**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 September 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
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  No.)


**354
                  Eisenhower Parkway****Livingston,
                  New Jersey**
              **07039**(Address
                  of principal executive offices)
              (Zip
                  Code)




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





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 Exchange Act).





o Yes
x
      No





Number
      of
      shares of Common Stock of Columbia Laboratories, Inc. issued and outstanding
      as
      of November 3, 2006: 49,690,213










**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 nine months ended September 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”).


2


COLUMBIA
      LABORATORIES, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED BALANCE SHEETS




September
                  30,
              
              December
                  31,2006
              
              2005(Unaudited)ASSETSCurrent
                  assets-Cash
                  and cash equivalents
              
              
              
              
              $
              20,052,086
              
              $
              7,136,854Accounts
                  receivable, net
              
              
              
              
              
              4,126,003
              
              
              4,020,019Inventories
              
              
              
              
              
              1,663,338
              
              
              1,821,433Prepaid
                  expenses and other current assets
              
              
              
              
              
              1,109,284
              
              
              625,908Total
                  current assets
              
              
              
              
              
              26,950,711
              
              
              13,604,214Property
                  and equipment, net
              
              
              
              
              
              820,972
              
              
              1,002,580Other
                  assets
              
              
              
              
              
              120,190
              
              
              124,756TOTAL
                  ASSETS
              
              
              
              
              $
              27,891,873
              
              $
              14,731,550LIABILITIES
                  AND STOCKHOLDERS' EQUITY (DEFICIENCY)Current
                  liabilities-Current
                  portion of financing agreements
              
              
              
              
              $
              763,244
              
              $
              12,840,161Accounts
                  payable
              
              
              
              
              
              1,739,912
              
              
              1,905,381Accrued
                  expenses
              
              
              
              
              
              2,851,516
              
              
              2,329,475Total
                  current liabilities
              
              
              
              
              
              5,354,672
              
              
              17,075,017Deferred
                  revenue
              
              
              
              
              
              4,359,277
              
              
              4,058,327Long-term
                  portion of financing agreements
              
              
              
              
              
              10,720,039
              
              
              8,747,743TOTAL
                  LIABILITIES
              
              
              
              
              
              20,433,988
              
              
              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, 3,200 and 3,250 sharesissued
                  and outstanding in 2006 and 2005, respectively
              
              
              
              
              
              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;49,690,213
                  and 41,754,784 shares issued and outstanding in2006
                  and 2005, respectively
              
              
              
              
              
              496,902
              
              
              417,548Capital
                  in excess of par value
              
              
              
              
              
              205,628,262
              
              
              175,340,023Accumulated
                  deficit
              
              
              
              
              
              (198,866,288
              )
              
              (191,084,974
              )Accumulated
                  other comprehensive income
              
              
              
              
              
              198,286
              
              
              177,143TOTAL
                  STOCKHOLDERS' EQUITY (DEFICIENCY)
              
              
              
              
              
              7,457,885
              
              
              (15,149,537
              )TOTAL
                  LIABILITIES AND STOCKHOLDERS'EQUITY
                  (DEFICIENCY)
              
              
              
              
              $
              27,891,873
              
              $
              14,731,550


See
      notes
      to condensed consolidated financial statements






3




COLUMBIA
      LABORATORIES, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





Nine
                  Months Ended
              
              Three
                  Months EndedSeptember
                  30,
              
              September
                  30,2006
              
              2005
              
              2006
              
              2005NET
                  REVENUES
              
              $
              15,014,877
              
              $
              17,148,364
              
              $
              4,946,387
              
              $
              6,533,942COST
                  OF REVENUES
              
              
              6,355,988
              
              
              6,452,554
              
              
              2,173,981
              
              
              2,390,114Gross
                  profit
              
              
              8,658,889
              
              
              10,695,810
              
              
              2,772,406
              
              
              4,143,828OPERATING
                  EXPENSES:Selling
                  and distribution
              
              
              4,859,602
              
              
              6,700,682
              
              
              1,620,112
              
              
              1,700,286General
                  and administrative
              
              
              5,064,597
              
              
              5,163,342
              
              
              1,715,801
              
              
              1,640,620Research
                  and development
              
              
              5,073,292
              
              
              3,993,397
              
              
              1,702,922
              
              
              1,452,575Total
                  operating expenses
              
              
              14,997,491
              
              
              15,857,421
              
              
              5,038,835
              
              
              4,793,481Loss
                  from operations
              
              
              (6,338,602
              )
              
              (5,161,611
              )
              
              (2,266,429
              )
              
              (649,653
              )OTHER
                  INCOME (EXPENSE):Interest
                  income
              
