCY)
              
              $
              29,290,701
              
              $
              14,731,550




See
      notes
      to condensed consolidated financial statements


Page
          3


COLUMBIA
      LABORATORIES, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


Six
                  Months Ended
              
              Three
                  Months EndedJune
                  30,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005NET
                  REVENUES
              
              $
              10,068,490
              
              $
              10,614,422
              
              $
              5,523,113
              
              $
              6,333,845COST
                  OF REVENUES
              
              
              4,182,007
              
              
              4,062,440
              
              
              2,303,739
              
              
              2,245,435Gross
                  profit
              
              
              5,886,483
              
              
              6,551,982
              
              
              3,219,374
              
              
              4,088,410OPERATING
                  EXPENSES:Selling
                  and distribution
              
              
              3,239,490
              
              
              5,000,396
              
              
              1,739,511
              
              
              2,101,793General
                  and administrative
              
              
              3,348,796
              
              
              3,522,722
              
              
              1,761,146
              
              
              1,696,964Research
                  and development
              
              
              3,370,370
              
              
              2,540,822
              
              
              1,643,753
              
              
              1,248,597Total
                  operating expenses
              
              
              9,958,656
              
              
              11,063,940
              
              
              5,144,410
              
              
              5,047,354Loss
                  from operations
              
              
              (4,072,173
              )
              
              (4,511,958
              )
              
              (1,925,036
              )
              
              (958,944
              )OTHER
                  INCOME (EXPENSE):Interest
                  income
              
              
              355,899
              
              
              86,399
              
              
              255,404
              
              
              40,561Interest
                  expense
              
              
              (1,216,470
              )
              
              (1,365,966
              )
              
              (545,479
              )
              
              (625,353
              )Other,
                  net
              
              
              (291,173
              )
              
              (13,218
              )
              
              (262,484
              )
              
              (46,300
              )(1,151,744
              )
              
              (1,292,785
              )
              
              (552,559
              )
              
              (631,092
              )Net
                  loss
              
              $
              (5,223,917
              )
              $
              (5,804,743
              )
              $
              (2,477,595
              )
              $
              (1,590,036
              )NET
                  LOSS PER COMMON SHARE:Basic
                  and diluted
              
              $
              (0.11
              )
              $
              (0.14
              )
              $
              (0.05
              )
              $
              (0.04
              )WEIGHTED
                  AVERAGE NUMBER OFCOMMON
                  SHARES OUTSTANDING:Basic
                  and diluted
              
              
              46,467,128
              
              
              41,751,934
              
              
              49,555,297
              
              
              41,751,934




See
      notes
      to condensed consolidated financial statements


Page
          4





COLUMBIA
      LABORATORIES, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS


(Unaudited)


Six
                  Months Ended
              
              Three
                  Months EndedJune
                  30,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005NET
                  LOSS
              
              $
              (5,223,917
              )
              $
              (5,804,743
              )
              $
              (2,477,595
              )
              $
              (1,590,036
              )Other
                  comprehensive loss:Foreign
                  currency translation, net of tax
              
              
              23,754
              
              
              (58,235
              )
              
              16,629
              
              
              (33,324
              )Comprehensive
                  loss
              
              $
              (5,200,163
              )
              $
              (5,862,978
              )
              $
              (2,460,966
              )
              $
              (1,623,360
              )





See
      notes
      to condensed consolidated financial statements


Page
          5


COLUMBIA
      LABORATORIES, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


( Uaudited)





Six
                Months Ended June 30,2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (5,223,917
            )
            $
            (5,804,743
            )Adjustments
                to reconcile net loss to netcash
                used in operating activities-Depreciation
                and amortization
            
            
            131,018
            
            
            155,055Provision
                for doubtful accounts
            
            
            55,855
            
            
            89,009Provision
                for returns and allowances
            
            
            620,868
            
            
            2,125,048Writedown
                of inventories
            
            
            349,722
            
            
            497,125Stock
                based compensation
            
            
            390,054
            
            
            —Interest
                expense on financing agreements
            
            
            1,206,910
            
            
            1,210,386Loss
                on partial extinguishment of financing agreement
            
            
            280,000
            
            
            —Loss
                on disposal of fixed asset
            
            
            2,178
            
            
            —Issuance
                of options for sales services
            
            
            —
            
            
            4,537Changes
                in assets and liabilities-(Increase)
                decrease in:Accounts
                receivable
            
            
            169,559
            
            
            (504,488
            )Inventories
            
            
            (297,045
            )
            
            (349,313
            )Prepaid
                expenses and other current assets
            
            
            (98,667
            )
            
            710,758Other
                assets
            
            
            4,552
            
            
            819Increase
                (decrease) in:Accounts
                payable
            
            
            (142,215
            )
            
            (1,300,498
            )Accrued
                expenses
            
            
            (913,350
            )
            
            (2,260,429
            )Deferred
                revenue
            
            
            477,593
            
            
            111,813Net
                cash used in operating activities
            
            
            (2,986,885
            )
            
            (5,314,921
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of property and equipment
            
            
            (9,500
            )
            
            (67,216
            )Net
                cash used in investing activities
            
            
            (9,500
            )
            
            (67,216
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from the issuance of common stock, net
            
            
            28,766,126
            
            
            —Proceeds
                from the issuance of preferred stock, net
            
            
            —
            
            
            6,900,000Payment
                of note payable
            
            
            —
            
            
            (10,000,000
            )Proceeds
                from exercise of options
            
            
            972,511
            
            
            —Payments
                pursuant to financing agreements
            
            
            (11,817,933
            )
            
            (2,193,544
            )Dividends
                paid
            
            
            (81,250
            )
            
            (81,250
            )Net
                cash provided by (used in) financing activities
            
            
            17,839,454
            
            
            (5,374,794
            )


EFFECT
                  OF EXCHANGE RATE CHANGES ON CASH
              
              
              23,754
              
              
              (58,127
              )NET
                  INCREASE (DECREASE) IN CASHAND
                  CASH EQUIVALENTS
              
              
              14,866,823
              
              
              (10,815,058
              )CASH
                  AND CASH EQUIVALENTS,Beginning
                  of period
              
              
              7,136,854
              
              
              19,781,591CASH
                  AND CASH EQUIVALENTS,End
                  of period
              
              $
              22,003,677
              
              $
              8,966,533




See
      notes to condensed consolidated financial
      statements




Page
          6





COLUMBIA
      LABORATORIES, INC. AND SUBSIDIARIES





NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





(1)
      SIGNIFICANT ACCOUNTING POLICIES :





The
      accounting policies followed for quarterly financial reporting are the same
      as
      those disclosed in Note (1) of the Notes to Consolidated Financial Statements
      included in the Company's Annual Report on Form 10-K for the fiscal year ended
      December 31, 2005.




