Summary of BIOSPECIFICS TECHNOLOGIES CORP

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

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

Overview

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

Outlook

We foresee the potential to generate income from limited sources in the next several years. Under the terms of our agreement with DFB Biotech, Inc. and its affiliates ("DFB"), we are scheduled to receive certain contractual anniversary payments and, if DFB exceeds a certain sales target, we would be entitled to an earn out on sales. Under the terms of our agreement with Auxilium, we may receive milestone payments upon their achieving certain regulatory progress and if Auxilium elects to pursue additional indications for injectable collagenase ("Additional Indications").

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

Significant Risks

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

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

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

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

Critical Accounting Policies, Estimates and Assumptions

The preparation of unaudited consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The information at September 30, 2008 and for the three and nine months ended September 30, 2008 and 2007 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the financial information set forth herein. The December 31, 2007 balance sheet amounts and disclosures included herein have been derived from the Company's December 31, 2007

audited consolidated financial statements. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2007 and 2006 included in the Company's Form 10-KSB filed with the SEC on May 2, 2008 and our Quarterly Reports on Form 10-Q for the quarter ended March 31, 2008 and June 30, 2008. While our significant accounting policies are described in more detail in the notes to our unaudited consolidated financial statements, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our unaudited consolidated financial statements.

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

We recognize royalties under the earn out provision of the Asset Purchase Agreement with DFB. We have the right to receive earn out payments in the future based on sales of certain products. Royalties are recognized as earned in accordance with the contract terms when royalties can be reliably measured, and collectibility is reasonably assured, such as upon the receipt of a royalty statement from our licensees.

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

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

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

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

Receivables and Deferred Revenue. Under our agreement with DFB, we agreed to provide certain technical assistance and transitional services in consideration of fees and costs totaling over $1.4 million. At the closing, DFB paid to us a partial payment of $400,000 in respect of the technical assistance to be provided by us. To date, we have received a total of $1,000,000 in payments from DFB. The consulting

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

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

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

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

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

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

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

Further, SFAS 123(R) requires that employee stock-based compensation costs be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid

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

RESULTS OF OPERATIONS

THREE-MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

Revenues

Product Revenues, net

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

Royalties

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

Licensing Revenues

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

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

Consulting Services

We recognize revenues from consulting and technical assistance contracts primarily as a result of the Asset Purchase Agreement and an Auxilium consulting agreement. Consulting revenues are recognized ratably over the term of the contract. The consulting obligations under the Asset Purchase Agreement generally expire during March 2011. For the three months ended September 30, 2008 and 2007 consulting revenues were $70,000 in each period.

Costs and Expenses

Research and Development Activities

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

General and Administrative Expenses

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

Other Income (expense), net

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

Income Taxes

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

NINE-MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

Revenues

Product Revenues, net

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

Royalties

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

Licensing Revenues

For the nine months ended September 30, 2008 and 2007, we recognized licensing revenue of $798,844 and $867,837, respectively. This decrease of $68,993 or 8% was primarily related to the extension of the development timeline for a certain indication for injectable collagenase under the Auxilium Agreement. Licensing revenues recognized are related to the cash payments received under the Auxilium Agreement in prior years and amortized over the expected development period.

Consulting Services

We recognize revenues from consulting and technical assistance contracts primarily as a result of the Asset Purchase Agreement and an Auxilium consulting agreement. Consulting revenues are recognized ratably over the term of the contract. The consulting obligations under the Asset Purchase Agreement generally expire during March 2011. For the nine months ended September 30, 2008 and 2007 consulting revenues were $354,185 and $210,000, respectively. This increase of $144,185 or 67% was primarily due to the recognition of revenues earned in connection with the October 2007 consulting agreement with Auxilium.

Costs and Expenses

Research and Development Activities

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

General and Administrative Expenses

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

Other Income (expense), net

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

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

Income Taxes

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

Liquidity and Capital Resources

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

Continuing Operations

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

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

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

Discontinued Operations

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