UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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 0-23678

BIOSPHERE MEDICAL, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware		04-3216867
(State or Other Jurisdiction of Organization or Incorporation)		(I.R.S. Employer Identification No.)

1050 Hingham Street, Rockland, Massachusetts 02370

(Address of Principal Executive Offices) (Zip Code)

(781) 681-7900

(Registrant’s Telephone Number, Including Area Code)

Indicate by a 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 a 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 o Non-Accelerated Filer x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act.). Yes o No x

The number of shares outstanding of the Registrant’s common stock as of November 1, 2006 was 17,822,241 shares.

BioSphere Medical, Inc.
INDEX

Part I—Financial Information
	Item 1.	Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2005 (unaudited)
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 (unaudited)
		Notes to Consolidated Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures
Part II—Other Information
	Item 1.	Legal Proceedings
	Item 1A.	Risk Factors
	Item 6.	Exhibits
Signatures
Exhibit Index

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BIOSPHERE MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands except share data)	September 30, 2006			December 31, 2005
	(unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	10,874		$	8,774
Marketable securities	10,984			—
Accounts receivable, net of allowance for doubtful accounts of $245 and $233 as of September 30, 2006 and December 31, 2005, respectively	3,465			3,521
Inventories	2,558			2,435
Prepaid expenses and other current assets	612			407
Total current assets	28,493			15,137
Property and equipment, net	935			858
Goodwill	1,443			1,443
Other assets	61			57
Total assets	$	30,932		$	17,495
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,351		$	1,146
Accrued compensation	1,882			1,830
Other accrued expenses	1,186			1,202
Current portion of capital lease obligations	70			127
Total current liabilities	4,489			4,305
Long-term capital lease obligations	57			101
Total liabilities	4,546			4,406

Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized: 6% series A convertible preferred stock, 12,000 authorized shares, 8,818 and 8,434 shares issued and outstanding, as of September 30, 2006 and December 31, 2005, respectively (aggregate liquidation preference including accrued dividends of $8,950 at September 30, 2006)	7,840			7,449
Common stock, $.01 par value, 25,000,000 shares authorized; 17,822,241 and 15,006,005 shares issued and outstanding as of September 30, 2006 and December 31, 2005, respectively	178			150
Additional paid-in capital	99,630			84,471
Deferred compensation	—			(41		)
Accumulated deficit	(81,315		)	(78,798		)
Accumulated other comprehensive income (loss)	53			(142		)
Total stockholders’ equity	26,386			13,089
Total liabilities and stockholders’ equity	$	30,932		$	17,495

The accompanying notes are an integral part of these consolidated financial statements.

BIOSPHERE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share data)	2006			2005			2006			2005
Product sales	$	5,644		$	4,412		$	16,550		$	13,330
Cost and expenses:
Costs of product sales	1,708			1,546			5,067			4,587
Research and development	511			498			1,654			1,648
Sales	2,001			1,372			5,756			4,365
Marketing	806			512			2,595			1,984
General, administrative and patent	1,230			949			4,192			3,172
Total costs and expenses:	6,256			4,877			19,264			15,756
Loss from operations	(612		)	(465		)	(2,714		)	(2,426		)
Interest income	268			66			666			156
Interest expense	(5		)	(4		)	(12		)	(12		)
Foreign exchange gains/(losses), net	(8		)	13			(40		)	(468		)
Other income/(expense), net	1			(4		)	20			2
Loss before income taxes	(356		)	(394		)	(2,080		)	(2,748		)
Income tax (provision)/benefit	(12		)	—			(44		)	93
Net loss	(368		)	(394		)	(2,124		)	(2,655		)
Preferred stock dividends	(132		)	(125		)	(391		)	(369		)
Net loss applicable to common stockholders	$	(500	)	$	(519	)	$	(2,515	)	$	(3,024	)
Net loss per common share applicable to common stockholders
Basic and diluted	$	(0.03	)	$	(0.04	)	$	(0.15	)	$	(0.21	)
Weighted average number of common shares outstanding
Basic and diluted	17,381			14,776			16,890			14,597

The accompanying notes are an integral part of these consolidated financial statements.

BIOSPHERE MEDICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

	For the Nine Months Ended September 30,
(in thousands)	2006			2005
Cash flows from operating activities:
Net loss	$	(2,124	)	$	(2,655	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts	7			46
Provision for inventory obsolescence	181			—
Depreciation and amortization	345			373
Non-cash stock compensation	1,029			11
Realized loss on available-for-sale investments	—			4
Changes in operating assets and liabilities:
Accounts receivable	117			(48		)
Inventories	(187		)	504
Prepaid expenses and other current assets	(182		)	(315		)
Accounts payable	154			(153		)
Accrued compensation	10			(279		)
Other accrued expenses	(80		)	(107		)
Net cash used in operating activities	(730		)	(2,619		)
Cash flows from investing activities:
Purchase of property and equipment	(385		)	(226		)
Purchase of marketable securities	(11,778		)	—
Sale and maturity of available for sale marketable securities	788			680
Net cash (used in) provided by investing activities	(11,375		)	454
Cash flows from financing activities:
Proceeds from issuance of common stock, net	13,498			—
Proceeds from issuance of common stock under employee benefit and incentive plans	702			536
Costs from issuance of convertible preferred stock and warrants, net	—			(59		)
Proceeds from issuance of long-term debt and capital leases	—			43
Principal payments under long-term debt and capital leases	(105		)	(127		)
Net cash provided by financing activities	14,095			393
Effect of exchange rate changes on cash and cash equivalents	110			370
Net increase (decrease) in cash and cash equivalents	2,100			(1,402		)
Cash and cash equivalents at beginning of period	8,774			9,460
Cash and cash equivalents at end of period	$	10,874		$	8,058

The accompanying notes are an integral part of these consolidated financial statements.

BIOSPHERE MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

A) Nature of Business

BioSphere Medical, Inc. (the “Company”) was incorporated in Delaware in December 1993. The Company is focused on applying its proprietary Embosphere® Microspheres and other ancillary embolotherapy products for use in treating uterine fibroids, hypervascularized tumors and arteriovenous malformations. The Company’s wholly owned subsidiary, Biosphere Medical SA (“BMSA”), a French société anonyme, holds the license to the embolotherapy technology that is the main focus of the Company’s business.

The Company believes that its existing working capital as of September 30, 2006, together with anticipated proceeds from sales of microspheres, delivery systems and other products, will be sufficient to fund operating and capital requirements, as currently planned, through 2007. In the longer term, the Company expects to fund its operations and capital requirements through a combination of expected proceeds from product sales and anticipated capital equipment financing. However, cash requirements may vary materially from those now planned due to a number of factors, including, without limitation, the Company’s failure to achieve expected revenue amounts, costs associated with changes in its uterine fibroid embolization (“UFE”) marketing programs, unanticipated research and development expenses, the scope and results of preclinical and clinical testing, changes in the focus and direction of research and development programs, competitive products and technologies, the timing and results of regulatory review at the United States Food and Drug Administration or comparable regulatory agencies in other countries and the market’s acceptance of any approved products.

B) Basis of Presentation

The accompanying consolidated financial statements are unaudited and have been prepared on a basis consistent with the Company’s annual audited financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2005. The consolidated financial statements include the accounts of the Company’s three wholly owned subsidiaries, BMSA, BioSphere Medical Japan, Inc. and BSMD Ventures, Inc. All material intercompany balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in its annual audited financial statements have been condensed or omitted. The consolidated financial statements, in the opinion of management, reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation of the results for the three and nine months ended September 30, 2006 and 2005. The results of operations for the periods presented are not necessarily indicative of the results of operations to be expected for the entire fiscal year. These consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, which has been filed with the Securities and Exchange Commission.

Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the current period presentation. However, these reclassifications have no impact on net loss.

C) Cash, Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments with a maturity of ninety days or less, as of the date of purchase, to be cash equivalents. In accordance with its investment policy, surplus cash is invested in investment grade corporate and U.S. government debt as well as certain asset-backed securities. The Company determines the appropriate classification of marketable securities at each balance sheet date. Available-for-sale marketable securities are carried at their fair value with unrealized gains and losses included in accumulated other comprehensive loss in the accompanying balance sheet.

D) Comprehensive Loss

Total comprehensive loss is comprised of net loss and other comprehensive income/(loss). Other comprehensive income/(loss) includes certain changes in equity that are excluded from net loss, specifically, the effects of foreign currency translation adjustments and any unrealized gains or losses on available-for-sale securities that are reflected separately in accumulated other comprehensive income/(loss) as stockholders’ equity. For the three and nine months ended September 30, 2006 and 2005, our comprehensive loss was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2006			2005			2006			2005
Net loss	$	(368	)	$	(394	)	$	(2,124	)	$	(2,655	)
Cumulative translation adjustment	33			(5		)	200			82
Unrealized gain/(loss) on available for sale securities	(5		)	3			(5		)	6
Total comprehensive loss	$	(340	)	$	(396	)	$	(1,929	)	$	(2,567	)

E) Net Loss Per Share

Basic net loss per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net loss per share incorporates the dilutive effect of common stock equivalent options, warrants and other convertible securities. Shares used to compute dilutive net loss per share exclude common share equivalents, as their inclusion would have an antidilutive effect.

The following potential common shares have been excluded from the computation of diluted net loss per share for the periods presented because their effect would have been antidilutive:

	As of September 30,
(in thousands)	2006	2005
Shares issuable upon exercise of stock options	2,716	2,838
Shares issuable upon conversion of convertible securities	2,238	2,109
Shares issuable upon exercise of outstanding warrants	400	400
Unvested restricted stock awards	430	15
	5,784	5,362

F) Stock-Based Compensation

As of September 30, 2006, the Company has granted options and/or restricted stock awards under the following four stock-based compensation plans: (i) the 2006 Stock Incentive Plan (the “2006 Plan”), which was adopted by the Company’s Board of Directors on March 9, 2006 and was approved by the Company’s stockholders on May 10, 2006 and which authorizes the issuance of up to an aggregate of 2,000,000 shares of common stock to officers, directors, advisors, consultants and employees of the Company; (ii) the 1997 Stock Option Plan (the “1997 Plan”), which expires in March 2007 and is intended to be replaced by the 2006 Plan, (iii) the 1994 Stock Option Plan (the “1994 Plan”), which expired in January 2004 and, accordingly, has no shares available for future grant and (iv) the 1994 Director Option Plan (the “Director Plan”), which expired in January 2000 and, accordingly, has no shares available for future grant. The Company’s 2006 Plan, 1997 Plan and 1994 Plan each provide for the grant of Incentive Stock Options (“ISOs”) to officers and employees and Non-Statutory Stock Options (“NSOs”) to officers, directors, advisors, consultants and employees of the Company. Options granted under such plans generally become exercisable in five equal annual installments beginning on the first anniversary of the date of the grant and have a maximum term of ten years from the date of grant. The Company’s Director Plan provided for the grant of NSOs to directors of the Company who are not officers or employees of the Company or any subsidiary of the Company. Options granted under the Director Plan vest in either two or five equal installments beginning on the first anniversary of the date of the grant depending on the nature of the grant and have a maximum term of ten years from the date of grant.