              
              612,691
              
              
              127,995
              
              
              256,792
              
              
              41,596Interest
                  expense
              
              
              (1,741,433
              )
              
              (2,031,630
              )
              
              (524,963
              )
              
              (665,664
              )Other,
                  net
              
              
              (313,970
              )
              
              (21,439
              )
              
              (22,797
              )
              
              (8,221
              )(1,442,712
              )
              
              (1,925,074
              )
              
              (290,968
              )
              
              (632,289
              )Net
                  loss
              
              $
              (7,781,314
              )
              $
              (7,086,685
              )
              $
              (2,557,397
              )
              $
              (1,281,942
              )NET
                  LOSS PER COMMON SHARE:Basic
                  and diluted
              
              $
              (0.17
              )
              $
              (0.17
              )
              $
              (0.05
              )
              $
              (0.03
              )WEIGHTED
                  AVERAGE NUMBER OFCOMMON
                  SHARES OUTSTANDING:Basic
                  and diluted
              
              
              47,547,819
              
              
              41,751,934
              
              
              49,673,962
              
              
              41,751,934




See
      notes
      to condensed consolidated financial statements





4





COLUMBIA
      LABORATORIES, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS


(Unaudited)







Nine
                  Months Ended
              
              Three
                  Months EndedSeptember
                  30,
              
              September
                  30,2006
              
              2005
              
              2006
              
              2005NET
                  LOSS
              
              $
              (7,781,314
              )
              $
              (7,086,685
              )
              $
              (2,557,397
              )
              $
              (1,281,942
              )Other
                  comprehensive income (loss):Foreign
                  currency translation, net of tax
              
              
              21,143
              
              
              (59,940
              )
              
              (2,611
              )
              
              (1,705
              )Comprehensive
                  loss
              
              $
              (7,760,171
              )
              $
              (7,146,625
              )
              $
              (2,560,008
              )
              $
              (1,283,647
              )


See
      notes
      to condensed consolidated financial statements







5





COLUMBIA
      LABORATORIES, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


( Uaudited)






Nine
                    Months Ended September 30,2006
                
                2005CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    loss
                
                $
                (7,781,314
                )
                $
                (7,086,685
                )Adjustments
                    to reconcile net loss to netcash
                    used in operating activities-Depreciation
                    and amortization
                
                
                192,543
                
                
                220,763Provision
                    for doubtful accounts
                
                
                105,855
                
                
                136,661Provision
                    for returns and allowances
                
                
                712,908
                
                
                2,263,044Writedown
                    of inventories
                
                
                455,393
                
                
                807,354Stock
                    based compensation
                
                
                701,086
                
                
                —Interest
                    expense on financing agreements
                
                
                1,731,873
                
                
                1,876,050Loss
                    on partial extinguishment of financing agreement
                
                
                280,000
                
                
                —Loss
                    on disposal of fixed asset
                
                
                3,275
                
                
                —Issuance
                    of options for sales services
                
                
                —
                
                
                6,738Changes
                    in assets and liabilities-(Increase)
                    decrease in:Accounts
                    receivable
                
                
                (211,839
                )
                
                (2,109,192
                )Inventories
                
                
                (297,298
                )
                
                (225,708
                )Prepaid
                    expenses and other current assets
                
                
                (483,377
                )
                
                479,934Other
                    assets
                
                
                4,566
                
                
                1,039Increase
                    (decrease) in:Accounts
                    payable
                
                
                (165,469
                )
                
                (232,628
                )Accrued
                    expenses
                
                
                (279,745
                )
                
                (2,849,734
                )Deferred
                    revenue
                
                
                300,950
                
                
                (34,452
                )Net
                    cash used in operating activities
                
                
                (4,730,593
                )
                
                (6,746,816
                )CASH
                    FLOWS FROM INVESTING ACTIVITIES:Purchase
                    of property and equipment
                
                
                (14,210
                )
                
                (78,936
                )Net
                    cash used in investing activities
                
                
                (14,210
                )
                
                (78,936
                )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
                
                
                1,021,759
                
                
                —Payments
                    pursuant to financing agreements
                
                
                (12,027,614
                )
                
                (2,471,742
                )Dividends
                    paid
                
                
                (121,379
                )
                
                (121,875
                )Net
                    cash provided by (used in) financing activities
                
                
                17,638,892
                
                
                (5,693,617
                )
 (continued)


6


COLUMBIA
      LABORATORIES, INC. AND SUBSIDIARIES




CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)




(Continued)