On
      January 1, 2006, the Company adopted Statement of Financial Accounting
      Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”)
      which requires the measurement and recognition of compensation expense for
      all
      stock-based awards made to employees and directors including employee stock
      options based on estimated fair values. SFAS 123(R) supersedes previous
      accounting under Accounting Principles Board Opinion No. 25, “Accounting
      for Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal year
      2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB
      107”) providing supplemental implementation guidance for SFAS 123(R). The
      Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).





SFAS
      123(R) requires companies to estimate the fair value of stock-based awards
      on
      the date of grant using an option pricing model. The value of the portion of
      the
      award that is ultimately expected to vest is recognized as expense over the
      requisite service periods in the Company’s Consolidated Statements of
      Operations. The Company adopted SFAS 123(R) using the modified prospective
      transition method which requires the recognition of expense relative to
      existing, unvested awards from January 1, 2006. The Company’s Condensed
      Consolidated Financial Statements, as of and for the three and six months ended
      June 30, 2006, reflect the impact of SFAS 123(R). Employee stock-based
      compensation expense for the three and six months ended June 30, 2006, was
      $288,997 and $390,054, respectively, which in each case consisted primarily
      of
      stock-based compensation expense related to employee stock options recognized
      under SFAS 123(R).




Prior
      to
      the adoption of SFAS 123(R), the Company accounted for stock-based awards
      to employees and directors using the intrinsic value method in accordance with
      APB 25 as allowed under Statement of Financial Accounting Standards
      No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the
      intrinsic value method, no stock-based compensation expense for employee stock
      options had been recognized in the Company’s Consolidated Statements of
      Operations, because the exercise price of the Company’s stock options granted to
      employees and directors equaled the fair market value of the underlying stock
      at
      the date of grant. In accordance with the modified prospective transition method
      the Company used in adopting SFAS 123(R), the Company’s results of operations
      prior to fiscal year 2006 have not been restated to reflect, and do not include,
      the possible impact of SFAS 123(R).




Stock-based
      compensation expense recognized during a period is based on the value of the
      portion of stock-based awards that is ultimately expected to vest. Stock-based
      compensation expense recognized in the three and six months ended June 30,
      2006 included compensation expense for stock-based awards granted prior to,
      but
      not yet vested as of December 31, 2005, based on the fair value on the
      grant date estimated in accordance with the pro forma provisions of SFAS 123,
      and compensation expense for the stock-based awards granted or modified
      subsequent to December 31, 2005, based on the fair value on the grant date
      estimated in accordance with the provisions of SFAS 123(R). In conjunction
      with
      the adoption of SFAS 123(R), the Company is continuing to use the straight
      line
      single-option method of attributing the value of stock-based compensation
      expense. Compensation expense for all stock-based awards granted prior to
      January 1, 2006 will be recognized using the straight line single-option
      approach, and compensation expense for all stock-based awards granted subsequent
      to December 31, 2005, will also be recognized using the straight line
      single-option method. Because stock-based compensation expense to be recognized
      in the results for periods beginning after December 31, 2005, is based on awards
      ultimately expected to vest, the amounts will be reduced for estimated
      forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
      grant and revised, if necessary, in subsequent periods if actual forfeitures
      differ from those estimates. Prior to 2006, the Company accounted for
      forfeitures as they occurred for the purposes of pro forma information under
      SFAS 123, as disclosed in the Notes to Consolidated Financial Statements for
      the
      related periods.


Page
          7




(2)
      INVENTORIES:





Inventories
      consisted of the following:


June
                  30,
              
              December
                  31,2006
              
              2005Finished
                  goods
              
              $
              1,269,303
              
              $
              1,165,413Raw
                  materials
              
              
              499,453
              
              
              656,020$
              1,768,756
              
              $
              1,821,433


(3)
      FINANCING AGREEMENTS:





In
      an
      agreement dated July 31, 2002, Quintiles Transnational Corp.’s strategic
      investment group, PharmaBio Development, Inc. (“PharmaBio”) agreed to pay the
      Company $4.5 million 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%. $193,846 and $172,291 were recorded as interest expense for the three
      months ended June 30, 2006 and June 30, 2005, respectively, and $381,036 and
      $320,168 were recorded as interest expense for the six months ended June 30,
      2006 and June 30, 2005, respectively. The Company has paid PharmaBio $3,291,759
      under this agreement through June 30, 2006.





In
      an
      agreement dated March 5, 2003 (the “Striant Agreement”), PharmaBio agreed to pay
      the Company $15
      million in five quarterly installments commencing 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 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 minimum
      ($30 million) and maximum ($55 million) amounts. Because
      the minimum amount exceeds the $15 million received by the Company, 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 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%. $490,203 and $453,062 were
      recorded as interest expense for the three months ended June 30, 2006 and June
      30, 2005, respectively, and $974,004 and $890,218 were recorded as interest
      expense for the six months ended June 30, 2006 and June 30, 2005,
      respectively.  The
      agreement called for a true-up payment on November 14, 2006 equal to the
      difference between royalties paid through and for the third quarter of 2006
      and
      $13,000,000. On April 14, 2006, the Company entered into a letter agreement
      (the
“Letter Agreement”) with PharmaBio pursuant to which the Company agreed to pay
      approximately $12 million of the true-up payment seven months early.
      Accordingly, on April 14, 2006, the Company paid PharmaBio $11,585,235 (the
      “Early Payment”), which was the present value of a November 14, 2006 $12 million
      true-up payment using a six percent (6%) annual discount factor. In
      consideration of such payment, PharmaBio agreed that PharmaBio will be deemed
      (solely for purposes of the Striant Agreement) to have received on account
      of
      that payment $12 million for purposes of the true-up payment. In the event
      that,
      as of the payment date for the true-up payment, the aggregate amount of
      royalties paid under the Striant Agreement, including the Early Payment, exceed
      $13 million, the Company will be entitled to have such excess reimbursed.
      Although the Company paid and will record approximately $415,000 less in
      interest expense during 2006 due to this early payment, for accounting purposes,
      the payment resulted in a non cash loss of approximately $280,000 during the
      second quarter of 2006. Including the Early Payment, the
      Company has paid PharmaBio $12,712,346 through June 30, 2006.