The 2006 Plan and 1997 Plan also provide for the grant of restricted stock awards to officers, directors, advisors, consultants and employees of the Company. Generally, the restricted stock awards are subject to a right of repurchase by the Company if service is terminated prior to specified dates and/or if specified performance conditions are not met, which right of repurchase lapses over time. Ownership of restricted stock cannot be transferred, except under specified circumstances, until the foregoing repurchase restrictions

have lapsed. In connection with restricted stock grants, the Company records compensation expense based on the fair value of the shares at the time of grant. This stock compensation is amortized on a straight-line basis over the vesting periods.

Pursuant to the terms of the 2006 Plan, upon re-election to the Board of Directors, each non-employee Director is eligible to receive a grant of 2,500 shares of restricted common stock, priced at $0.01 per share and subject to repurchase by the Company in the event that the Director ceases to serve on the Board of Directors during the two year period after the date of grant.

On June 1, 2006, the Board of Directors awarded an aggregate of 400,000 shares of restricted common stock to the Company’s executive officers under the 2006 Plan. The shares of restricted common stock are subject to a right of repurchase by the Company which lapses on June 1, 2010 subject to the achievement by the Company of specified stockholder returns on its common stock. If on June 1, 2010, the four-year cumulative total stockholder return on the Company’s common stock is equal in dollar amount to the four-year cumulative total return for the NASDAQ Medical Equipment Index (“NASDAQ Index”), 25% of the restricted stock award will vest and no longer be subject to the repurchase option. An additional 1.6304% of the restricted stock award will vest and become free of the repurchase option for each one percentage that the four-year cumulative total stockholder return on the Company’s common stock exceeds the four-year cumulative total return for the NASDAQ Index. The aggregate intrinsic value of the 400,000 shares of the Company’s common stock underlying the restricted stock awards was $2.40 million, based on the closing price of the Company’s common stock on the NASDAQ Global Market on the date of grant. The Company utilized a Monte-Carlo simulation to simulate a range of possible future stock prices over the four-year period, for the Company’s common stock and the NASDAQ Index to determine the number of restricted shares that may vest, based upon such simulation. Using the Monte-Carlo simulation method, the Company calculated an aggregate compensation cost of $580,000 at the time of the grant. The Company will recognize this compensation cost over the four-year service period whether or not the market condition is actually satisfied. In the event that a qualifying change in the control of the Company occurs prior to June 1, 2010, the Company’s repurchase option will fully lapse, and the Company will then recognize a compensation change equal to the full $2.40 million intrinsic value less any previously recognized compensation expense.

Pursuant to the Company’s 2000 Employee Stock Purchase Plan, the Company may issue and sell to its eligible employees up to an aggregate of 100,000 shares of common stock at a purchase price equal to 85% of the lower of the fair market value on the first or last day of each six-month offering period. Eligible employees may elect to have between 1% and 10% of their regular compensation withheld through payroll deductions to pay the purchase price of the shares at the end of the offering period, subject to limitations specified in the plan.

The Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), beginning January 1, 2006, using the modified prospective transition method. This statement requires the Company to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize cost over the requisite service period. Under the modified prospective transition method, the Company has not adjusted its financial statements for periods prior to the date of adoption for the change in accounting. However, the Company will recognize compensation expense for (a) all share-based payments granted after the effective date and (b) all awards granted to employees prior to the effective date that remain unvested on the effective date. The Company recognizes compensation expense on fixed awards with pro rata vesting on a straight-line basis over the awards vesting period.

Prior to January 1, 2006, the Company used the intrinsic value method to account for stock-based employee compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and, therefore, the Company did not recognize compensation expense in association with employee options granted at or above the market price of the Company’s common stock at the date of grant.

As a result of adopting SFAS 123R, stock-based compensation charges during the three and nine months ended September 30, 2006 increased by approximately $289,000 and $938,000, respectively. Net loss applicable to common stockholders for the three and nine months ended September 30, 2006 increased as compared to the same periods in 2005 by $0.02 and $0.06 per basic and diluted share, respectively. Stock-based compensation charges for stock options and awards granted during the first nine months of 2006 were $453,000.

The following table presents the stock-based compensation expense for the three and nine months ended September 30, 2006:

	Three Months		Nine Months
(in thousands)	Ended September 30, 2006		Ended September 30, 2006
Cost of product sales	$	47	$	135
Research and development	19		51
Sales	84		235
Marketing	4		11
General, administrative and patent	156		597
	$	310	$	1,029

The fair value of options granted during the three and nine months ended September 30, 2006 and 2005 is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Options granted (in thousands)	47			14			552			465
Weighted average exercise price	$	5.83		$	5.60		$	7.01		$	4.45
Weighted average grant date fair value	$	4.12		$	4.25		$	5.29		$	3.16
Assumptions:
Dividend yield	0		%	0		%	0		%	0		%
Expected volatility	77		%	90		%	85		%	83		%
Risk-free interest rate	4.86		%	4.21		%	4.90		%	3.77		%
Expected term (years)	6.20			5.93			6.30			5.70

Historical Company information was the primary basis for the expected volatility and the expected term assumptions. Based on the analysis of the historical forfeitures performed during the three months ended September 30, 2006, the Company changed its estimated forfeiture rate to 15% from 14%, which was the forfeiture rate utilized for the six-month period ended June 30, 2006. Prior to January 1, 2006, forfeitures were recorded on an actual basis.

The following table presents a reconciliation of reported net loss and per share information to pro forma net loss and per share information that would have been reported if the fair value method had been used to account for stock-based employee compensation for all periods prior to January 1, 2006:

	Three Months			Nine Months
(in thousands)	Ended September 30, 2005			Ended September 30, 2005
Net loss applicable to common stockholders
As reported	$	(519	)	$	(3,024	)
Pro forma compensation expense	(229		)	(644		)
Pro forma net loss	$	(748	)	$	(3,668	)

Basic and diluted loss per share
As reported	$	(0.04	)	$	(0.21	)
Pro forma	$	(0.05	)	$	(0.25	)

Changes in outstanding stock options for the nine months ended September 30, 2006, were as follows:

(in thousands, except exercise price and term)	Number of Stock Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at December 31, 2005	2,623		$	4.07
Granted	552		$	7.01
Exercised	(317	)	$	2.05
Forfeited	(142	)	$	5.60

Outstanding at September 30, 2006	2,716		$	4.83	7.00	$	6,680

Exercisable at September 30, 2006	1,043		$	5.50	4.52	$	2,761
Vested or expected to vest at September 30, 2006	2,202		$	4.90	6.61	$	5,530

Changes in outstanding restricted stock awards for the nine months ended September 30, 2006, were as follows:

(in thousands, except fair value)	Number of Restricted Shares	Weighted Average Grant Date Fair Value
Outstanding at December 31, 2005	15	$	3.90
Awarded	415	$	1.65
Outstanding at September 30, 2006	430	$	1.73

The aggregate intrinsic value of options outstanding at September 30, 2006 of $6.68 million is calculated as the difference between the exercise price of the underlying options and the market price of the Company’s common stock for the 2,084,400 shares that had exercise prices that were lower than the $6.60 closing market price of the Company’s common stock at September 29, 2006. The total intrinsic value of options exercised was $1.61 million during the nine months ended September 30, 2006, and $1.48 million for the nine months ended September 30, 2005, determined as of the date of exercise.

At September 30, 2006, there was $3.01 million and $636,000 of unrecognized compensation cost, net of estimated forfeitures, related to non-vested options and restricted stock awards, respectively, which the Company expects to recognize over a weighted-average period of 3.78 years and 3.49 years, respectively. However, the amount of stock compensation expense recognized in any future period cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. The adoption of SFAS 123R did not require any cumulative adjustments to the Company’s financial statements.

2. Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following as of:

(in thousands)	September 30, 2006		December 31, 2005
Raw material	$	257	$	209
Work in process	800		878
Finished goods	1,501		1,348
Total inventory	$	2,558	$	2,435

Included in inventory is an excess and obsolete product valuation allowance for finished goods of $291,000 and $117,000 as of September 30, 2006 and December 31, 2005, respectively.

3. Segment Information

The Company develops microspheres and other ancillary embolotherapy products for use in the treatment of uterine fibroids, hypervascularized tumors and arteriovenous malformations. The Company operates exclusively in the medical device business, which the Company considers as one business segment. Financial information by geographic area, attributed to countries according to the location of customers and equipment, is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2006		2005		2006		2005
Revenues:
United States	$	4,097	$	3,072	$	11,870	$	8,980
France	823		754		2,645		2,611
Other European Union countries	405		386		1,340		1,245
Other foreign countries	319		200		695		494
Total revenues	$	5,644	$	4,412	$	16,550	$	13,330

(in thousands)	September 30, 2006		December 31, 2005
Long-lived assets:
United States	$	395	$	297
France	540		561
Total long-lived assets	$	935	$	858

4. Common Stock

On February 22, 2006, the Company sold 2,075,000 shares of common stock at a price per share of $7.00 to several investors in a private placement. Upon payment of all offering expenses, the Company received net proceeds of approximately $13.50 million. The common stock was issued in reliance upon the exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder, relative to sales by an issuer not involving any public offering. The proceeds are being used to fund current operations.

5. Contingencies

Company’s insurer under reservation of rights with respect to the claim of punitive damages, for which an exclusion from coverage exists. The Company has filed an answer to this lawsuit in which it has denied the claims being made. The Company believes that this lawsuit is without merit and that it has viable defenses to the allegations in the complaint. Accordingly, the Company intends to defend against the claims vigorously. However, the Company cannot give any assurance that it will prevail and it is currently unable to predict the impact, financial or otherwise, of this product liability litigation.

6. Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 151, “Inventory Costs—an amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4” (“SFAS 151”). SFAS 151 is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting Standards Board (“IASB”) toward development of a single set of high quality accounting standards. The FASB and the IASB noted that both ARB No. 43, Chapter 4 and International Accounting Standard No. 2, “Inventories,” (“IAS No. 2”) require that abnormal amounts of idle freight, handling costs and wasted materials be recognized as period costs; however, the FASB and the IASB noted that differences in the wording of the two standards could lead to inconsistent application of those similar requirements. The FASB concluded that clarifying the existing requirements in ARB No. 43, Chapter 4 by adopting language similar to that used in IAS No. 2 is consistent with its goals of improving financial reporting in the United States and promoting convergence of accounting standards internationally. The adoption of SFAS 151 by the Company as of January 1, 2006 did not have an impact on the results of operations and financial position of the Company.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (the “Interpretation”). The Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006. The Company has not completed its evaluation of the Interpretation, but does not currently believe that adoption will have a material impact on its results of operations, financial position or cash flows.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes included elsewhere in this report. Some of the information contained in this discussion and analysis and set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the section titled “Risk Factors” for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We develop, manufacture and market products for medical applications using embolotherapy techniques. Embolotherapy is the therapeutic introduction of various substances into a patient’s circulatory system to occlude blood vessels, either to arrest or prevent hemorrhaging or to devitalize a structure or organ by occluding its blood supply. Our core technologies consist of patented bioengineered polymers, which are chemical compounds that we create through the application to medical science of engineering principles and manufacturing methods. These core technologies are used to produce miniature spherical beads, or microspheres, with unique properties for a variety of applications. In a typical embolotherapy procedure using our products, an interventional radiologist injects our microspheres through a catheter into the blood vessels that feed these target areas. By selectively blocking the target tissue’s blood supply, the deprived tissue will either become destroyed or devitalized, designed to result in therapeutic benefit.

We currently market and sell three microsphere products: our Embosphere® Microspheres, which are marketed for uterine fibroids, hypervascularized tumors and other arteriovenous malformations in the United States, the European Union and several other foreign markets; our EmboGold® Microspheres, which are marketed for hypervascularized tumors and other arteriovenous malformations in the United States, the European Union and several other foreign markets; and our HepaSphere™ Microspheres, which are marketed in the European Union for primary and metastatic liver cancer and are also sold in limited quantities in Japan pursuant to private import regulations. In the first nine months of 2006, and during the fiscal year ended December 31, 2005, we generated revenues primarily from product sales of our Embosphere Microspheres in North America and the European Union. We also generated revenues from product sales in other geographic territories, including the Middle East, Africa, South America and Asia. Product revenues also include the sale of accessory embolotherapy devices such as our EmboCath® Hydrophilic Infusion Catheter, Segway® Guidewire and our Sequitor™ Guidewire, as well as our barium delivery kits and other ancillary medical devices sold exclusively in Europe. We currently derive a majority of our revenues in the United States and the European Union from the sale of Embosphere Microspheres for use in the treatment of uterine fibroids using a procedure called uterine fibroid embolization, or UFE.

Our principal focus is on growing our microsphere and accessory embolotherapy device business worldwide, specifically our Embosphere Microsphere product for the UFE procedure, which we believe will be a key driver to our success. Our marketing strategy is to promote the UFE procedure for patients suffering with uterine fibroids through our ask4UFE.com® awareness and education program and also to specifically promote our Embosphere Microspheres as the product of choice for the UFE procedure. Our success will depend upon the continued acceptance by the medical community, patients and third-party payers of the UFE procedure, our Embosphere Microsphere product and our other products, as safe, medically therapeutic and cost effective.

We have experienced operating losses in each fiscal period since our inception. As of September 30, 2006, we had approximately $21.86 million in cash, cash equivalents and marketable securities, and an accumulated deficit of approximately $81.32 million. Most of our expenditures to date have been for sales and marketing activities, general and administrative expenses and research and development activities. We expect to incur operating losses for the remainder of 2006 as we seek to execute on our business plan, including continuing to establish sales and marketing capabilities and conducting research and development activities.

On February 22, 2006, we sold 2,075,000 shares of our common stock at a price of $7.00 to several investors in a private placement. We received net proceeds of approximately $13.50 million.

On March 13, 2006, we announced that we have instituted a voluntary recall of our HepaSphere Microspheres in Europe and Japan to correct a packaging defect that we identified while conducting aging studies routinely performed on all of our product packaging. HepaSphere Microspheres, which are used in the treatment of primary and metastatic liver cancer, are contained in a prefilled vial that is in turn packaged inside a paper pouch. We determined that a defect in the paper pouch could compromise the sterility of the outside of the vial. If the sterility of the outside of the vial is not maintained, there is the risk that a physician’s hands

can become contaminated when handling the vial. We are not aware of any adverse events resulting from the defects in the paper packaging. We recognized an inventory charge of approximately $30,000 related to the recall of HepaSphere Microspheres during the nine months ended September 30, 2006. Sales of HepaSphere Microspheres outside of the United States resumed in the paper pouch packaging with a shortened shelf life during the second quarter, and we launched the new packaging configuration for HepaSphere Microspheres in the third quarter of 2006.

Research and Development

The following table identifies each of the programs for which we have incurred research and development expenses in the nine months ended September 30, 2006 and 2005, respectively, and the current development phase of each.

Product / Product Candidate		Development Status
Embosphere® Microspheres		Marketed for uterine fibroids, hypervascularized tumors and other arteriovenous malformations in the United States, Canada, European Union, Argentina, Brazil, Costa Rica, Ecuador, Panama, Peru, Uruguay, Hong Kong, Taiwan and Australia; clinical evaluation in China

EmboGold® Microspheres		Marketed for hypervascularized tumors and arteriovenous malformations in the United States, Canada, European Union, Argentina, Brazil, Costa Rica, Ecuador, Panama, Peru, Uruguay, Hong Kong, Taiwan and Australia

EmboCath® Hydrophilic Infusion Catheter		Marketed for infusion of various diagnostic, embolic and therapeutic agents and super-selective angiography within peripheral and coronary vasculature in the United States, Canada, European Union, Argentina, Brazil, Costa Rica, Ecuador, Panama and China

Segway® Guidewire		Marketed for placement of catheters within peripheral and coronary vasculature in the United States, Canada, European Union, Argentina, Brazil, Costa Rica, Ecuador, Panama and China

HepaSphereTM Microspheres(1)		Marketed in the European Union for primary and metastatic liver cancer; clinical evaluation in Japan

SequitorTM Steerable Guidewire		Marketed in the United States, Canada, and in the European Union for various diagnostic and interventional procedures within peripheral vasculature

EmboCath® Plus Infusion Microcatheter		Received market clearance from the United States Food and Drug Administration, or FDA, Health Canada, and CE Mark in the European Union for infusion of various diagnostic, embolic and therapeutic agents and super-selective angiography within peripheral vasculature

QuadraSphereTM Microspheres(2)		Received market clearance from the FDA for embolization of hypervascularized tumors and peripheral arteriovenous malformations

MR (magnetic resonance)—Embosphere Microspheres		Preclinical research—animal studies

(1) Pursuant to our CE Mark approval in the European Union, HepaSphere Microspheres are indicated for use in the embolization of blood vessels for therapeutic or preoperative purposes in the following procedures: embolization of hepato-cellular carcinoma and the embolization of hepatic metastasis. Hepato-cellular carcinoma refers to cancer which originates in the liver and hepatic metastasis refers to cancer which has spread to the liver from other sites in the body. We have exclusive worldwide rights to the HepaSphere Microsphere technology under a license from Dr. Shinichi Hori, subject only to Dr. Hori’s right to conduct clinical trials on our behalf in Japan, treat patients at Rinku Medical Center and Osaka Medical Center in Japan and engage in research at Osaka University.

(2) In Novmember 2006, we received marketing clearance in the United States from the FDA for our QuadraSphere Microsphere product candidate for the treatment of hypervascularized tumors and peripheral arteriovenous malformations. Although our QuadraSphere Microspheres are technically identical in all respects to our HepaSphere Microspheres, our QuadraSphere Microspheres are not specifically indicated for use in hepato-cellular carcinoma and hepatic metastasis. FDA regulations require that we conduct formal clinical trials prior to seeking to claim the use of the QuadraSphere Microspheres for the treatment of a specific disease or condition, such as hepato-cellular cancer or hepatic metastasis, while European Union regulations do not mandatorily require it for this class of medical devices. Accordingly, in order for us to seek FDA clearance to promote the use of QuadraSphere Microspheres for the embolization of hepato-cellular carcinoma and hepatic metastasis in the United States, we will be required to undertake clinical trials.

Research and development expenses relate primarily to:

· research to identify and evaluate new and innovative embolotherapy products based on our platform microsphere technology, such as our MR (magnetic resonance) Embosphere Microspheres;

· preclinical testing and clinical trials of our HepaSphere Microsphere, Sequitor Steerable Guidewire, EmboCath Plus Infusion Microcatheter, and our QuadraSphere Microsphere products;

· development related to improving manufacturing processes; and

· product and production facilities validation processes under FDA Good Manufacturing Practices.

Our research and development functions typically work on a number of projects concurrently. In addition, except for clinical expenses, a substantial amount of fixed research and development costs such as salary and salary-related benefits, rent, equipment depreciation, utilities, insurance and maintenance are shared among various programs. Accordingly, we have not historically tracked specific costs for each of our research and development projects.

The successful development of our product candidates is highly uncertain. We cannot reasonably estimate or know the nature, timing and estimated costs of the efforts necessary to complete the development of, or the period in which material net cash inflows are expected to commence from, any of our product candidates due to the numerous risks and uncertainties associated with developing medical devices, including the uncertainty of:

· the scope, rate of progress and cost of clinical trials and other research and development activities undertaken by us;

· future clinical trial results;

· the cost, timing and success of regulatory approvals;

· the cost, timing and success of establishing sales, marketing and distribution capabilities;

· the cost of establishing clinical and commercial supplies of our product candidates and any products that we may develop;

· the effect of competing technological and market developments; and

· the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

Any failure to complete the development of our product candidates in a timely manner, or at all, could have a material adverse effect on our operations, financial position and liquidity. A discussion of the risks and uncertainties associated with completing our projects on schedule, or at all, and some consequences of failing to do so, are set forth in “Risk Factors.”

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure at the date of our financial statements. The significant accounting policies which we believe are most critical in gaining an understanding of our financial statements include policies and judgments relating to revenue recognition, stock-based compensation, accounts receivable and inventories. Actual results could differ materially from these estimates. For a more detailed explanation of the judgments made in these areas, refer to note B of the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005, which is on file with the Securities and Exchange Commission, or SEC. The significant accounting estimates which we believe are the most critical to gaining a full understanding of and evaluating our reported financial results include the following:

Revenue Recognition

We comply with the revenue recognition guidelines summarized in Staff Accounting Bulletin, or SAB, No. 104, “Revenue Recognition.” We recognize revenue from product sales when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is reasonably assured, persuasive evidence of an arrangement exists (a valid purchase order from an approved customer), and the sales price is fixed or determinable. We establish reserves for potential sales returns and evaluate the adequacy of those reserves based upon realized experience. Under our current policy, only those products on a customer’s initial order qualify for product satisfaction-related credit returns. To date, returns related to product satisfaction have been immaterial. While such returns have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same return rates that we have in the past. Any significant change in product satisfaction and any resulting credit returns could have a material adverse impact on our operating results for the period or periods in which such returns materialize.