Nine
                  Months Ended September 30,2006
              
              2005EFFECT
                  OF EXCHANGE RATE CHANGES ON CASH
              
              
              21,143
              
              
              (59,828
              )NET
                  INCREASE (DECREASE) IN CASHAND
                  CASH EQUIVALENTS
              
              
              12,915,232
              
              
              (12,579,197
              )CASH
                  AND CASH EQUIVALENTS,Beginning
                  of period
              
              
              7,136,854
              
              
              19,781,591CASH
                  AND CASH EQUIVALENTS,End
                  of period
              
              $
              20,052,086
              
              $
              7,202,394





See
      notes
      to condensed consolidated financial statements






7





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 nine months
      ended
      September 30, 2006, reflect the impact of SFAS 123(R). Employee stock-based
      compensation expense for the three and nine months ended September 30, 2006,
      was
      $311,032 and $701,086, 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 nine months ended
      September 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.







8




(2)
      INVENTORIES:





Inventories
      consisted of the following:




September
                  30,
              
              December
                  31,2006
              
              2005Finished
                  goods
              
              $
              1,003,990
              
              $
              1,165,413Raw
                  materials
              
              
              659,348
              
              
              656,020$
              1,663,338
              
              $
              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%. $202,087 and $198,119 were recorded as interest expense for the three
      months ended September 30, 2006 and September 30, 2005, respectively, and
      $583,123 and $518,287 were recorded as interest expense for the nine months
      ended September 30, 2006 and September 30, 2005, respectively. The Company
      has
      paid PharmaBio $3,464,148 under this agreement through September 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
      Striant 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 Striant
      Agreement, assuming an interest rate of 10.67%. $322,876 and $467,545 were
      recorded as interest expense for the three months ended September 30, 2006
      and
      September 30, 2005, respectively, and $1,148,750 and $1,357,763 were recorded
      as
      interest expense for the nine months ended September 30, 2006 and September
      30,
      2005, respectively.  The
      Striant 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 this 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 $12,749,639 through September 30, 2006.






9


Long
      term
      liabilities from financing agreements consisted of the following:




September
                  30,
              
              December
                  31,2006
              
              2005July
                  31, 2002 financing agreement
              
              $
              3,446,161
              
              $
              3,242,607March
                  5, 2003 financing agreement
              
              
              8,037,122
              
              
              18,345,29711,483,283
              
              
              21,587,904Less:
                  current portion
              
              
              763,244
              
              
              12,840,161$
              10,720,039
              
              $
              8,747,743


10


(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:








ProfitNet
              
              (Loss)
                  from
              
              IdentifiableRevenues
              
              Operations
              
              AssetsAs
                  of and for the nine monthsended
                  September 30, 2006-United
                  States
              
              $
              7,881,017
              
              $
              (9,117,662
              )
              $
              20,811,483Europe
              
              
              7,133,860
              
              
              2,779,060
              
              
              7,080,390$
              15,014,877
              
              $
              (6,338,602
              )
              $
              27,891,873As
                  of and for the nine monthsended
                  September 30, 2005-United
                  States
              
              $
              9,195,126
              
              $
              (8,875,021
              )Europe
              
              
              7,953,238
              
              
              3,713,410$
              17,148,364
              
              $
              (5,161,611
              )As
                  of and for the three monthsended
                  September 30, 2006-United
                  States
              
              $
              2,864,719
              
              $
              (3,050,769
              )Europe
              
              
              2,081,668
              
              
              784,340$
              4,946,387
              
              $
              (2,266,429
              )As
                  of and for the three monthsended
                  September 30, 2005-United
                  States
              
              $
              4,034,120
              
              $
              (1,733,665
              )Europe
              
              
              2,499,822
              
              
              1,084,012$
              6,533,942
              
              $
              (649,653
              )







11




(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:




Nine
                Months Ended
            
            Three
                Months EndedSeptember
                30,
            
            September
                30,2006
            
            2005
            
            2006
            
            2005Net
                loss
            
            $
            (7,781,314
            )
            $
            (7,086,685
            )
            $
            (2,557,397
            )
            $
            (1,281,942
            )Less:
                Preferred stock dividends
            
            
            (121,379
            )
            
            (121,875
            )
            
            (40,129
            )
            
            (40,625
            )Net
                loss applicable tocommon
                stock
            
            $
            (7,902,693
            )
            $
            (7,208,560
            )
            $
            (2,597,526
            )
            $
            (1,322,567
            )Basic
                and diluted:Weighted
                average number ofcommon
                shares outstanding
            
            
            47,547,819
            
            
            41,751,934
            
            
            49,673,962
            
            
            41,751,934Basic
                and diluted net loss per common share
            
            $
            (0.17
            )
            $
            (0.17
            )
            $
            (0.05
            )
            $
            (0.03
            )






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 11,814,410 and
      11,195,470 at September 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.