Page
          8


Long
      term
      liabilities from financing agreements consisted of the
      following:


June
                  30,
              
              December
                  31,2006
              
              2005July
                  31, 2002 financing agreement
              
              $
              3,416,463
              
              $
              3,242,607March
                  5, 2003 financing agreement
              
              
              7,573,783
              
              
              18,345,29710,990,246
              
              
              21,587,904Less:
                  current portion
              
              
              754,611
              
              
              12,840,161$
              10,235,635
              
              $
              8,747,743


Page
          9


(4)
      GEOGRAPHIC INFORMATION:





The
      Company and its subsidiaries are engaged in one line of business, the
      development and sale of pharmaceutical products, medical devices, and cosmetics.
      The following table shows selected unaudited information by geographic
      area:


Net
                          Revenues
              
              Profit
                      (Loss)
                        from
                      Operations
              
              Identifiable AssetsAs
                  of and for the six monthsended
                  June 30, 2006-United
                  States
              
              $
              5,016,298
              
              $
              (6,066,893
              )
              $
              21,350,900Europe
              
              
              5,052,192
              
              
              1,994,720
              
              
              7,939,801$
              10,068,490
              
              $
              (4,072,173
              )
              $
              29,290,701As
                  of and for the six monthsended
                  June 30, 2005-United
                  States
              
              $
              5,161,006
              
              $
              (7,141,356
              )Europe
              
              
              5,453,416
              
              
              2,629,398$
              10,614,422
              
              $
              (4,511,958
              )As
                  of and for the three monthsended
                  June 30, 2006-United
                  States
              
              $
              2,964,606
              
              $
              (2,975,544
              )Europe
              
              
              2,558,507
              
              
              1,050,508$
              5,523,113
              
              $
              (1,925,036
              )As
                  of and for the three monthsended
                  June 30, 2005-United
                  States
              
              $
              3,431,639
              
              $
              (2,659,739
              )Europe
              
              
              2,902,206
              
              
              1,700,795$
              6,333,845
              
              $
              (958,944
              )


Page
          10


(5)
      INCOME (LOSS) PER COMMON AND POTENTIAL COMMON SHARE:





The
      calculation of basic and diluted loss per common and potential common share
      is
      as follows:




Six
                  Months Ended
              
              Three
                  Months EndedJune
                  30,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005Net
                  loss
              
              $
              (5,223,917
              )
              $
              (5,804,743
              )
              $
              (2,477,595
              )
              $
              (1,590,036
              )Less:
                  Preferred stock dividends
              
              
              (81,250
              )
              
              (81,250
              )
              
              (40,625
              )
              
              (40,625
              )Net
                  loss applicable tocommon
                  stock
              
              $
              (5,305,167
              )
              $
              (5,885,993
              )
              $
              (2,518,220
              )
              $
              (1,630,661
              )Basic
                  and diluted:Weighted
                  average number ofcommon
                  shares outstanding
              
              
              46,467,128
              
              
              41,751,934
              
              
              49,555,297
              
              
              41,751,934Basic
                  and diluted net loss per common share
              
              $
              (0.11
              )
              $
              (0.14
              )
              $
              (0.05
              )
              $
              (0.04
              )




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 periods. 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. Shares to be issued upon the
      exercise of the outstanding options and warrants or the conversion of the
      preferred stock excluded from the calculation amounted to 11,821,413 and
      11,278,475 at June 30, 2006 and 2005, respectively.





(6)
      LEGAL PROCEEDINGS:





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
      operations. 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.





(7)
      STOCK-BASED COMPENSATION:




On
      January 1, 2006, the Company adopted SFAS 123(R) using the modified
      prospective transition method. SFAS 123(R) requires the measurement and
      recognition of compensation expense for all stock-based awards made to the
      Company’s employees and directors including employee stock options and other
      stock-based awards based on estimated fair values.




Page
          11




The
      following table summarizes the impact of the adoption of SFAS 123(R) on
      stock-based compensation costs for employees on the Company’s Condensed
      Consolidated Statements of Operations for the three and six months ended
      June 30, 2006 and 2005:


Six
                  Months Ended
              
              Three
                  Months EndedJune
                  30,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005Employee
                  stock-based compensation in:Cost
                  of revenue
              
              $
              34,302
              
              $
              —
              
              $
              18,220
              
              $
              —Selling
                  and distribution
              
              
              35,343
              
              
              —
              
              
              19,511
              
              
              —General
                  and administrative
              
              
              262,306
              
              
              —
              
              
              217,526
              
              
              —Research
                  and development
              
              
              58,103
              
              
              —
              
              
              33,740
              
              
              —Total
                  employee stock-based compensationin
                  operating expenses
              
              
              355,752
              
              
              —
              
              
              270,777
              
              
              —Total
                  employee stock-based compensation
              
              $
              390,054
              
              $
              —
              
              $
              288,997
              
              $
              —




No
      tax
      benefit has been recognized due to net losses during the periods
      presented.




The
      table
      below reflects net loss and net loss per share for the three and six months
      ended June 30, 2006, compared with the pro forma information for the three
      and six months ended June 30, 2005 reflecting the impact of stock-based
      compensation as if accounted for under SFAS 123(R):


Six
                  Months Ended
              
              Three
                  Months EndedJune
                  30,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005(pro
                  forma)
              
              
              
              (pro
                  forma)Net
                  loss, before stock-based compensationfor
                  employees, prior period
              
              $
              (5,223,917
              )
              $
              (5,804,743
              )
              $
              (2,477,595
              )
              $
              (1,590,036
              )Less:
                  Stock-based employee compensation includedin
                  the determination of net loss as reported
              
              
              390,054
              
              
              
              
              
              288,997Add:
                  Stock-based compensation expense foremployees
                  determined under fair-value based method
              
              
              (390,054
              )
              
              (941,012
              )
              
              (288,997
              )
              
              (268,707
              )Net
                  loss, after effect of stock-based compensationfor
                  employees
              
              $
              (5,223,917
              )
              $
              (6,745,755
              )
              $
              (2,477,595
              )
              $
              (1,858,743
              )Net
                  loss per share:Basic
                  and diluted - as reported in prior year
              
              $
              (0.11
              )
              $
              (0.14
              )
              $
              (0.05
              )
              $
              (0.04
              )Basic
                  and diluted - after effect of stock-basedcompensation
                  for employees
              
              $
              (0.11
              )
              $
              (0.16
              )
              $
              (0.05
              )
              $
              (0.05
              )


Page
          12


As
      of
      June 30, 2006, total unamortized stock-based compensation cost related to
      non-vested stock options was $1,542,043 which is expected to be recognized
      over
      the remaining vesting period of the outstanding options, up to the next 47
      months. The Company selected the Black-Scholes option pricing model as the
      most
      appropriate model for determining the estimated fair value for stock-based
      awards. The use of the Black-Scholes model requires the use of extensive actual
      employee exercise behavior data and the use of a number of complex assumptions
      including expected volatility, risk-free interest rate, and expected dividends.