Stock Based Compensation

We adopted the provisions of Statement of Financial Accounting Standards, No. 123R, “Share-Based Payment” or SFAS 123R, beginning January 1, 2006, using the modified prospective transition method. This statement requires us to measure the cost of employee services in exchange for an award of equity based on the grant-date fair value of the award and to recognize cost over the requisite service period. Under the modified prospective transition method, financial statements for periods prior to the date of adoption are not adjusted for the change in accounting. However, we recognize compensation expense for (a) all share-based payments granted after the effective date and (b) all awards granted to employees prior to the effective date that remain unvested on the effective date. We recognize compensation expense on fixed awards with pro rata vesting on a straight-line basis over the awards’ vesting period.

Prior to January 1, 2006, we used the intrinsic value method to account for stock-based employee compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and therefore we did not recognize compensation expense in association with options granted at or above the market price of our common stock at the date of grant.

As a result of adopting the new standard, stock-based compensation charges during the three and nine months ended September 30, 2006 increased by approximately $289,000 and $938,000, respectively. Net loss applicable to common stockholders for the three and nine months ended September 30, 2006, increased by $0.02 and $0.06 per basic and diluted share, respectively. At September 30, 2006, there was $3.01 million and $636,000 of unrecognized compensation cost, net of estimated forfeitures related to non-vested options and awards, which we expect to recognize over a weighted-average period of 3.78 and 3.49 years, respectively. However, the amount of stock compensation expense recognized in any future period cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. The adoption of SFAS 123R did not require any cumulative adjustments to our financial statements.

We estimate the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model, which requires the consideration of several subjective assumptions, including the expected dividends on our common stock, the expected volatility of our common stock, the risk-free interest rate for the expected option term and the expected term of the option. Equity instrument valuation models, such as the Black-Scholes valuation model, are highly subjective. Any significant changes in any of our estimates and judgments, including those used to select the inputs for the Black-Scholes valuation model, could have a significant impact on the

fair value of the equity instruments granted or sold and the associated compensation charge, if any, we record in our financial statements.

Accounts Receivable

We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical payment experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Substantially all of our receivables are due from hospitals, distributors, health care clinics and managed care systems located throughout the United States, Canada, Europe, Asia and South America. A significant portion of products sold, both foreign and domestic, is ultimately funded through government reimbursement programs. As a consequence, changes in these programs can have an adverse impact on liquidity and profitability of our customer base. If our credit losses are higher than expected, including as a result of changes in government reimbursement programs, then our provision for estimated credit losses may be inadequate, which could have an adverse impact on our operating results.

Inventories

We value our inventory at the lower of the actual cost to purchase or manufacture the inventory or the market value for such inventory. We regularly review inventory quantities in process and on hand and record a provision for production loss and obsolete inventory based primarily on actual loss experience and on our estimated forecast of product demand. A significant decrease in demand caused by our release of new products, which may compete with our existing products, could result in an increase in the amount of excess inventory quantities on hand. In the future, if our inventory is determined to be overvalued, we would be required to recognize such charges in our costs of product sales at the time of such determination. Although we make every effort to ensure the accuracy of our production process and forecasts of future product demand, any significant unanticipated changes in production yield or product demand could have a significant impact on the value of our inventory and our reported operating results.

Results of Operations

Three and Nine Months Ended September 30, 2006 and 2005

Revenue and Margin Overview

	For the Three Months Ended,						Increase/			Increase/
	September 30,						(Decrease)			(Decrease)
(in thousands)	2006			2005			($)			(%)
Total revenues	$	5,644		$	4,412		$	1,232		28	%
Costs of product sales	1,708			1,546			162			10	%
Gross margin	$	3,936		$	2,866		$	1,070		37	%
Gross margin%	70		%	65		%	5		%

	For the Nine Months Ended,						Increase/			Increase/
	September 30,						(Decrease)			(Decrease)
(in thousands)	2006			2005			($)			(%)
Total revenues	$	16,550		$	13,330		$	3,220		24	%
Costs of product sales	5,067			4,587			480			10	%
Gross margin	$	11,483		$	8,743		$	2,740		31	%
Gross margin%	69		%	66		%	3		%

Revenues. Total revenues increased for the three and nine month periods ended September 30, 2006, respectively, as compared to the three and nine month periods ended September 30, 2005, primarily due to the following:

· Revenues from microsphere sales in the United States grew approximately $1.03 million and $2.96 million, or 35% and 34%, from the three and nine month periods ended September 30, 2005, respectively, on increased demand for Embosphere Microspheres across all regions. This volume growth is partially due to the addition of five new sales territories in the first nine months of 2006 and, we believe, to increased awareness of the UFE procedures resulting from additional local advertising.

· Revenues from microsphere sales outside of the United States grew approximately $137,000 and $221,000, or 19% and 9%, from the three and nine month periods ended September 30, 2005, respectively, on increased product volumes. Revenues for the three month period ended September 30, 2006 included sales of approximately $60,000 to our distributor located in the People’s Republic of China, for use in clinical evaluations, which were the first sales of Embosphere Microspheres to this distributor in China.

· Revenues from the sale of our new HepaSphere Microsphere product outside of the United States totaled $35,000 and $54,000 in the three and nine month periods ended September 30, 2006. We introduced this product commercially in December 2005.

· Changes in foreign exchange rates during the three month period ended September 30, 2006 as compared to the same period in 2005 increased revenues $56,000 as sales from our French office increased due to the weakening of the U.S. dollar versus the Euro, which averaged 1.27 dollars to the Euro during the three months ended September 30, 2006 compared to 1.22 dollars to the Euro during the three months ended September 30, 2005. Foreign exchange rates during the nine month periods ended September 30, 2006 and 2005 were relatively consistent, averaging approximately 1.24 dollars to the Euro.

Revenues from our delivery system and other products, which include barium delivery kits and other ancillary products, on a three and nine month basis, were consistent with the prior period.

Costs of Product Sales. The increase in costs of product sales in the three and nine month periods ended September 30, 2006, respectively, as compared to the same periods in 2005, was primarily due to higher Embosphere Microsphere sales volume and, to a lesser extent, the recognition of equity compensation costs of approximately $47,000 and $135,000, respectively, resulting from the

adoption of SFAS 123R in January 2006 and costs associated with an increase in reserves for excess inventory of $122,000 and $181,000 respectively, identified during our normal quarterly reviews.

The gross margin improvement as a percentage of revenues for both the three and nine month periods ended September 30, 2006, as compared to the three and nine month periods ended September 30, 2005, was primarily attributable to the increase in microsphere sales net of equity compensation costs and to the increase in inventory reserves.

We expect that future gross margin will be highly correlated with the following factors:

· revenue growth;

· production levels;

· foreign exchange rate movements;

· terms and conditions of subcontracted manufacturer and supplier agreements; and

· future inventory reserve requirements.

Expense Overview

	For the Three Months Ended				Increase/		Increase/
	September 30,				(Decrease)		(Decrease)
(in thousands)	2006		2005		($)		(%)
Research and development	$	511	$	498	$	13	3	%
Sales	2,001		1,372		629		46	%
Marketing	806		512		294		57	%
General, administrative and patent	1,230		949		281		30	%
Total operating expenses	$	4,548	$	3,331	$	1,217

	For the Nine Months Ended				Increase/		Increase/
	September 30,				(Decrease)		(Decrease)
(in thousands)	2006		2005		($)		(%)
Research and development	$	1,654	$	1,648	$	6	0	%
Sales	5,756		4,365		1,391		32	%
Marketing	2,595		1,984		611		31	%
General, administrative and patent	4,192		3,172		1,020		32	%
Total operating expenses	$	14,197	$	11,169	$	3,028

Research and Development Expense. Total research and development expense in the three and nine month periods ended September 30, 2006 was essentially unchanged when compared to the same periods in 2005. The commercial introduction of our EmboCath Plus and Sequitor delivery system products in the three month period ended September 30, 2006 resulted in a decrease in third party development spending, which was offset by an increase in equity compensation costs. In the nine month period ended September 30, 2006, overhead expenses and spending on product development projects in the first quarter of 2006 decreased as compared with the first quarter of 2005, but were offset by increases in spending on various research and development projects in the second quarter of 2006. Research and development expense included $19,000 and $51,000 of equity compensation costs for the three and nine month periods ended September 30, 2006, due to the adoption of SFAS 123R beginning in January 2006.

Sales Expense. Sales expense for the three and nine month periods ended September 30, 2006 increased over the comparable periods in 2005 due to increased recruiting, payroll and related spending incurred with the expansion of the sales team in the United States to support five new sales territories. In addition, sales expense included $84,000 and $235,000 of equity compensation costs for the three and nine month periods ended September 30, 2006, due to the adoption of SFAS 123R beginning in January 2006.

Marketing Expense. Marketing expense for the three and nine month periods ended September 30, 2006, increased over the comparable periods in 2005 primarily due to increased local promotional activities, including radio and transit advertising, and to an increase in promotional materials in an effort to build physician and patient demand for UFE in the United States.

General, Administrative and Patent Expense. General, administrative and patent expense for the three and nine month periods ended September 30, 2006 increased over the comparable periods in 2005 primarily due to an increase in compensation and consulting costs. Included in general, administrative and patent expense for the three and nine month period ended September 30, 2006 is $156,000 and $597,000, respectively, of equity compensation costs, due to the adoption of SFAS 123R beginning in January 2006. In addition, in the first nine months of 2006, we incurred approximately $155,000 in consulting costs to help us position the company for continued growth.

Interest Income, Net. Interest income, net of interest expense, in the three and nine month periods ended September 30, 2006 was $263,000 and $654,000, respectively, compared to $62,000 and $144,000, respectively, in the comparable periods of 2005. The increase of $201,000 and $510,000, respectively, for the three and nine month periods ended September 30, 2006, was primarily due to higher average daily invested cash balances and higher interest rates on available investment grade assets as compared to the prior year periods.

Foreign Exchange Losses, Net. Foreign exchange gains and losses primarily result from Euro to U.S. dollar foreign currency fluctuations on Euro denominated intercompany trade accounts. The foreign exchange losses during the three and nine month periods ended September 30, 2006 totaled approximately $8,000 and $40,000, respectively, compared to a gain of $13,000 and loss of $468,000 in the same periods of 2005. The decrease was primarily due to lower intercompany trade payable and receivable balances, which are denominated in Euros, during the first nine months of 2006 as compared to the first nine months of 2005.

Liquidity and Capital Resources

As of September 30, 2006, we had $21.86 million of cash, cash equivalents and marketable securities, an increase of $13.08 million from $8.77 million at December 31, 2005. This increase was primarily the result of the net proceeds from our private placement of common stock in February 2006, offset by operating losses and changes in working capital. We have historically funded our operations from the net proceeds provided by public and private equity offerings, net revenues, bank financing, equipment financing leases and, to a lesser extent, the exercise of stock options.