12




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 nine months ended
      September 30, 2006 and 2005:





Nine
                  Months Ended
              
              Three
                  Months EndedSeptember
                  30,
              
              September
                  30,2006
              
              2005
              
              2006
              
              2005Employee
                  stock-based compensation in:Cost
                  of revenue
              
              $
              54,997
              
              $
              —
              
              $
              20,695
              
              $
              —Selling
                  and distribution
              
              
              65,250
              
              
              —
              
              
              29,907
              
              
              —General
                  and administrative
              
              
              486,309
              
              
              —
              
              
              224,003
              
              
              —Research
                  and development
              
              
              94,530
              
              
              —
              
              
              36,427
              
              
              —Total
                  employee stock-based compensationin
                  operating expenses
              
              
              646,089
              
              
              —
              
              
              290,337
              
              
              —Total
                  employee stock-based compensation
              
              $
              701,086
              
              $
              —
              
              $
              311,032
              
              $
              —






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







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




Nine
                  Months Ended
              
              Three
                  Months EndedSeptember
                  30,
              
              September
                  30,2006
              
              2005
              
              2006
              
              2005(pro
                  forma)
              
              
              
              (pro
                  forma)Net
                  loss, before stock-based compensationfor
                  employees, prior period
              
              $
              (7,781,314
              )
              $
              (7,086,685
              )
              $
              (2,557,397
              )
              $
              (1,281,942
              )Less:
                  Stock-based employee compensation includedin
                  the determination of net loss as reported
              
              
              701,086
              
              
              
              
              
              311,032Add:
                  Stock-based compensation expense foremployees
                  determined under fair-value based method
              
              
              (701,086
              )
              
              (1,223,288
              )
              
              (311,032
              )
              
              (282,276
              )Net
                  loss, after effect of stock-based compensationfor
                  employees
              
              $
              (7,781,314
              )
              $
              (8,309,973
              )
              $
              (2,557,397
              )
              $
              (1,564,218
              )Net
                  loss per share:Basic
                  and diluted - as reported in prior year
              
              $
              (0.17
              )
              $
              (0.17
              )
              $
              (0.05
              )
              $
              (0.03
              )Basic
                  and diluted - after effect of stock-basedcompensation
                  for employees
              
              $
              (0.17
              )
              $
              (0.20
              )
              $
              (0.05
              )
              $
              (0.04
              )




13




As
      of
      September 30, 2006, total unamortized stock-based compensation cost related
      to non-vested stock options was $1,802,131 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:




Nine
                  Months Ended
              
              Three
                  Months EndedSeptember
                  30,
              
              September
                  30,2006
              
              2005
              
              2006
              
              2005Risk
                  free interest rate
              5.03%
              
              4.02%
              
              4.95%
              
              4.00%Expected
                  term
              4.75
                  years
              
              6.68
                  years
              
              4.75
                  years
              
              6.25
                  yearsDividend
                  yield
              0.0
              
              0.0
              
              0.0
              
              0.0Expected
                  volatility
              62.43%
              
              81.92%
              
              60.31%
              
              81.62%






The
      Company estimated the volatility of its 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.






14




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




Nine
                  Months Ended
              
              Three
                  Months EndedSeptember
                  30, 2006
              
              September
                  30, 2006Weighted
              
              
              
              WeightedAverage
              
              
              
              AveragePrice
              
              
              
              PriceNumber
                  of
              
              Per
              
              Number
                  of
              
              PerShares
              
              Share
              
              Shares
              
              ShareOutstanding
                  at beginning of period
              
              
              5,960,525
              
              $
              7.79
              
              
              4,858,127
              
              $
              8.37Options
                  granted
              
              
              290,500
              
              $
              4.27
              
              
              15,000
              
              $
              3.10Options
                  exercised
              
              
              (335,049
              )
              $
              3.05
              
              
              (22,625
              )
              $
              2.18Options
                  forfeited or expired
              
              
              (1,070,124
              )
              $
              5.60
              
              
              (4,650
              )
              $
              3.75Outstanding
                  at September 30, 2006
              
              
              4,845,852
              
              $
              8.39
              
              
              4,845,852
              
              $
              8.39






The
      weighted average grant date fair values of options granted was $1.69 and 2.40
      per share during the three and nine and months ended September 30, 2006,
      respectively, and $2.16 and $1.86 per share during the three and nine months
      ended September 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
      September 30, 2006:




Options
                  Outstanding
              
              Options
                  Exercisable
              
              Unvested
                  OptionsWeighted-Average
              
              Weighted-
              
              
              