The
      assumptions used to value options granted are as follows:


Six
                  Months Ended
              
              Three
                  Months EndedJune
                  30,
              
              June
                  30,2006
              
              2005
              
              2006
              
              2005Risk
                  free interest rate
              
              
              5.03
              %
              
              4.02
              %
              
              5.03
              %
              
              3.89
              %Expected
                  term
              
              
              4.75
                  years
              
              
              6.69
                  years
              
              
              4.75
                  years
              
              
              6.25
                  yearsDividend
                  yield
              
              
              0.0
              
              
              0.0
              
              
              0.0
              
              
              0.0Expected
                  volatility
              
              
              62.55
              %
              
              81.92
              %
              
              62.55
              %
              
              81.81
              %




The
      Company estimated the volatility of the Company’s stock based on historical
      volatility in accordance with guidance in SFAS 123(R) and SAB 107. The risk-free
      interest rate assumption is based upon observed interest rates appropriate
      for
      the term of the employee stock options. The dividend yield assumption is based
      on our history and expectation of dividend payouts.





Generally,
      stock options granted under the Company’s 1996 Long-term Performance Plan (“1996
      Plan”) prior to January 1, 2006 have a contractual term of ten years from
      the date of grant, and stock options granted under the 1996 Plan on or
      after January 1, 2006 are expected to have a contractual term of seven
      years from the date of grant. Options generally vest over a four-year period,
      with 25% vesting on each of the first four anniversaries of the date of grant.
      The Company’s general policy is to issue new shares upon the exercise of stock
      options. Pursuant
      to the 1996 Plan, an aggregate of 8,000,000 shares of common stock have been
      reserved for issuance.




The
      expected term of employee stock options represents the weighted-average period
      that employees are expected to hold the options before exercise. The Company
      derived the expected term assumption based on the Company’s historical
      settlement experience, while giving consideration to options that have life
      cycles less than the contractual terms and vesting schedules in accordance
      with
      guidance in SFAS 123(R) and SAB 107. Prior to the adoption of SFAS
      123(R), the Company used historical settlement experience to derive the expected
      term for the purposes of pro forma information under SFAS 123, as disclosed
      in
      the Notes to the Company’s Consolidated Financial Statements for the related
      periods.


Page
          13




A
      summary
      of the Company’s stock option activity and related activity for the three and
      six months ended June 30, 2006 is as follows:


Six
                  Months Ended
              
              Three
                  Month EndedJune
                  30, 2006
              
              June
                  30, 2006Number
                      of
                    Shares
              
              Weighted
                          Average
                          Price
                            Per
                          Share
              
              Number
                      of
                    Shares
              
              Weighted
                        Average
                        Price
                          Per
                        ShareOutstanding
                  at beginning of period
              
              
              5,960,525
              
              $
              7.79
              
              
              5,408,922
              
              $
              8.07Options
                  granted
              
              
              275,500
              
              $
              4.34
              
              
              275,500
              
              $
              4.34Options
                  exercised
              
              
              (312,424
              )
              $
              3.11
              
              
              (229,046
              )
              $
              3.11Options
                  forfeited or expired
              
              
              (1,065,474
              )
              $
              5.60
              
              
              (597,249
              )
              $
              5.76Outstanding
                  at June 30, 2006
              
              
              4,858,127
              
              $
              8.37
              
              
              4,858,127
              
              $
              8.37




The
      weighted average grant date fair values of options granted was $2.44 per share
      during the three and six and months ended June 30, 2006 and $2.01 and $1.86
      per share during the three and six months ended June 30, 2005, respectively.




The
      following table summarizes the range of exercise prices and the weighted average
      prices for options outstanding, options exercisable and unvested options at
      June
      30, 2006:


Options
                  Outstanding
              
              Options
                  Exercisable
              
              Unvested
                  OptionsRange
                      of Exercise Prices
              
              Number
                    Outstanding
                      at
                    June
                      30, 2006
              
              Weighted-
                        Average
                        Remaining
                        Contractual
                        Life
                          (Years)
              
              Weighted-
                      Average
                      Exercise
                      Price
              
              Number
                    Exercisable
                      at
                    June
                      30, 2006
              
              Weighted-
                      Average
                      Exercise
                      Price
              
              Number
                    Unvested
                      at
                    June
                      30, 2006
              
              Weighted-
                      Average
                      Exercise
                        Price$1.91
                  - $3.83
              
              
              1,164,277
              
              
              6.75
              
              $
              2.79
              
              
              741,134
              
              $
              2.92
              
              
              423,143
              
              $
              2.56$4.05
                  - $7.90
              
              
              1,394,350
              
              
              6.20
              
              
              5.21
              
              
              892,076
              
              
              5.57
              
              
              502,274
              
              
              4.57$8.25
                  - $12.13
              
              
              1,209,500
              
              
              1.82
              
              
              11.24
              
              
              1,194,500
              
              
              11.24
              
              
              15,000
              
              
              10.68$14.00
                  - $18.63
              
              
              1,090,000
              
              
              0.68
              
              
              15.22
              
              
              1,090,000
              
              
              15.22
              
              
              —
              
              
              0.00$1.91
                  - $18.63
              
              
              4,858,127
              
              
              4.00
              
              
              8.37
              
              
              3,917,710
              
              
              9.48
              
              
              940,417
              
              
              3.76




The
      aggregate intrinsic value of options outstanding and options exercisable at
      June
      30, 2006 is $798,986 and $419,890, respectively.




During
      the first six months of 2006, cash received from the exercise of options was
      $972,511.


Page
          14




Restricted
      stock grants consist of the Company’s common stock. The Board set a two or four
      year vesting period for most of the issued restricted shares. The fair value
      of
      each restricted share grant is equal to the market price of the Company’s common
      stock at the date of grant. Expense relating to restricted shares is amortized
      ratably over the vesting period.




A
      summary
      of the Company’s restricted stock activity and related information for the three
      and six months ended June 30, 2006 is as follows:


Six
                  Months Ended
              
              Three
                  Months EndedJune
                  30, 2006
              
              June
                  30, 2006Shares
              
              Weighted-
                    Average
                      Grant
                    Date
                      Fair Value
              
              Shares
              
              Weighted-
                    Average
                      Grant
                    Date
                      Fair ValueUnvested
                  at beginning of period
              
              
              —
              
              $
              —
              
              
              70,000
              
              $
              4.70Granted
              
              
              157,875
              
              $
              4.49
              
              
              87,875
              
              $
              4.33Vested
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —Forfeited
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —Unvested
                  at June 30, 2006
              
              
              157,875
              
              $
              4.49
              
              
              157,875
              
              $
              4.49


(8)
      RECENT ACCOUNTING PRONOUNCEMENTS:





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
      interpretation of FASB Statement No. 109 (“FIN 48”), which provides criteria for
      the recognition, measurement, presentation and disclosure of uncertain tax
      positions. A tax benefit from an uncertain position may be recognized only
      if it
      is “more likely than not” that the position is sustainable based on its
      technical merits. The provisions of FIN 48 are effective for fiscal years
      beginning after December 15, 2006. We no not expect FIN 48 will have a material
      effect on our consolidated financial condition or results of
      operations.