Net cash used in operating activities was $730,000 and includes a net loss of $2.12 million and $168,000 in working capital changes. Accounts receivable decreased $56,000 on higher sales offset by a six-day decrease in days sales outstanding, which decreased to 55 days from 61 days at December 31, 2005.

In the first nine months of 2006, we spent $385,000 to purchase manufacturing equipment to produce our delivery system product candidates and to purchase other equipment to support our sales and marketing expansion and to support our existing infrastructure. We anticipate the level of capital expenditures in the fourth quarter of 2006 to increase as we continue to invest in manufacturing equipment, research and development equipment and marketing equipment.

Net cash provided by financing activities was $14.10 million for the nine months ended September 30, 2006, which included $13.50 million of net proceeds from our private placement of 2,075,000 shares of common stock in February 2006 and $702,000 from the exercise of common stock options offset by scheduled principal payments on existing capital leases.

We believe that the approximately $21.86 million in cash, cash equivalents and marketable securities that we have as of September 30, 2006, together with anticipated proceeds from sales of our microspheres, delivery systems and other products, will be sufficient to fund our operating and capital requirements as currently planned through 2007. In the longer term, we expect to fund our operations and capital requirements through a combination of expected proceeds from product sales and capital equipment financings. However, our cash requirements may vary materially from those now planned due to a number of factors, including, without limitation, our failure to achieve expected revenue amounts, costs associated with changes in our UFE marketing programs, unanticipated research and development expenses, the scope and results of preclinical testing, changes in the focus and direction of our research and development programs, competitive and technological advances, the timing and results of FDA regulatory review and the market’s acceptance of any approved products, including our Embosphere Microspheres for UFE and HepaSphere Microspheres.

We may incur additional costs, including costs related to ongoing research and development activities, preclinical studies, clinical trials, the expansion of our manufacturing, laboratory and administrative functions, as well as costs relating to further market development and commercialization efforts. We may also need additional funds for such activities and for possible strategic acquisitions of synergistic businesses, products and/or technologies. These additional funds may be substantial and raised from time to time through additional public or private sales of equity, through borrowings or through other financings. There are no assurances that we will be able to obtain any additional funding that may be required, or that any such funding will be on acceptable terms.

Borrowing Arrangements

In June 2004, we entered into an agreement to extend until June 2007 the credit facility with a bank that we originally entered into for an initial period of two years in May 2002. The amended agreement reduced our maximum borrowings from $5.00 million to $3.00 million. We may use amounts borrowed under the agreement for general working capital and corporate purposes, subject to limitations defined in the agreement.

There were no borrowings outstanding under this agreement as of September 30, 2006. Each available 30, 60, 90 or 180-day advance will bear interest at a per annum rate, at our option, equal to either (i) a variable rate as determined by the bank or (ii) a rate equal to the corresponding 30, 60, 90 or 180-day London Inter Bank Offer Rate, or LIBOR rate (5.32% as of September 30, 2006), plus a LIBOR advance rate spread as determined by certain current working capital balances at the time of the advance. In connection with the credit facility, we entered into a security agreement pursuant to which we have pledged to the bank all of our U.S. assets, excluding our equity ownership of BioSphere Medical SA, a wholly owned subsidiary, as collateral.

Other Contractual Obligations

On February 24, 2006, we amended the lease for the office and laboratory facility we currently occupy in Rockland, Massachusetts. Pursuant to the amendment, the leased premises was increased to a total area of approximately 13,000 square feet at a cost of $19,500 per month, and the term of the lease was extended from March 31, 2007 to February 28, 2009. Our other material contractual obligations are set forth in our annual report on Form 10-K for the year ended December 31, 2005, which is on file with the SEC.

Off Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

Inflation

We believe that the effects of inflation generally do not have a material adverse impact on our operations or financial condition.

New Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 151, “Inventory Costs—an amendment of Accounting Research Bulletin, or ARB, No. 43, Chapter 4,” or SFAS 151. SFAS 151 is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting Standards Board, or IASB, toward development of a single set of high quality accounting standards. The FASB and the IASB noted that ARB No. 43, Chapter 4 and International Accounting Standard No. 2, “Inventories,” or IAS No. 2, require that abnormal amounts of idle freight, handling costs, and wasted materials be recognized as period costs; however, the FASB and the IASB noted that differences in the wording of the two standards could lead to inconsistent application of those similar requirements. The FASB concluded that clarifying the existing requirements in ARB No. 43, Chapter 4 by adopting language similar to that used in IAS No. 2 is consistent with its goals of improving financial reporting in the United States and promoting convergence of accounting standards internationally. Our adoption of SFAS 151 as of January 1, 2006, did not have a material impact on our results of operations and financial position.

Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006. We have not completed our evaluation of the Interpretation, but we do not currently believe that adoption will have a material impact on our results of operations, financial position or cash flows.

Forward Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including:

· any projections of revenues, expenses, earnings or losses from operations, or other financial items;

· any statements of the plans, strategies and objectives of management for future operations;

· any statements concerning product research, development and commercialization timelines;

· any statements about our expectations regarding market acceptance and market penetration for our products;

· any statements of expectation or belief; and

· any statements of assumptions underlying any of the foregoing.

The risks, uncertainties and assumptions referred to above include risks that are described below in “Risk Factors” and elsewhere in this quarterly report and that are otherwise described from time to time in our SEC reports filed after this report.

The forward-looking statements included in this quarterly report represent our estimates as of the date of this quarterly report. We specifically disclaim any obligation to update these forward-looking statements in the future. These forward-looking statements should not be relied upon as representing our estimates or views as of any date subsequent to the date of this quarterly report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments

As of September 30, 2006, we did not participate in any derivative financial instruments or other financial and commodity instruments. However, in the future we may consider certain financing instruments, including foreign currency forward contracts or alternative instruments, which may be considered derivative in nature.

Primary Market Risk Exposures

Our primary market risk exposure is in the area of foreign currency exchange rate fluctuations. We are exposed to currency exchange rate fluctuations related to our operations in France. Operations in France are denominated in Euro, and as of September 30, 2006 approximately Euro 890,000 or $1.13 million remained outstanding within the intercompany trade accounts. We have not engaged in formal currency hedging activities to date, but we do have a limited natural hedge in that both our revenues and expenses in France are primarily denominated in the Euro. We also attempt to minimize exchange rate risk by converting non-U.S. currency to U.S. dollars as often as practicable. We generally view our investment in foreign subsidiaries operating under a functional currency (the Euro) other than our reporting currency (the U.S. dollar) as long term. Our investment in foreign subsidiaries is sensitive to fluctuations in foreign currency exchange rates. The effect of a change in foreign exchange rates on our net investment in foreign subsidiaries is reflected in the “Other accumulated comprehensive loss” component of stockholders’ equity. Because our foreign currency exchange rate risk is not material, no quantitative tabular disclosure has been provided.

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. We maintain our portfolio of cash equivalents and short-term investments in money market funds. Due to the conservative nature of our investments, we believe interest rate risk is mitigated.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2006. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2006, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d – 15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2006, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On August 17, 2005, a lawsuit commenced in the Circuit Court, Twenty-Second Judicial Circuit, St. Louis, Missouri captioned Brett Pingel by next friend Dawn LaRose vs. BioSphere Medical, Inc., Bruce Kirke Bieneman, M.D., St. Louis University Hospital, John Stith, M.D and St. Louis University. The lawsuit alleges, among other things, that a juvenile patient suffered permanent bilateral blindness in a nasal angiofibroma embolization as a result of the use of our Embosphere Microspheres or the negligence of the health care providers or both factors combined. All defendants have denied the allegations against them. Plaintiffs seek compensatory and punitive damages. We carry product liability insurance and this case is currently being defended by our insurer under reservation of rights with respect to the claim of punitive damages, for which an exclusion from coverage exists. We have filed an answer to this lawsuit in which we have denied the claims being made. We believe that this lawsuit is without merit and that we have viable defenses to the allegations in the complaint. Accordingly, we intend to defend against the claims vigorously. However, we cannot give any assurance that we will prevail and we are currently unable to predict the impact, financial or otherwise, of this product liability litigation.

ITEM 1A. RISK FACTORS

Investing in our common stock involves a high degree of risk. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we deem immaterial may also impair our business operations. Any of the following risks could materially adversely affect our business, operating results and financial condition and could result in a complete loss of your investment.

The following risk factors restate and supersede the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. We have not made any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005 other than:

· to update financial and stock ownership information as of September 30, 2006;

· to further revise our risk factor titled “If we do not retain our senior management and other key employees, we may not be able to successfully implement our business strategy;”

· to further revise our risk factor titled “If the FDA or other regulatory agencies place restrictions on, or impose additional approval requirements with respect to, products we are then marketing, we may incur substantial additional costs and experience delays or difficulties in continuing to market and sell these products;” and

· to further revise our risk factor titled “Because we rely on a limited number of suppliers, we may experience difficulty in meeting our customers’ demands for our products in a timely manner or within budget.”

Risks Relating to Our Future Profitability, Our Financial Results and Need For Financing

Because we have a history of losses and our future profitability is uncertain, our common stock is a speculative investment.

We have incurred operating losses since our inception and, as of September 30, 2006, had an accumulated deficit of approximately $81.32 million. We expect to spend substantial funds to continue research and product testing, to maintain sales, marketing, quality control, regulatory, manufacturing and administrative capabilities and for other general corporate purposes. We expect to continue to incur operating losses for the remainder of 2006 as we continue our research, development and commercialization efforts.

We may never become profitable. If we do become profitable, we may not remain profitable on a continuing basis. Our failure to become and remain profitable would depress the market price of our common stock and impair our ability to raise capital and expand, diversify or continue our operations.

We will continue to need additional funds, and if additional capital is not available, we may have to limit, scale back or cease our operations.

We believe that our existing cash and other working capital, together with anticipated proceeds from sales of our products, will be sufficient to fund our operating and capital requirements, as currently planned through 2007.

Our currently planned operating and capital requirements primarily include the need for working capital to:

· produce and manufacture our products;

· support our sales and marketing efforts for our Embosphere Microsphere products for UFE and other indications, as well as our other products for sale;

· support our research and development activities; and

· fund our general and administrative costs and expenses.

However, our cash requirements may vary materially from those now planned due to a number of factors, including, without limitation, the amount of revenues we generate from sales of our products, in particular from the use of our Embosphere Microspheres for UFE; changes in our UFE regulatory and marketing programs; anticipated research and development efforts; cost and time involved in preclinical and clinical testing; costs resulting from changes in the focus and direction of our research and development programs; competitive advances that make it harder for us to market and sell our products; the timing and cost of FDA regulatory review and, the market’s acceptance of any approved products.

We also expect to incur additional costs related to ongoing research and development activities, preclinical studies, clinical trials, and the expansion of our manufacturing, laboratory and administrative capabilities, as well as costs relating to further market development and commercialization efforts. We may also need additional funds for possible strategic acquisitions of synergistic businesses, products and/or technologies. If adequate funds are not available, we may be required to delay, scale back or eliminate some of our research, development, sales and marketing initiatives, which would have a material adverse effect on our business, results of operations and ability to achieve profitability.