              Weighted-
              
              
              
              Weighted-Range
                  of
              
              Number
              
              Remaining
              
              Average
              
              Number
              
              Average
              
              Number
              
              AverageExercise
              
              Outstanding
                  at
              
              Contractual
              
              Exercise
              
              Exercisable
                  at
              
              Exercise
              
              Unvested
                  at
              
              ExercisePrices
              
              September
                  30, 2006
              
              Life
                  (Years)
              
              Price
              
              September
                  30, 2006
              
              Price
              
              September
                  30, 2006
              
              Price$1.91
                  - $3.83
              
              
              1,155,302
              
              
              6.48
              
              $
              2.81
              
              
              719,784
              
              $
              2.94
              
              
              435,518
              
              $
              2.58$4.05
                  - $7.90
              
              
              1,391,050
              
              
              5.94
              
              
              5.21
              
              
              897,076
              
              
              5.56
              
              
              493,974
              
              
              4.57$8.25
                  - $12.13
              
              
              1,209,500
              
              
              1.57
              
              
              11.24
              
              
              1,194,500
              
              
              11.24
              
              
              15,000
              
              
              10.68$14.00
                  - $18.63
              
              
              1,090,000
              
              
              0.43
              
              
              15.22
              
              
              1,090,000
              
              
              15.22
              
              
              —
              
              
              0.00$1.91
                  - $18.63
              
              
              4,845,852
              
              
              3.74
              
              
              8.39
              
              
              3,901,360
              
              
              9.52
              
              
              944,492
              
              
              3.75






The
      aggregate intrinsic value of options outstanding and options exercisable at
      September 30, 2006 was $784,436 and $397,653, respectively.




During
      the first nine months of 2006, cash received from the exercise of options was
      $1,021,759.






15




A
      summary
      of the status of the Company’s unnvested stock options for the three months and
      nine months ending September 30, 2006 is presented below:




Nine
                  Months Ended
              
              Three
                  Months EndedSeptember
                  30, 2006
              
              September
                  30, 2006Weighted
              
              
              
              Weightedaverage
              
              
              
              averageNumber
                  of
              
              exercise
                  price
              
              Number
                  of
              
              exercise
                  priceshares
              
              per
                  share
              
              shares
              
              per
                  shareUnvested
                  shares at beginning of period
              
              
              1,312,887
              
              $
              3.49
              
              
              940,417
              
              $
              3.76Options
                  granted
              
              
              290,500
              
              $
              4.27
              
              
              15,000
              
              $
              3.10Options
                  vested
              
              
              (371,221
              )
              $
              3.32
              
              
              (6,875
              )
              $
              4.39Options
                  forfeited
              
              
              (287,674
              )
              $
              3.46
              
              
              (4,050
              )
              $
              3.55Unvested
                  shares at September 30, 2006
              
              
              944,492
              
              $
              3.75
              
              
              944,492
              
              $
              3.75






Restricted
      stock grants consist of the Company’s common stock. The Board has 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 nine months ended September 30, 2006 is as follows:




Nine
                  Months Ended
              
              Three
                  Months EndedSeptember
                  30, 2006
              
              September
                  30, 2006Weighted-
              
              
              
              Weighted-Average
                  Grant
              
              
              
              Average
                  GrantShares
              
              Date
                  Fair Value
              
              Shares
              
              Date
                  Fair ValueUnvested
                  at beginning of period
              
              
              —
              
              $
              —
              
              
              157,875
              
              $
              4.49Granted
              
              
              157,875
              
              $
              4.49
              
              
              —
              
              $
              —Vested
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —Forfeited
              
              
              —
              
              $
              —
              
              
              —
              
              $
              —Unvested
                  at September 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 do not expect FIN 48 will have a material
      effect on our consolidated financial condition or results of
      operations.







16




(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,
      and
      expire 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
      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.







17




**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 solid
      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
      projects designed to realize additional potential from currently marketed
      Prochieve products by developing new indications, notably Prochieve 8% for
      the
      prevention of recurrent preterm birth in women at-risk for this condition while
      advancing the development of new product candidates including
      vaginally-administered lidocaine to prevent and treat dysmenorrhea. Our focus
      in
      fiscal 2006 is to build on this foundation and execute well in key areas.