(9)
      SALE OF COMMON STOCK:




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
      gross proceeds from the sale of the Shares were approximately $30 million.
      The
      Warrants are exercisable for common stock of the Company at $5.39 per share
      beginning on September 9, 2006, and expiring on March 11, 2011. The exercise
      price and number of shares issuable upon exercise of the Warrants 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. Pursuant to the Securities
      Purchase Agreement, the Company filed with the SEC, within 30 days, a
      registration statement to register for resale the Shares and the shares of
      common stock issuable upon the exercise of the Warrants. This registration
      statement was declared effective on April 14, 2006.


Page
          15


**Item
      2. 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. MD&A is provided as
      a supplement to, and should be read in conjunction with, our financial
      statements and the accompanying notes thereto.




We
      are in
      the business of developing, manufacturing and selling pharmaceutical products
      that treat various medical conditions, as well as similar products that may
      be
      classified for regulatory purposes as medical devices or cosmetics. 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, and a desmopressin buccal product for the treatment of
      nocturnal enuresis in children.




All
      of
      our products and product candidates utilize our novel, proprietary Bioadhesive
      Delivery System (“BDS”), which consists principally of a polymer (polycarbophil)
      and, for pharmaceutical products, 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.




Over
      the
      last few years we have laid a foundation for the Company’s long-term growth. We
      established marketing partnerships and forged 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,
      notably Prochieve 8% for the prevention of preterm birth in women at-risk for
      this condition while advancing the development of new product candidates. Our
      focus in fiscal 2006 is to build on this foundation and execute well in key
      areas.





**Results
      of Operations - Six Months Ended June 30, 2006 versus Six Months Ended June
      30,
      2005**





Net
      revenues decreased 5% in the six months ended June 30, 2006 to $10.1 million
      as
      compared to $10.6 million in the six months ended June 30, 2005. Net revenues
      in
      the six-month period ended June 30, 2005 reflect a provision for product returns
      amounting to $2.1 million. During the 2005 period, the Company re-evaluated
      its
      estimate for product returns to take into consideration additional factors
      related to inventory and return practices of its primary trade customers. 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 Ares Trading S.A. (“Serono”) on a worldwide
                basis;


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


Page
          16





·
            Replens®
                Vaginal Moisturizer sold to Lil’ Drug Store Products, Inc. (“Lil’ Drug
                Store”) ex-U.S.;


·
            RepHresh®
                Vaginal Gel sold to Lil’ Drug Store on a worldwide basis;
                and,


·
            Royalty
                and licensing revenues.




Promoted
      Products are:




·
            Prochieve®
                8%, Prochieve 4% and Striant 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 and RepHresh® Vaginal Gell, which Lil’ Drug Store pays
                us promotion fees to present to
                OB/GYNs.





Revenues
      from promoted products decreased 5% to $2.9 million in the six months ended
      June
      30, 2006 as compared to $3.1 million in the six months ended June 30, 2005,
      primarily as a result of a decrease in sales of Striant and the Prochieve line
      of products, reflecting the trend among wholesalers to reduce their inventory
      levels of pharmaceutical products to a one-to-two month supply.





Revenues
      from partnered products decreased 5% to $7.1 million in the six months ended
      June 30, 2006 as compared to $7.5 million in the six months ended June 30,
      2005,
      primarily as a result of the reduction in orders of RepHresh by one of our
      marketing partners. The higher level of orders of RepHresh in the six months
      ended June 30, 2005 reflected that marketing partner’s orders to support its
      launch of the product.





Gross
      profit as a percentage of revenues was 58% in the six months ended June 30,
      2006
      and 62% in the six months ended June 30, 2005. The
      4%
      decrease in gross profit percentage from 2005 to 2006 was the result of a lower
      effective rate on royalties paid to Serono in the 2005 period. Under the
      Company’s Prochieve marketing sublicense, the Company is obligated to pay Serono
      a royalty equal to 30% of net sales on
      all
      Prochieve sales. This amounted to approximately $431,000 and $3,000 for the
      six
      months ended June 30, 2006 and June 30, 2005, respectively. The lower royalty
      expense in 2005 resulted from the deduction of actual product returns in
      calculating net sales on which the royalty is based. The
      Company is also 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. This amounted to approximately $119,000 and $143,000
      for
      the six months ended June 30, 2006 and June 30, 2005, respectively. Both of
      these royalty payments are included in cost of revenues.





Selling
      and distribution expenses decreased 35% to $3.2 million in the six months ended
      June 30, 2006, as compared to $5.0 million in the six months ended June 30,
      2005. 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. The Company restructured its sales force
      in
      February 2005, reducing the number of salespeople, which is reflected in the
      2006 reduction in expense. Included in the 2006 expenses were sales force costs
      of approximately $1.7 million, product marketing expenses of approximately
      $569,000 and salary costs of approximately $244,000. Expenses in 2005 included
      approximately $2.9 million in sales force costs, approximately $768,000 in
      product marketing expenses and approximately $467,000 in salary
      costs.





General
      and administrative expenses 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 5% to $3.3 million in the six months ended June 30, 2006 as compared
      to $3.5 million in the six months ended June 30, 2005. The reduction in 2006
      expenses is primarily the result in a decrease in salary expense ($587,000),
      offset by increases in insurance premiums ($164,000) and the 2006 expense for
      stock-based compensation ($262,000).


Page
          17


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 33% to $3.4 million in
      the
      six months ended June 30, 2006 as compared to $2.5 million in the six months
      ended June 30, 2005. The increase is primarily related to the higher costs
      associated with the Company’s ongoing Phase III trial for Prochieve® 8% in
      preventing preterm birth in pregnant women who are at-risk for this
      problem.





As
      a
      result, the net loss for the six months ended June 30, 2006 was $5.2 million
      or
      $(0.11) per common share as compared to the net loss for the six months ended
      June 30, 2005 of $5.8 million or $(0.14) per common share.





**Results
      of Operations - Three Months Ended June 30, 2006 versus Three Months Ended
      June
      30, 2005**





Net
      revenues decreased 13% in the three months ended June 30, 2006 to $5.5 million
      as compared to $6.3 million in the three months ended June 30, 2005. Net
      revenues in the second quarter of 2005 reflect a provision for product returns
      amounting to $1.6 million. During the 2005 quarter, the Company re-evaluated
      its
      estimate for product returns to take into consideration additional factors
      related to inventory and return practices of its primary trade
      customers.





Revenues
      from promoted products decreased 33% to $1.1 million in the three months ended
      June 30, 2006 as compared to $1.7 million in the three months ended June 30,
      2005, primarily as a result of a decrease in sales of Striant and the Prochieve
      line of products, reflecting the trend among wholesalers to reduce their
      inventory levels of pharmaceutical products to a one-to-two month supply.