We may need to raise additional funds to develop and commercialize our new products successfully. If we cannot fund these new products through cash generated from existing operations and cannot raise more funds, we could be required to reduce our capital expenditures, scale back our product development, reduce our workforce and license to others products or technologies that we otherwise would seek to commercialize ourselves. Although we may seek additional funding through collaborative arrangements, borrowing money or the sale of additional equity securities, we may not receive additional funding on reasonable terms, or at all. Any sales of additional shares of our capital stock are likely to dilute our existing stockholders.

Further, if we issue additional equity securities, the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. Alternatively, we may borrow money from commercial lenders, possibly at high interest rates, which will increase the risk of your investment in us.

If operating results fluctuate significantly from quarter to quarter, then our stock price may decline.

Our operating results could fluctuate significantly from quarter to quarter. These fluctuations may be due to a number of factors, including:

· the timing and volume of customer orders for our products;

· procedure cancellations;

· introduction or announcement of competitive products;

· regulatory approvals;

· product recalls;

· turnover in our direct sales force;

· timing and amount of expenses;

· reductions in orders by our distributors;

· effectiveness of new marketing and sales program;

· changes in management;

· negative publicity; and

· general economic conditions.

Due to these fluctuations, our operating results in some quarters may not meet the expectations of our investors. In that case, our stock price may decline.

In addition, a large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed. Accordingly, if our revenues decline or do not grow as much as we anticipate, we might not be able to improve our operating margins.

Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period.

Risks Relating to Our Industry, Business and Strategy

If we do not achieve widespread market acceptance of our microsphere products, our business prospects will be seriously harmed.

Our microspheres are based on new technologies and therapeutic approaches. In the United States, we began selling our microsphere product in the first half of 2000. In November 2002, we received FDA clearance to market our Embosphere Microspheres in the United States for specific use in the embolization of uterine fibroids. Our success will depend upon increasing acceptance by the medical community, patients and third-party payers that our Embosphere Microspheres and other products are medically therapeutic and cost effective. Our embolotherapy techniques are administered by interventional radiologists. To date we have not achieved widespread market acceptance of our Embosphere Microspheres or other products. In the treatment of uterine fibroids using UFE, we believe that we have not yet achieved widespread acceptance primarily because obstetrics and gynecology physicians may elect to offer and provide other forms of treatment to their patients with uterine fibroids that do not require a referral to another specialist, such as an interventional radiologist. The majority of our revenues are from the sale of our EmboSphere Microsheres for UFE. Accordingly, our future success will depend upon obstetrics and gynecology physicians referring patients to interventional radiologists to receive treatment using our Embosphere Microspheres in lieu of, or in addition to, receiving other forms of treatment that the obstetrics and gynecology physicians can otherwise provide directly.

Negative publicity associated with any adverse medical effects attributed to embolization treatments generally, or our products specifically, may create the market perception that our products are unsafe. For example, patients commonly experience a day or two of post-procedure abdominal pain or cramping. Other infrequently occurring complications may include allergic reactions, rashes, early onset of menopause, infertility and infection that may, in some cases, require a hysterectomy. We are also aware that a small number of the patient population, which we believe constitutes approximately 2% of those receiving the UFE procedure using EmboGold Microspheres, reported a delayed onset of rash and/or pain.

If our microsphere products are not properly used or if the market concludes that our products are not safe or effective, our business could be adversely affected.

Our microspheres are designed to permanently occlude targeted blood vessels. There is some risk that some or all of the microspheres used in a medical procedure may travel in the blood system to sites other than the intended surgical site and occlude, or block, other blood vessels, resulting in the potential for significant adverse health effects on the patient or, in a worst case, even death. Moreover, to use our microspheres correctly for a particular medical procedure, trained physicians must select and use the proper size and quantity. A physician’s selection and use of the wrong size or quantity of our microspheres could potentially have significant adverse health effects on the patient, including death. It is necessary for us to educate physicians about the selection and use of the proper size and quantity of microspheres in patient therapy. In addition, there is only limited data concerning the long-term health effects on persons receiving embolotherapy using our microspheres. For example, the effect of UFE on continued fertility has not yet been specifically studied, and our FDA clearance for Embosphere Microspheres currently does not include women who desire future pregnancy.

If we are not able to successfully educate physicians to properly use our product, or if the market determines or concludes that any of our products are not safe or effective for any reason, we may be exposed to product liability claims, product recalls, fines or other penalties or enforcement actions by regulatory agencies and associated adverse publicity. For example, in August 2005 we were named as a defendant in a product liability lawsuit in which the defendant, a minor child, claims that he was rendered blind in both eyes as a result of the use of our Embosphere Microsphere product during a nasal angiofibroma embolization. See “We may be exposed to product liability claims, and if we are unable to obtain or maintain adequate product liability insurance, then we may have to pay significant monetary damages in a successful product liability claim against us.” While we have product liability insurance, we may not be able to maintain such insurance at favorable rates, or at all, and any successful judgments against us could exceed our coverage. In addition, we have provided to our customers a satisfaction guarantee that requires us to accept the return of any inventory and credit the entire amount of the original order if a properly trained customer is not satisfied with the performance of our microspheres or our delivery system products.

If we experience adverse publicity or are subject to product liability claims, excessive guarantee claims, recalls, fines and the like, we will be unable to achieve widespread market acceptance of our microsphere products and achieve profitability. For example, in March 2006 we announced that we had instituted a voluntary recall of our HepaSphere Microspheres in Europe and Japan to correct a packaging defect that we identified while conducting aging studies routinely performed on all of our product packaging. HepaSphere Microspheres are contained in a prefilled vial that is in turn packaged inside a paper pouch. We determined that a defect in the paper pouch may compromise the sterility of the outside of the vial. If the sterility of the outside of the vial is not maintained, there is the risk that a physician’s hands can become contaminated when handling the vial. Although we are not aware of any adverse events resulting from the defects in the paper packaging, our voluntary recall of this product could result in reputational harm or a perception that the product is not safe, either of which could adversely affect market acceptance of our microsphere products.

If we do not successfully market and promote our Embosphere Microspheres for use in uterine fibroid embolization, our product revenues will not increase.

In the first quarter of 2003, we launched our ask4UFE campaign to increase awareness among patients, referring physicians, interventional radiologists and third-party payers of UFE as an alternative treatment for fibroids. We believe the majority of our revenues in the United States for the two years ended December 31, 2005, and for the nine months ended September 30, 2006, were derived from the sale of Embosphere Microspheres for use in UFE. Although we believe that EmboGold Microspheres accounted for a significant portion of revenue, we currently do not intend to seek 510(k) clearance for use of EmboGold Microspheres in UFE. Because we do not intend to seek 510(k) clearance of EmboGold Microspheres, we believe that our future product revenues are substantially dependent on our ability to achieve widespread acceptance of the use of Embosphere Microspheres for the treatment of UFE, and if we do not achieve increased market acceptance, our product revenues, profitability and success will be adversely affected. We are continuing to market EmboGold Microspheres for use in hypervascularized tumors (other than uterine fibroids) and arteriovenous malformations. If we cease to market EmboGold Microspheres for any reason, we could incur substantial costs to write off and replace existing inventories. As of September 30, 2006, we had EmboGold inventory with a carrying value of $205,000, including in-process inventory of $120,000 and finished goods syringes of $85,000. We currently believe no provision for the write-off or replacement of EmboGold Microspheres inventory is required in the accompanying financial statements.

If we do not maintain our relationships with the healthcare community, our growth will be limited and our business could be harmed. If gynecologists, obstetricians, interventional radiologists and other healthcare providers do not recommend and endorse our products, our sales may decline or we may be unable to increase our sales and profits.

Our relationships with gynecologists, obstetricians, interventional radiologists and other healthcare providers are critical to our continued growth. We believe that these relationships are based on the quality of our products, our long-standing commitment to embolotherapy treatments, our marketing efforts and our presence at medical society and trade association meetings. Any actual or perceived diminution in our reputation or the quality of our products, or our failure or inability to maintain these other efforts could damage our current relationships, or prevent us from forming new relationships, with healthcare professionals and cause our growth to be limited and our business to be harmed.

In order for us to sell our products, healthcare professionals must recommend and endorse them. We may not obtain the necessary recommendations or endorsements from this community. Acceptance of our products depends on educating the medical community as to the distinctive characteristics, perceived benefits, safety, clinical efficacy and cost-effectiveness of our products compared to traditional methods of treatment and the products of our competitors, and on training healthcare professionals in the proper application of our products. If we are not successful in obtaining the recommendations or endorsements of gynecologists, obstetricians, interventional radiologists and other healthcare professionals for our products, our sales may decline or we may be unable to increase our sales and profits.

If we experience delays, difficulties or unanticipated costs in establishing the sales, distribution and marketing capabilities necessary to successfully commercialize our products, we will have difficulty maintaining and increasing our sales.

We are continuing to develop sales, distribution and marketing capabilities in the United States, the European Union, Asia and in South America. In 2003 we began a marketing strategy to promote UFE awareness and the benefits of our product for the treatment of uterine fibroids. It will be expensive and time-consuming for us to develop a global marketing and sales force. Moreover, we may choose, or find it necessary, to enter into strategic collaborations to sell, market and distribute our products. At September 30, 2006 we had a sales force of 26 persons located principally in the United States. Competition for skilled salespersons in the medical device industry is intense, and we may not be able to provide adequate incentive to maintain our sales force or to attract new sales personnel or to establish and maintain favorable distribution and marketing collaborations with other companies to promote our products. We have only limited sales and marketing experience both in the United States and internationally and may not be successful in developing and implementing our strategy. Among other things, we need to:

· provide or assure that distributors provide the technical and educational support customers need to use our products successfully;

· establish and implement successful sales and marketing and education programs that encourage our customers to purchase our products;

· manage geographically dispersed operations; and

· modify our products and marketing and sales programs for foreign markets.

We currently have distribution agreements with approximately 45 third-party distributors. Any third party with whom we have established a marketing and distribution relationship may not devote sufficient time to the marketing and sales of our products, thereby exposing us to potential expenses in terminating such distribution agreements. For example, in 2002, our subsidiary, BSMA, ended a distribution agreement with a third party in part because of such party’s failure to achieve sales forecasts agreed upon by the parties. As a result of subsequent litigation BSMA was required to pay approximately $800,000 in damages arising from such termination and incurred additional legal and administrative expenses incident to the legal proceeding. We and any of our third-party collaborators must also market our products in compliance with federal, state and local laws relating to the providing of incentives and inducements. Violation of these laws can result in substantial penalties. If we are unable to successfully motivate and expand our marketing and sales force and further develop our sales and marketing capabilities, or if our distributors fail to promote our products, we will have difficulty maintaining and increasing our sales.