**Results
      of Operations - Nine Months Ended September 30, 2006 versus Nine Months Ended
      September 30, 2005**





Net
      revenues decreased 12% in the nine months ended September 30, 2006 to $15.0
      million as compared to $17.1 million in the nine months ended September 30,
      2005. Net revenues in the nine-month period ended September 30, 2005 reflected
      a
      change in estimate, amounting
      to approximately $1.8 million, as a result of the adoption by a wholesale
      customer of a policy to stop selling our products to retail establishments
      six
      months prior to the expiration date on the packaging. This policy was adopted
      notwithstanding the fact that retail pharmacies tend not to maintain large
      supplies of our products in their inventory, order on an ‘as needed’ basis, and
      turn their inventory over rapidly. Also the Company’s products are normally used
      up by the patient within a 30-day period after a prescription is presented.
      As a
      result, we revised our estimating procedure to include this shortened period
      of
      salability.






18




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 non-U.S. marketing partners;


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


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


·
            Royalty
                and licensing revenues.








Promoted
      Products are:


·
            Prochieve®
                8%, Prochieve 4% 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 Gel, which Lil’ Drug Store pays
                us promotion fees to present to
                OB/GYNs.





Revenues
      from promoted products increased 1% to $5.6 million in the nine months ended
      September 30, 2006 as compared to $5.4 million in the nine months ended
      September 30, 2005, primarily as a result of a decrease in the provision for
      product returns offset by a decrease in the sales of Striant.





Revenues
      from partnered products decreased 19% to $9.4 million in the nine months ended
      September 30, 2006 as compared to $11.7 million in the nine months ended
      September 30, 2005, primarily as a result of the timing of an order of Crinone
      for the United States by one of our marketing partners and a reduction in orders
      of RepHresh by one of our marketing partners. In 2005, shipments of United
      States Crinone orders occurred in the second and third quarters; in 2006, one
      order was shipped in the second quarter and the second order is scheduled to
      be
      shipped in the fourth quarter. The higher level of orders of RepHresh in the
      nine months ended September 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 nine months ended September
      30, 2006 and 62% in the nine months ended September 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 $950,000 and $274,000 for the
      nine months ended September 30, 2006 and September 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 $187,000 and $195,000
      for
      the nine months ended September 30, 2006 and September 30, 2005, respectively.
      Both of these royalty payments are included in cost of revenues.





Selling
      and distribution expenses decreased 27% to $4.9 million in the nine months
      ended
      September 30, 2006, as compared to $6.7 million in the nine
      months ended September 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 and reduced the number
      of
      salespeople, which is reflected in the 2006 reduction in expense. Included
      in
      the 2006 expenses were sales force costs of approximately $2.5 million, product
      marketing expenses of approximately $927,000 and salary costs of approximately
      $303,000. Expenses in 2005 included approximately $3.8 million in sales force
      costs, approximately $1.1 million in product marketing expenses and
      approximately $610,000 in salary costs.






19


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 2% to $5.1 million in the nine months ended September 30, 2006
        as
        compared to $5.2 million in the nine months ended September 30, 2005. The
        reduction in 2006 expenses is primarily the result in a decrease in salary
        expense of approximately $678,000, offset by increases in insurance premiums
        of
        approximately $214,000 and the 2006 expense for stock-based compensation
        of
        approximately $486,000.


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 27% to $5.1 million in
      the
      nine months ended September 30, 2006 as compared to $4.0 million in the nine
      months ended September 30, 2005. The increase is primarily related to the higher
      costs associated with the Company’s ongoing Phase III trial of Prochieve® 8% for
      the prevention of recurrent preterm birth.





As
      a
      result, the net loss for the nine
      months ended September 30, 2006 was $7.8 million or $(0.17) per common share
      as
      compared to the net loss for the nine months ended September 30, 2005 of $7.1
      million or $(0.17) per common share.





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





Net
      revenues decreased 24% to $4.9 million in the three months ended September
      30,
      2006 as compared to $6.5 million in the three months ended September 30, 2005.





Revenues
      from promoted products increased 12% to $2.6 million in the three months ended
      September 30, 2006, as compared to $2.3 million in the three months ended
      September 30, 2005, primarily as a result of increases in the sales of the
      Prochieve line of products, offset by a decrease in sales of Striant.





Revenues
      from partnered products decreased 45% to $2.3 million in the three months ended
      September 30, 2006 as compared to $4.2 million in the three months ended
      September 30, 2005, primarily as a result of no United States Crinone order
      shipped in the three months ended September 30, 2006 versus one United States
      Crinone order shipped in the three months ended September 30, 2005 and the
      reduction in orders of RepHresh by one of our marketing partners, as previously
      described. At this time, a United States Crinone order is scheduled for shipment
      in the fourth quarter of 2006, while no order was shipped in the fourth quarter
      of 2005.