Revenues
      from partnered products decreased 5% to $4.4 million in the three months ended
      June 30, 2006 as compared to $4.6 million in the three months ended June 30,
      2005, primarily as a result of the reduction in orders of RepHresh by one of
      our
      marketing partners. The higher level of orders of RepHresh in the 2005 quarter
      reflected that marketing partner’s orders to support its launch of the
      product.





Gross
      profit as a percentage of revenues was 58% in the three months ended June 30,
      2006 and 65% in the three months ended June 30, 2005. The
      7%
      decrease in gross profit percentage from 2005 to 2006 was the result of a change
      in product mix and a lower effective rate on royalties paid to Serono in the
      2005 period. Under the Company’s Prochieve marketing sublicense, the Company is
      obligated to pay Serono a royalty equal to 30% of net sales on
      all
      Prochieve sales. This amounted was approximately $67,000 and $158,000 for the
      three months ended June 30, 2006 and June 30, 2005, respectively. In 2005,
      the
      deduction of actual product returns in calculating net sales on which the
      royalty is based reduced the royalty expense by approximately $100,000. The
      Company is also 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. This amounted to approximately $63,000 and $65,000 for
      the three months ended June 30, 2006 and June 30, 2005, respectively. Both
      of
      these royalty payments are included in cost of revenues.





Selling
      and distribution expenses decreased 17% to $1.7 million in the three months
      ended June 30, 2006, as compared to $2.1 million in the three months ended
      June
      30, 2005. Included in the 2006 expenses were sales force costs of approximately
      $829,000, product marketing expenses of approximately $385,000 and salary costs
      of approximately $141,000. Expenses in 2005 included approximately $1.2 million
      in sales force costs, approximately $286,000 in product marketing expenses
      and
      approximately $195,000 in salary costs.


Page
          18


General
      and administrative expenses increased 4% to $1.8 million in the three months
      ended June 30, 2006 as compared to $1.7 million in the three months ended June
      30, 2005. The increase in 2006 expenses is primarily the result of the 2006
      expense for stock-based compensation ($218,000) and an increase in insurance
      premiums ($85,000) offset partially by reductions in salaries ($184,000) and
      professional fees ($86,000).





Research
      and development expenses increased 32% to $1.6 million in the three months
      ended
      June 30, 2006 as compared to $1.2 million in the three months ended June 30,
      2005. The increase is primarily related to the higher costs associated with
      the
      Company’s ongoing Phase III trial for Prochieve® 8% in preventing preterm
      delivery in pregnant women who are at-risk for this problem. There were 61
      study
      centers and 599 patients enrolled in the Prochieve preterm birth study at June
      30, 2006, compared to 33 study centers and 175 patients enrolled at June 30,
      2005.





As
      a
      result, the net loss for the three months ended June 30, 2006 was $2.5 million
      or $(0.05) per common share as compared to the net loss for the three months
      ended June 30, 2005 of $1.6 million or $(0.04) per common
      share.





**Liquidity
      and Capital Resources**





Cash
      and
      cash equivalents were $22,003,677 and $7,136,854 at June 30, 2006 and December
      31, 2005, respectively.





Cash
      provided by (used in) operating, investing and financing activities is
      summarized as follows:


Six
                  Months EndedJune
                  30,2006
              
              2005Cash
                  flows:Operating
                  activities
              
              $
              (2,986,885
              )
              $
              (5,314,921
              )Investing
                  activities
              
              
              (9,500
              )
              
              (67,216
              )Financing
                  activities
              
              
              17,839,454
              
              
              (5,374,794
              )





Operating
      Activities:





Net
      cash
      used in operating activities in 2006 resulted primarily from the net loss,
      net
      of non-cash items amounting to $2,187,312, a reduction in accrued expenses
      of
      approximately $913,000, related to customer usage of sales return credits and
      to
      a reduction in accrued salaries, an increase in inventory (primarily Prochieve
      manufactured in the second quarter of 2006) amounting to approximately $297,000
      and a decrease in accounts payable of approximately $142,000. These were
      partially offset by the receipt of milestone payments received from a licensee
      totaling $800,000.


Page
          19


Net
      cash
      used in operating activities in 2005 resulted primarily from the net loss,
      net
      of non-cash items amounting to $1,723,583, a reduction in accrued expenses
      of
      approximately $2,260,000, principally related to customer usage of sales return
      credits , an increase in accounts receivables of approximately $504,000
      resulting from increased second quarter 2005 sales, an increase in inventory,
      primarily related to Striant amounting to approximately $349,000 and a decrease
      in accounts payable of approximately $1,300,000. These were partially offset
      by
      a reduction in prepaid expense and other current assets of approximately
      $711,000 primarily as a result of a reduction in prepaid insurance.





Investing
      Activities:





Net
      cash
      used in investing activities in 2006 and 2005 was primarily attributable to
      the
      purchase of office equipment, including computers





Financing
      Activities:





Net
      cash
      provided by financing activities in 2006 resulted from the receipt of
      $28,766,126 in net proceeds from the issuance of common stock and $972,511
      from
      the exercise of stock options. Offsetting these receipts was the payment of
      $11,817,933 on the Company’s two product financing agreements (including an
      $11,585,235 true-up payment on the Striant Agreement and $81,250 in dividends
      paid to the owners of the Company’s Series C Convertible Preferred
      Stock.





Net
      cash
      used in financing activities in 2005 was attributable to the $10 million payoff
      of the subordinated convertible note due on March 15, 2005, $2,193,544 paid
      on
      the Company’s two product financing agreements with PharmaBio (including the
      $1,891,944 true-up payment on the women’s healthcare products financing
      agreement) and $81,250 in dividends paid to the owners of the Company’s Series C
      Convertible Preferred Stock. Offsetting these payments was the receipt by the
      Company of $6,900,000 in gross proceeds from the issuance of Series E
      Convertible Preferred Stock.





The
      Company has an effective registration statement that we filed with 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.





In
      connection with the 1989 purchase of the assets of Bio-Mimetics, Inc., which
      assets consisted of the patents underlying the Company’s BDS, other patent
      applications and related technology, the Company pays Bio-Mimetics, Inc. 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 maximum royalty
      obligation, in cash or stock at the option of the Company, within 30 days of
      March 2 of any year in which the closing price on that date of the Company’s
      common stock on any national securities exchange is $20 or more. Through June
      30, 2006, the Company has paid approximately $3.5 million in royalty
      payments.


Page
          20





As
      of
      June 30, 2006, the Company has outstanding exercisable options and warrants
      that, if exercised, would result in approximately $42.1 million of additional
      capital and would cause the number of shares outstanding to increase. However,
      there can be no assurance that any such options or warrants will be
      exercised.