We may be required to expend significant resources for research, development, testing and regulatory approval of our products under development, and these products may not be developed successfully.

We are developing and commercializing products for medical applications using embolotherapy techniques. Most of our next-generation embolotherapy product candidates, including MR-Embosphere Microspheres, are still in the early stages of research and development. Our products may not provide greater benefits than current treatments or products, or alternative treatments or products under development. All of our products under development will require significant additional research, development, engineering, preclinical and/or clinical testing, regulatory approval and a commitment of significant additional resources prior to their commercialization. Our potential products may not:

· be developed successfully;

· be proven safe and effective in clinical trials;

· offer therapeutic or other improvements over current treatments and products;

· meet applicable regulatory standards or receive regulatory approvals;

· be capable of production in commercial quantities at acceptable costs; or

· be successfully marketed.

If we do not develop and introduce new products, we may not achieve additional revenue opportunities.

We derived approximately 11% of our revenues for the nine month period ended September 30, 2006, from the sale of nonstrategic medical products that we expect will constitute a less significant portion of our revenues on an ongoing basis. These nonstrategic medical products include barium delivery kits sold by us in the European Union, as well as other ancillary devices for hospital and physician use. In addition, we estimate that a significant portion of our revenues for the nine months ended September 30, 2006, and for the year ended December 31, 2005, were derived from the sale of EmboGold Microspheres for UFE, an indication for which we do not have, and do not presently intend to seek, clearance from the FDA to market. We made the decision not to seek FDA clearance for our EmboGold Microsphere product because of reports that a small number of patients treated with UFE using EmboGold Microspheres, which we believe constitute approximately 2% of the total number of patients receiving the procedure, reported a delayed onset of rash and/or pain. Accordingly, we need to develop and introduce new applications for our embolotherapy technology and pursue opportunities for microsphere technology in other medical applications. Any such new application for our embolotherapy technology or microsphere technology will be subject to a number of risks inherent in the development and commercialization of a medical device product, including uncertainties with respect to the successful completion of clinical trials, our ability to achieve and maintain, and our willingness to seek, required regulatory approvals and our ability to successfully commercialize, market and sell these new applications assuming FDA approval is achieved. If, as a result of these or other risks, we are not successful in developing new applications and products, we will not achieve new revenue opportunities.

We may be exposed to product liability claims, and if we are unable to obtain or maintain adequate product liability insurance, then we may have to pay significant monetary damages in a successful product liability claim against us.

The development and sale of medical devices entails an inherent risk of product liability. For example, if we are not able to successfully educate physicians to properly use our products, if patients experience adverse side effects in procedures in which our products are used, or if the market determines or concludes that any of our products are not safe or effective for any reason, we may be exposed to product liability claims. Although we maintain insurance, including product liability insurance, we cannot provide assurance that any claim that may be brought against us will not result in court judgments or settlements in amounts that are in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance.

In August 2005 we were named as a defendant in a lawsuit commenced in the Circuit Court, Twenty-Second Judicial Circuit, St. Louis, Missouri, which we refer to as the Pingel Claim. The lawsuit alleges, among other things, that a juvenile patient suffered

permanent bilateral blindness in a nasal angiofibroma embolization as a result of the use of our Embosphere Microspheres or the negligence of the healthcare providers or both factors combined. Plaintiffs seek compensatory and punitive damages. Although we currently maintain product liability insurance coverage for our products, including the Embosphere Microsphere product that is the subject of the Pingel claim, our existing insurance and any additional insurance we may subsequently obtain may not provide us with adequate coverage against all potential claims. For example, although our product liability insurer has agreed to vigorously defend us with regards to all of the counts set forth against us in the Pingel Claim, the insurer has advised us in writing that any verdict against us for punitive damages is specifically excluded from coverage. The insurer has also advised us that it does not waive any other defenses to coverage that may apply.

Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates or the inability to secure additional insurance coverage in the future. A product liability claim, whether meritorious or not, could be time consuming, distracting and expensive to defend, could be harmful to our reputation, could result in a diversion of management and financial resources away from our primary business and could result in product recalls. In any such case, our business may suffer.

We have instituted a voluntary recall of our HepaSphere Microspheres product in the European Union and Japan, which may result in decreased market acceptance of this product and reputational harm, as well as hindering our ability to generate revenue from sales of the product.

On March 13, 2006, we announced that we instituted a voluntary recall of our HepaSphere Microspheres in Europe and Japan to correct a packaging defect that we identified while conducting aging studies routinely performed on all of our product packaging. We received CE mark approval to sell HepaSphere Microspheres in the European Union in 2004 and commercial launch began in late 2005. We also have had limited sales of HepaSphere Microspheres in Japan under private import restrictions. HepaSphere Microspheres are contained in a prefilled vial that is in turn packaged inside a paper pouch. We determined that a defect in the paper pouch may compromise the sterility of the outside of the vial. If the sterility of the outside of the vial is not maintained, there is the risk that a physician’s hands can become contaminated when handling the vial. Although we are not aware of any adverse events resulting from the defects in the paper packaging, our voluntary recall of this product could result in reputational harm or a perception that the product is not safe, either of which could adversely affect market acceptance of our microsphere products and result in decreased sales. In the third quarter of 2006 we launched a new packaging configuration for our HepaShere Microsphere product designed to correct this defect.

If we are not able to compete effectively, we may experience decreased demand for our products, which may result in price reductions.

We have many competitors in the United States and abroad, including medical device, biotechnology and other alternative therapeutic companies, universities and other private and public research institutions. We have experienced increased competition since receiving FDA approval for use of our Embosphere Microspheres for UFE. Our success depends upon our ability to develop and maintain a competitive position in both the embolotherapy and related delivery systems markets. Our key competitors in both the fields of embolotherapy and the delivery systems used in the UFE procedure are Angiodynamics Incorporated, Biocompatibles, Ltd., Boston Scientific Corporation, Cook Incorporated, Cordis Corporation, a Johnson and Johnson Company, Pfizer, Inc. and Terumo Corporation. These and many of our other competitors have greater capabilities, experience and financial resources than we do. As a result, they may develop products quicker or at less cost, that compete with our microsphere products and related delivery systems. In addition, we may experience decreased demand for our products if these or other competitors announce that they have begun to develop products that compete with our products. For example, in 2004, some of our competitors provided free or reduced-price samples of competing forms of microspheres for the treatment of medical procedures for which our Embosphere Microspheres are indicated. The availability of these free or reduced-price samples has had, and may continue to have, a material adverse effect on our product revenues, primarily due to a loss of market share for the sale of our products. Currently, the primary products with which our microspheres compete for some of our applications are spherical PVA sold by Boston Scientific, Terumo and Biocompatibles, and gel foam sold by Pfizer and non-spherical PVA sold by Angiodynamics, Boston Scientific and Cook. In addition, our competitors may develop technologies that render our products obsolete or otherwise noncompetitive.

We may not be able to improve our products or develop new products or technologies quickly enough to maintain a competitive position in our market and continue to commercially develop our business. Moreover, we may not be able to compete effectively, and competitive pressures may result in less demand for our products and impair our ability to become profitable.

In the treatment of symptomatic uterine fibroids, we also compete with obstetrics and gynecology physicians who elect to offer and provide other forms of treatment to their patients with uterine fibroids that do not require referral to another specialist.

If we fail to maintain, or in some instances obtain, an adequate level of reimbursement for our products by third-party payers, there may be no commercially viable markets for our products.

The availability and levels of reimbursement by governmental and other third-party payers affects the market for any medical device. We may not be able to sell our products profitably if reimbursement is unavailable or limited in scope or amount. Some insurance companies do not fully reimburse for embolization procedures. These third-party payers attempt to contain or reduce the costs of healthcare by challenging the prices that companies such as ours charge for medical products. In some foreign countries, particularly the countries of the European Union where our microsphere products are currently marketed and sold, the pricing of medical devices is subject to governmental control, and the prices charged for our products have in some instances been reduced as a result of these controls.

Initiatives to limit the growth of healthcare costs, including price regulation, are underway in the United States and other major healthcare markets. For example, these proposals include prescription drug benefit legislation recently enacted in the United States, and healthcare reform initiatives proposed in certain state and local jurisdictions and other countries. While these initiatives have in many cases related to pharmaceutical pricing, implementation of more sweeping healthcare reforms in significant markets may limit the price of, or the level at which reimbursement is provided for, our products and may influence a physician’s selection of products used to treat patients.

If we do not retain our senior management and other key employees we may not be able to successfully implement our business strategy.

Our success is substantially dependent on our ability to retain members of our senior management and other key employees. All of the agreements with our officers provide that their employment may be terminated either by the employee or by us at any time and without notice. Although we do not have any reason to believe that we may lose the services of any of these persons in the foreseeable future, the loss of the services of any of these persons might impede the achievement of our research, development, and commercialization objectives. We do not carry key man life insurance on any of our executive officers or other personnel.

If we make any acquisitions, we will incur a variety of costs and may never successfully integrate the acquired business into ours.

We may attempt to acquire businesses, technologies, services or products that we believe are a strategic complement to our business model. We may encounter operating difficulties and expenditures relating to integrating an acquired business, technology, service or product. These acquisitions may also absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may never realize the anticipated benefits of any acquisition. We may also make dilutive issuances of equity securities, incur debt or experience a decrease in the cash available for our operations, or incur contingent liabilities in connection with any future acquisitions.

Because key stockholders beneficially own a significant amount of our common stock, they may be able to exert control over us.

As of September 30, 2006, we believe that Sepracor Inc., or Sepracor, and funds affiliated with Cerberus Capital Management, L.P., or Cerberus, beneficially owned approximately 22% and 14% of our outstanding common stock, respectively, including shares of common stock issuable upon the exercise of warrants and series A preferred stock held by these stockholders. Moreover, two of our directors are executive officers of Sepracor and we have granted board observation rights to Cerberus. Accordingly, Sepracor and Cerberus may have significant influence over corporate actions requiring stockholder approval, such as the election of directors, amendment of our charter documents and the approval of merger or significant asset sale transactions. In addition, the shares of our series A preferred stock held by Sepracor and Cerberus entitled them to certain voting rights in accordance with the terms and conditions of the series A preferred stock. Specifically, we will need the consent of holders of at least 50% of the series A preferred stock initially purchased by Sepracor and Cerberus to undertake certain key corporate actions, including the following:

· amending our charter or bylaws in a manner that adversely affects the holders of series A preferred stock;

· authorizing or issuing any equity security that is senior to or pari passu with the series A preferred stock; and

· declaring or paying any dividends on, or redeeming or repurchasing any shares of, our capital stock, subject to customary exceptions.