Gross
      profit as a percentage of revenues was 56% in the three months ended September
      30, 2006 and 63% in the three months ended September 30, 2005. The
      7%
      decrease in gross profit percentage from 2005 to 2006 was the result of a change
      in product mix and a higher effective rate on royalties paid to Serono in the
      2006 period. Under the Company’s Prochieve marketing sublicense, the Company
      must pay Serono a royalty equal to 30% of net sales on
      all
      Prochieve sales. This amount was approximately $519,000 and $272,000 for the
      three months ended September 30, 2006 and September 30, 2005, respectively.
      The
      2005 royalty expense was reduced by approximately $73,000 by the deduction
      of
      actual product returns in arriving at net sales, on which the royalty is based. The
      Company must also 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 $68,000 and $52,000 for
      the three months ended September 30, 2006 and September 30, 2005, respectively.
      Both of these royalty payments are included in cost of revenues.





20


Selling
      and distribution expenses decreased 5% to $1.6 million in the three months
      ended
      September 30, 2006 as compared to $1.7 million in the
      three months ended September 30, 2005. Included in the 2006 expenses were sales
      force costs of approximately $709,000, product marketing expenses of
      approximately $357,000 and salary costs of approximately $58,000. Expenses
      in
      2005 included approximately $920,000 in sales force costs, approximately
      $312,000 in product marketing expenses and approximately $143,000 in salary
      costs.





General
      and administrative expenses increased 5% to $1.7 million in the three months
      ended September 30, 2006 as compared to $1.6 million in the three months ended
      September 30, 2005. The increase in 2006 expenses is primarily the result of
      the
      2006 expense for stock-based compensation of approximately $224,000 and an
      increase in insurance premiums of approximately $51,000 offset partially by
      reductions in salaries of approximately $113,000 and professional fees of
      approximately $45,000.





Research
      and development expenses increased 17% to $1.7 million in the three months
      ended
      September 30, 2006 as compared to $1.5 million in the three months ended
      September 30, 2005. The increase is primarily related to the higher costs
      associated with the Company’s ongoing Phase III trial for Prochieve® 8% to
      prevent recurrent preterm birth.





As
      a
      result, the net loss for the three months ended September 30, 2006 was $2.6
      million or $(0.05) per common share as compared to the net loss for the three
      months ended September 30, 2005 of $1.3 million or $(0.03) per common
      share.




**Liquidity
      and Capital Resources**





Cash
      and
      cash equivalents were $20,052,086 and $7,136,854 at September 30, 2006 and
      December 31, 2005, respectively.





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




Nine
                  Months EndedSeptember
                  30,2006
              
              2005Cash
                  flows:Operating
                  activities
              
              $
              (4,730,593
              )
              $
              (6,746,816
              )Investing
                  activities
              
              
              (14,210
              )
              
              (78,936
              )Financing
                  activities
              
              
              17,638,892
              
              
              (5,693,617
              )








21





Operating
      Activities:





Net
      cash
      used in operating activities in the 2006 period resulted primarily from: the
      net
      loss, net of non-cash items amounting to $3,598,381; a $483,000 increase in
      prepaid expenses and other current assets, related to the payment of the October
      1, 2006 - September 30, 2007 FDA user fee of $618,900 on September 29, 2006;
      a
      reduction in accrued expenses of approximately $280,000, related to customer
      usage of sales return credits, offset by an accrual for marketing expenses
      at
      September 30, 2006; an increase in inventory (primarily Prochieve manufactured
      in the second quarter of 2006) amounting to approximately $297,000; an increase
      in accounts receivable of approximately $212,000 related to one customer that
      paid invoices two months late in October 2006; and, a decrease in accounts
      payable of approximately $165,000. These were partially offset by the receipt
      of
      milestone payments received from a licensee totaling $800,000.





Net
      cash
      used in operating activities in the 2005 period resulted primarily from the
      net
      loss, net of non-cash items amounting to $1,776,075; a reduction in accrued
      expenses of approximately $2,850,000, principally related to customer usage
      of
      sales return credits; an increase in accounts receivables of approximately
      $2,109,000 resulting from increased second quarter 2005 sales; an $226,000
      increase in inventory, primarily related to Striant; and, a decrease in accounts
      payable of approximately $233,000. These were partially offset by a $480,000
      reduction in prepaid expense and other current assets due to the reduction
      in
      prepaid insurance (primarily as a result of a significant reduction in insurance
      premiums)..





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 reflects the receipt of $28,766,126
      in
      net proceeds from the issuance of common stock and $1,021,759 from the exercise
      of stock options. Offsetting these receipts was the payment of $12,027,614
      on
      the Company’s two product financing agreements (including an $11,585,235 true-up
      payment on the Striant Agreement) and $121,379 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, $2,471,742 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 $121,875 in dividends paid to the owners of the Company’s Series
      C Convertible Preferred Stock. These payments were offset by the receipt of
      $6,900,000 in gross proceeds from the issuance of Series E Convertible Preferred
      Stock.