Significant
      expenditures anticipated by the Company in the near future are concentrated
      on
      research and development related to new products and new indications for
      currently approved products. In addition, the Company anticipates it will spend
      approximately $50,000 on property and equipment in 2006.





As
      of
      June 30, 2006, the Company had available net operating loss carryforwards of
      approximately $135 million to offset its 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
      June
      30, 2006 and December 31, 2005, other assets in the accompanying consolidated
      balance sheets include deferred tax assets of approximately $48 and $45 million,
      respectively (comprised primarily of a net operating loss carryforward), for
      which a full valuation allowance has been recorded since the realizability
      of
      the deferred tax assets are not determinable.





**Contractual
      Obligations, Commercial Commitments and Off-Balance Sheet
      Arrangements**





The
      Company’s contractual obligations, commercial commitments and off-balance sheet
      arrangements disclosures in its Annual Report on Form 10-K for the year ended
      December 31, 2005 have not materially changed since that report was
      filed.





**Recent
      Accounting Pronouncements**





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
      interpretation of FASB Statement No. 109 (“FIN 48”), which provides criteria for
      the recognition, measurement, presentation and disclosure of uncertain tax
      positions. A tax benefit from an uncertain position may be recognized only
      if it
      is “more likely than not” that the position is sustainable based on its
      technical merits. The provisions of FIN 48 are effective for fiscal years
      beginning after December 15, 2006. We no not expect FIN 48 will have a material
      effect on our consolidated financial condition or results of
      operations.




**Critical
      Accounting Policies and Estimates**





The **** Company
      has identified the policies below as critical to its business operations and
      the
      understanding of its **** results
      of operations. 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 the Annual Report on Form 10-K for the year ended
      December 31, 2005, beginning on page F-11. Note that the preparation of this
      Quarterly Report on Form 10-Q requires the Company 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.





*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.


Page
          21




*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 are in excess of the amount to be received by the Company, the Company
      has recorded the money received as liabilities. The excess of the minimum to
      be
      paid by the Company over the amount received by the Company is being recorded
      as
      interest expense over the terms of the agreements.




*Stock-Based
      Compensation - Employee Stock-Based Awards.* On
      January 1, 2006, the Company adopted SFAS 123(R) which requires the
      measurement and recognition of compensation expense for all stock-based awards
      made to employees and directors including employee stock options based on
      estimated fair values. SFAS 123(R) supersedes previous accounting under APB
      25 for periods beginning in fiscal year 2006. In March 2005, the SEC issued
      SAB
      107 providing supplemental implementation guidance for SFAS 123(R). We have
      applied the provisions of SAB 107 in our adoption of SFAS 123(R).





SFAS
      123(R) requires companies to estimate the fair value of stock-based awards
      on
      the date of grant using an option pricing model. The value of the portion of
      the
      award that is ultimately expected to vest is recognized as expense over the
      requisite service periods in the Company’s Consolidated Statements of
      Operations. The Company adopted SFAS 123(R) using the modified prospective
      transition method which requires the application of the accounting standard
      starting from January 1, 2006. The Condensed Consolidated Financial
      Statements, as of and for the three and six months ended June 30, 2006,
      reflect the impact of SFAS 123(R). Stock-based compensation expense for the
      three and six months ended June 30, 2006, was $288,997 and $390,054,
      respectively, which in each case consisted primarily of stock-based compensation
      expense related to employee stock options recognized under SFAS
      123(R).




Prior
      to
      the adoption of SFAS 123(R), the Company accounted for stock-based awards
      to employees and directors using the intrinsic value method in accordance with
      APB 25 as allowed under Statement of Financial Accounting Standards
      No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the
      intrinsic value method, no stock-based compensation expense for employee stock
      options had been recognized in the Company’s Consolidated Statements of
      Operations, because the exercise price of our stock options granted to employees
      and directors equaled the fair market value of the underlying stock at the
      date
      of grant. In accordance with the modified prospective transition method the
      Company used in adopting SFAS 123(R), the results of operations prior to fiscal
      year 2006 have not been restated to reflect, and do not include, the possible
      impact of SFAS 123(R).




Stock-based
      compensation expense recognized during a period is based on the value of the
      portion of stock-based awards that is ultimately expected to vest. Stock-based
      compensation expense recognized in the three and six months ended June 30,
      2006 included compensation expense for stock-based awards granted prior to,
      but
      not yet vested as of December 31, 2005, based on the fair value on the
      grant date estimated in accordance with the pro forma provisions of SFAS 123,
      and compensation expense for the stock-based awards granted subsequent to
      December 31, 2005, based on the fair value on the grant date estimated in
      accordance with the provisions of SFAS 123(R). In conjunction with the adoption
      of SFAS 123(R), the Company is continuing to use the straight line single-option
      method of attributing the value of stock-based compensation expense.
      Compensation expense for all stock-based awards granted prior to January 1,
      2006 will continue to be recognized using the straight line single-option
      approach, while compensation expense for all stock-based awards granted
      subsequent to December 31, 2005, will also be recognized using the straight
      line single-option method. Because stock-based compensation expense to be
      recognized in the results for periods beginning after December 31, 2005, is
      based on awards ultimately expected to vest, the amounts will be reduced for
      estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
      the
      time of grant and revised, if necessary, in subsequent periods if actual
      forfeitures differ from those estimates. Prior to 2006, the Company accounted
      for forfeitures as they occurred for the purposes of pro forma information
      under
      SFAS 123, as disclosed in the Notes to Consolidated Financial Statements for
      the
      related periods.


Page
          22




Upon
      adoption of SFAS 123(R), the Company selected the Black-Scholes option pricing
      model as the most appropriate method for determining the estimated fair value
      for stock-based awards. The Black-Scholes model requires the use of highly
      subjective and complex assumptions which determine the fair value of stock-based
      awards, including the option’s expected term and the price volatility of the
      underlying stock.




Generally,
      stock options granted under the 1996 Plan prior to January 1, 2006 have a
      contractual term of ten years from the date of grant, and stock options granted
      under the 1996 Plan on or after January 1, 2006 are expected to have a
      contractual term of seven years from the date of grant.





**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**





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
      4. Controls And Procedures**





**Evaluation
      of Disclosure Controls and Procedures**




We
      maintain “disclosure controls and procedures,” as such term is defined in Rule
      13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
      Act”), that are designed to ensure that information required to be disclosed by
      us in reports that we file or submit under the Exchange Act is recorded,
      processed, summarized, and reported within the time periods specified in SEC
      rules and forms, and that such information is accumulated and communicated
      to
      our management, including our Chief Executive Officer and Chief Financial
      Officer, as appropriate, to allow timely decisions regarding required
      disclosure. In designing and evaluating our disclosure controls and procedures,
      management recognized that disclosure controls and procedures, no matter how
      well conceived and operated, can provide only reasonable, not absolute,
      assurance that the objectives of the disclosure controls and procedures are
      met.
      Additionally, in designing disclosure controls and procedures, our management
      necessarily was required to apply its judgment in evaluating the cost-benefit
      relationship of possible disclosure controls and procedures. The design of
      any
      disclosure controls and procedures also is based in part upon certain
      assumptions about the likelihood of future events, and there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions.