T he
      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.





22


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
      September 30, 2006, the Company has paid approximately $3.6 million in royalty
      payments to Bio-Mimetics.




As
      of
      September 30, 2006, the Company has outstanding exercisable options and warrants
      that, if exercised, would result in approximately $52.3 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.





As
      of
      September 30, 2006, the Company had available net operating loss carryforwards
      of approximately $127 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
      September 30, 2006 and December 31, 2005, other assets in the accompanying
      condensed consolidated balance sheets include deferred tax assets of
      approximately $45 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 do not expect FIN 48 will have a material
      effect on our consolidated financial condition or results of
      operations.







23





**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.





*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 nine months ended September 30,
      2006, reflect the impact of SFAS 123(R). Stock-based compensation expense for
      the three and nine months ended September 30, 2006, was $311,032 and
      $701,086, respectively, which in each case consisted primarily of stock-based
      compensation expense related to employee stock options recognized under SFAS
      123(R).






24




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 nine months ended
      September 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.




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.




The
      Company’s Audit Committee has initiated a review of the Company’s stock option
      granting practices from October 1996 to the present. The review was initiated
      independently by the Committee in light of the recent heightened scrutiny
      regarding this topic. The review has not revealed any pattern or practice of
      inappropriately identifying grant dates with hindsight in order to provide
      “discounted” or “in-the-money” options. However, with respect to fiscal years
      1996-2001, the review has identified certain instances where the granting of
      the
      options was not consistent with the terms of the Company’s 1996 Long-term
      Performance Plan (the “Plan”). Specifically, the Plan provides for the exercise
      price of options to be the average of the high and low reported sales prices
      of
      the Company’s common stock on the date of grant. During this period, however,
      options were generally priced at the closing price on the date of grant or
      the
      closing price on the day before the date of grant. The review also identified
      that, during this period, certain grants of stock options were approved by
      the
      Compensation Committee by means of unanimous written consents in lieu of a
      meeting, in which the unanimous written consent was finalized and signed by
      all
      members of the Compensation Committee later than the date identified as the
      grant date of the option. In certain cases, although the period in which the
      unanimous written consent was signed is known, the measurement date for
      accounting purposes is subject to uncertainties that are still under review.





25


Accordingly,
      although the review is not yet complete, the Audit Committee has reached a
      preliminary conclusion that, pursuant to the requirements of Accounting
      Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
      (APB 25), the actual accounting measurement dates for certain stock option
      grants during the period 1996-2001 differed from the stated dates of grant
      previously used in determining how to account for such grants. In certain cases,
      applying the pricing methodology of the Plan to the grant as of the actual
      accounting measurement date in lieu of the stated date of grant results in
      a
      non-cash, stock-based compensation charge that was not recorded in the
      appropriate periods. While the review is ongoing, the Company estimates that
      the
      cumulative impact of all such discrepancies is an understatement of compensation
      expense in the range of $1.2 million to $3.1 million, with the vast majority
      of
      such amount attributable to options granted in 1997 and 1998, with related
      compensation expense to be recorded from 1997 to 1999.





Statement
      of Financial Accounting Standards No. 154, Accounting Changes and Error
      Correction (SFAS 154), provides for the cumulative effect of such prior year
      errors regarding stock-based compensation for the years 1996 to 2001, to be
      recorded as an adjustment to the opening accumulated deficit balance and opening
      capital in excess of par value balance.





The
      Committee’s review is ongoing, and the Company believes it will be completed by
      the end of December 2006. Because the Committee’s review has not been completed,
      it is possible that additional issues may be identified; however, we estimate
      that the expected increase to the opening accumulated deficit balance and
      opening capital in excess of par value balance will be in the range of $1.2
      million to $3.1 million. The Company expects no change to stockholder’s equity
      or to 2006 earnings. The Company does not believe the above amounts meet the
      quantitative or qualitative considerations of materiality under Staff Accounting
      Bulletin No. 99, and therefore the appropriate amount will be adjusted upon
      the
      completion of our review.




**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.




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 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.





26





**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 recurrent 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.








27


**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**





None.





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





None.





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





(a)
            Exhibits




31(i).1
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the
                Company.1/


31(i).2
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Financial Officer of the
                Company.1/


32.1
            
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.1/


32.2
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.1/





1/
            Filed
                herewith.








28


**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: November
              9, 2006
            By:
            /s/ DAVID
              L.
              WEINBERGDAVID
              L. WEINBERGVice
                President
              Finance and Chief Financial
                Officer