Page
          23




Based
      on
      their evaluation as of the end of the period covered by this Quarterly Report
      on
      Form 10-Q, our Chief Executive Officer and Chief Financial Officer have
      concluded that our disclosure controls and procedures were effective.





**Changes
      in Internal Control over Financial Reporting**




There
      was
      no change in our internal control over financial reporting that occurred during
      the period covered by this Quarterly Report on Form 10-Q that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.


Page
          24




**PART
      II - OTHER INFORMATION**





**Item
      1.**  **Legal
      Proceedings**





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 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 for any unfavorable outcome resulting
      from these actions.





**Item 1A.
      Risk Factors**





There
      have been no material changes to the factors disclosed in Item 1A. Risk Factors
      in our Annual Report on Form 10-K for the year ended December 31,
      2005.





**Forward-Looking
      Information**





From
      time
      to time, the Company and its representatives make written or verbal
      forward-looking statements, including statements contained in this and other
      filings with the SEC and in the Company’s reports to stockholders, which 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 clinical research programs, sales, earnings or other
      future financial performance and liquidity, product introductions, entry into
      new geographic regions and general views 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.





Although
      the Company believes that its expectations are based on reasonable assumptions
      within the bounds of its knowledge of its business and operations, there can
      be
      no assurance that actual results will not differ materially from its
      expectations. Factors
      that might cause future results to differ include, but are not limited to,
      the
      following: the successful marketing of Prochieve ® 8%,
      Prochieve ® 4% and
      Striant ® in the
      U.S.; whether Prochieve is dispensed to patients of physicians on Serono’s
      target list of fertility specialists at a rate of less than 10% the amount
      of
      Crinone ® dispensed to those patients as further described in the Company’s annual report
      on Form 10-K, the timing and size of orders for out-licensed products from
      our
      marketing partners; the timely and successful development of products; the
      timely and successful completion of clinical studies, including the Phase III
      study of Prochieve 8% in preventing preterm birth and vaginally-administered
      lidocaine studies; success in obtaining acceptance and approval of new products
      and indications for current products by the FDA and international regulatory
      agencies, including acceptance and approval of an indication for preventing
      preterm birth for Prochieve 8% from the FDA; the impact of competitive products
      and pricing; competitive economic and regulatory factors in the pharmaceutical
      and health care industry; general economic conditions; and other risks and
      uncertainties that may be detailed, from time to time, in the Company’s reports
      filed with the SEC . 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 Quarterly Report. Readers
      are advised to consult any further disclosures the Company may make on related
      subjects in subsequent Form 10-Q, 8-K, and 10-K reports to the
      SEC.


Page
          25


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





None.





**Item
      3.**  **Defaults
      upon Senior Securities**




None.





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





The
      Annual Meeting of shareholders was held on May 15, 2006. At the meeting:





1.
      Seven
      nominees for director were elected for one-year terms by a vote of shares as
      follows:





Valerie
      L. Andrews received 38,007,462 votes for her election (99.4% of shares voted;
      72.1% of shares outstanding) and 241,335 votes were withheld (0.6% of shares
      voted; 0 .5% of outstanding shares).





Edward
      A.
      Blechschmidt received 38,019,902 votes for his election (99.4% of shares voted;
      72.1% of shares outstanding) and 228,895 votes were withheld (0.6% of shares
      voted; 0 .4% of outstanding shares).





James
      S.
      Crofton received 38,024,412 votes for his election (99.4% of shares voted;
      72.1%
      of shares outstanding) and 224,385 votes were withheld (0.6% of shares voted;
      0.4% of outstanding shares).





Stephen
      Kasnet received 38,015,502 votes for his election (99.4% of shares voted; 72.1%
      of shares outstanding) and 233,295 votes were withheld (0.6% of shares voted;
      0.4% of outstanding shares).





Robert
      S.
      Mills, Jr. received 38,010,702 votes for his election (99.4% of shares voted;
      72.1% of shares outstanding) and 238,095 votes were withheld (0.6% of shares
      voted; 0.5% of outstanding shares).





Denis
      M.
      O’Donnell received 37,992,662 votes for his election (99.3% of shares voted;
      72.0% of shares outstanding) and 256,135 votes were withheld (0.7% of shares
      voted; 0.5% of outstanding shares).





Selwyn
      P.
      Oskowitz received 38,009,912 votes for his election (99.4% of shares voted;
      72.1% of shares outstanding) and 236,885 votes were withheld (0.6% of shares
      voted; 0.4% of outstanding shares).




2.
      The
      designation of Goldstein Golub Kessler LLP to audit the books and records of
      the
      Company for the year ending December 31, 2006 was ratified by a vote of 99.7%
      of
      shares voted (or 72.3% of outstanding shares).





For
            
            
            Against
            
            
            Abstain38,143,596
            
            
            32,358
            
            
            72,843





**Item
      5.**  **Other
      Information**





None.


Page
          26


**Item
      6.**  **Exhibits**





(a)
            Exhibits






10.60
            Employment
                Agreement by and between Columbia Laboratories, Inc. and Robert S.
                Mills
                dated March 30, 2006.1/10.61
            Employment
                Agreement by and between Columbia Laboratories, Inc. and Michael
                McGrane
                dated March 30, 2006.1/10.62
            Letter
                Agreement Supplement to Striant Investment and Royalty Agreement
                dated
                April 14, 2006.2/10.63
            Form
                of Restricted Stock Agreement.3/10.64
            Form
                of Option Agreement.3/10.65
            Description
                of the Registrant’s compensation and reimbursement practices for
                non-employee directors.3/31(i).1
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the
                Company.4/31(i).2
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Financial Officer of the
                Company.4/32.1
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.4/32.2
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.4/1/
            Incorporated
                by reference to the Company’s Current Report on Form 8-K, datedMarch
                30, 20062/
            Incorporated
                by reference to the Company’s Current Report on Form 8-K, dated April 14,
                2006.3/
            Incorporated
                by reference to the Company’s Current Report on Form 8-K, dated May 15,
                2006.4/
            Filed
                herewith.


Page
          27


**SIGNATURES**





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





**COLUMBIA LABORATORIES,
              INC.**DATE:
              August
              9, 2006
            
            /S/
              DAVID L. WEINBERGDAVID
                L. WEINBERG, Vice President-
              Finance
                and Chief Financial Officer




Page
          28