The ownership concentration of Sepracor and Cerberus could cause the market price of our common stock to decline. In addition, conflicts of interest between these key stockholders and us may arise, including with respect to competitive business activities and control of our management and our affairs.

The holders of shares of our series A preferred stock have rights that could adversely affect an investment in our common stock.

The holders of our series A preferred stock have the right to an adjustment in the conversion rate of the series A preferred stock if we issue securities at a price below the purchase price paid by these holders. These provisions could substantially dilute stockholders’ interest in BioSphere in the event of future financing transactions. The holders of series A preferred stock also have the right to receive a 6% dividend per annum which, at our election, may be paid in cash or additional shares of series A preferred stock. To date all such dividend payments have been made in additional shares of series A preferred stock. If such dividends continue to be paid in stock, this dividend could also further dilute stockholders’ ownership interest. In addition, the holders of our series A preferred stock have the right to participate in future capital raising transactions by BioSphere. The existence of this right may reduce our ability to establish terms with respect to, or enter into, any financing with parties other than the investors.

In the event that we enter into an acquisition or business combination in which we sell all or substantially all of our assets or if there occurs a change of control of a majority of our common stock outstanding prior to such transaction, the holders of our series A preferred stock will have the right to receive, before any distributions or payments to the holders of our common stock, an amount in cash equal to their initial purchase price, $8,000,000, plus an amount equal to any accrued but unpaid dividends, and will then participate with the holders of the common stock on a pro rata basis with respect to the distribution of any remaining assets. The existence of this right may make it difficult for us to raise capital in financing transactions with third parties and will also result in holders of our common stock receiving less distributions or payments upon a change of control or asset sale than they would be entitled to receive if no preferential payments were required to be made to holders of our series A preferred stock.

Risks Relating to Regulatory Matters

If we do not obtain and maintain the regulatory approvals or clearances required to market and sell our products, then our business may be unsuccessful and the market price of our stock may decline.

We are subject to regulation by government agencies in the United States and abroad with respect to the design, manufacture, packaging, labeling, advertising, promotion, distribution and sale of our products. For example, our products are subject to approval or clearance by the FDA prior to commercial marketing in the United States. Similar regulations exist in most major foreign markets, including the European Union, Latin America and Asia. The process of obtaining necessary regulatory approvals and clearances will be time-consuming and expensive for us. If we do not receive required regulatory approval or clearance to market our products, or if any approvals or clearances we have received are revoked or terminated, we may not be able to commercialize our products and become profitable, and the value of our common stock may decline.

We are also subject to numerous U.S. and foreign regulatory requirements governing the conduct of clinical trials, marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above, as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Approval by the FDA does not assure approval by regulatory authorities of some countries outside the United States. Many foreign regulatory authorities, including those in major markets such as Japan and China, have different approval procedures than those required by the FDA and may impose additional testing requirements for our medical device candidates.

If the FDA or other regulatory agencies place restrictions on, or impose additional approval requirements with respect to, products we are then marketing, we may incur substantial additional costs and experience delays or difficulties in continuing to market and sell these products.

Even if the FDA grants us clearance with respect to marketing any product, such products will be subject to ongoing regulatory review and restrictions, including the review of clinical results which are reported after such products are made commercially available, and restrictions on the indications for which we can market the product. The FDA can propose to withdraw approval if new clinical data or experience shows that a product is not safe for use under the approved conditions of use. The marketing claims we are permitted to make in labeling or advertising regarding our microspheres are limited to those consistent with any FDA clearance or approval. For example, because our EmboGold Microspheres are not cleared for specific use in UFE, we may not promote them for this specific use. Although our QuadraSphere Microspheres are technically identical in all respects to our HepaSphere Microspheres, which are currently marketed in the European Union for use in the embolization of hepato-cellular carcinoma and hepatic metastasis, our QuadraSphere Microspheres are not specifically indicated for use in hepato-cellular carcinoma and hepatic metastasis. FDA regulations require that we conduct formal clinical trials prior to seeking to claim the use of the QuadraSphere Microspheres for the treatment of a specific disease or condition, such as hepato-cellular cancer or hepatic metastasis, while European Union regulations do not mandatorily require it for this class of medical devices. Accordingly, in order for us to seek FDA clearance to promote the use of QuadraSphere MicroSpheres for the embolization of hepato-cellular carcinoma and hepatic metastasis, we will be required to undertake clinical trials in the United States.

For our approved products, the FDA requires us to submit copies of our advertisements and promotional labeling, including, for example, professional journal advertisements, website pages, professional direct mailers, direct-to-consumer advertisements, convention booth panels and handouts, to the FDA at the time of initial publication or dissemination. If the FDA believes these materials, or statements made by our sales representatives or other company officials, promote our products for unapproved indications, the FDA could allege that our promotional activities misbrand our products. Specifically, the FDA could issue an untitled letter or warning letter, which requests, among other things, that we cease such promotional activities, including disseminating the advertisements and promotional labeling, and that we issue corrective advertisements and labeling, including sending letters to healthcare providers. The FDA also could take enforcement action including seizure of allegedly misbranded product, injunction or criminal prosecution against us and our officers or employees. If we repeatedly or deliberately fail to submit such advertisements and labeling to the agency, the FDA could withdraw our approvals. The FDA also monitors manufacturers’ support of continuing medical education, or CME, programs where the programs involve the manufacturers’ or a competitor’s products to ensure that manufacturers do not influence the CME content as a means of promoting their products for off-label uses.

We may in the future make modifications to our microspheres or their labeling which we determine do not necessitate the filing of a new 510(k) notification. However, if the FDA does not agree with our determination, it will require us to make additional 510(k) filings for the modification, and we may be prohibited from marketing the modified product or the new claims until we obtain FDA clearance. Similarly, if we obtain premarket approval, we may not be able to make product or labeling changes until we get further FDA approval.

If we fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to enforcement actions which could affect our ability to develop, market and sell our products and product candidates successfully and could harm our reputation and lead to decreased acceptances of our products by the market.

Even if we obtain the necessary FDA clearances or approvals, if we or our suppliers fail to comply with ongoing regulatory requirements our products could be subject to corrections and removals or recalls from the market.

We are subject to the Medical Device Reporting, or MDR, regulations that require us to report to the FDA if our products may have caused or contributed to patient death or serious injury, or if our device malfunctions and a recurrence of the malfunction would likely result in a death or serious injury. We must also file reports of device corrections and removals and adhere to the FDA’s rules on labeling and promotion. Our failure to comply with these or other applicable regulatory requirements could result in enforcement action by the FDA, which may include any of the following:

· untitled letters, warning letters, fines, product seizures, injunctions and civil penalties;

· administrative detention, which is the detention by the FDA of medical devices believed to be adulterated or misbranded;

· customer notification, or FDA orders for repair, replacement or refund;

· voluntary or mandatory recall or seizure of our products;

· operating restrictions, partial suspension or total shutdown of production;

· refusal to review premarket notification or premarket approval submissions;

· rescission of a substantial equivalence order or suspension or withdrawal of a premarket approval; and

· criminal prosecution.

If we are subject to an enforcement action, our ability to develop, market and sell our products successfully would be adversely affected, our reputation could be harmed and we may experience decreased market acceptance of our products.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and, if we are unable to fully comply with such laws, could face substantial penalties.

Our operations may be directly or indirectly affected by various broad state and federal healthcare fraud and abuse laws, including the federal Anti-Kickback Statute, which prohibit any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, to induce or reward either the referral of an individual, or the furnishing or arranging for an item or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. If our past or present operations are found to be in violation of these laws, we or our officers may be subject to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment and exclusion from Medicare and Medicaid program participation. If enforcement action were to occur, our business and financial condition would be harmed.

Risks Relating to Our Intellectual Property

If we are unable to obtain patent protection for our products, their competitive value could decline.

We may not obtain meaningful protection for our technology and products with the patents and patent applications that we own or license relating to our microsphere technology or other ancillary products. In particular, the patent rights we possess or are pursuing generally cover our technologies to varying degrees, and these rights may not prevent others from designing products similar to or otherwise competitive with our Embosphere Microspheres and other products we commercialize. To the extent that our competitors are able to design products competitive with ours, we may experience less market penetration with our products and, consequently, we may have decreased revenues.

We do not know whether competitors have similar U.S. patent applications on file, since U.S. patent applications filed before November 28, 2000, or for which no foreign patents will be sought are secret until issued, and applications filed after November 28, 2000, are published approximately 18 months after their earliest priority date. Consequently, the United States Patent and Trademark Office could initiate interference proceedings involving our owned or licensed U.S. patent applications or issued patents. Further, there is a substantial backlog of patent applications at the United States Patent and Trademark Office, and the approval or rejection of patent applications may take several years.

We require our employees, consultants and advisors to execute confidentiality agreements. However, we cannot guarantee that these agreements will provide us with adequate protection against improper use or disclosure of confidential information. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Further, others may independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets. Our failure to protect our proprietary information and techniques may inhibit or limit our ability to exclude certain competitors from the market.

If we become involved in expensive patent litigation or other proceedings to enforce or defend our patent rights, we could incur substantial costs and expenses or substantial liability for damages or be required to stop our product development and commercialization efforts.

On January 13, 2005, we were notified of a proceeding brought before the European Patent Office on December 23, 2004, by Biocompatibles UK Limited challenging the patentability of the claims in our granted European Patent 1128816, which relates to certain PVA microspheres, their use in embolization and methods of manufacture related to such PVA microspheres. We are defending our European PVA patent in this proceeding. While we are not able to predict the outcome of this patent opposition proceeding, it will not impact our ability to sell our Embosphere Microsphere products.

With the exception of the European Opposition proceeding just described, we are not currently involved in any other litigation or actions with third parties to enforce or defend our patent rights. However, in order to protect or enforce our patent rights, we may have to initiate legal proceedings against third parties, such as infringement suits or interference proceedings. By initiating legal proceedings to enforce our intellectual property rights, we may also provoke these third parties to assert claims against us and, as a result, our patents could be narrowed, invalidated or rendered unenforceable by a court. Furthermore, we may be sued for infringing on the intellectual property rights of others. We may find it necessary, if threatened, to initiate a lawsuit seeking a declaration from a court regarding the proprietary rights of others. Intellectual property litigation is costly and, even if we prevail, could divert management attention and resources away from our business.

The patent position of companies like ours generally is highly uncertain, involves complex legal and factual questions, and has recently been the subject of much litigation. We may not prevail in any patent-related proceeding. If we do not prevail in any litigation, we could be required to pay damages, stop the infringing activity, or obtain a license. Any required license might not be available to us on acceptable terms, or at all. In addition, some licenses may be nonexclusive, and therefore our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be prevented from selling some of our products, which could decrease our revenues.

If any of our licenses to use third-party technologies in our products are terminated, we may be unable to develop, market or sell our products.

We are dependent on various license agreements relating to each of our current and proposed products that give us rights under intellectual property rights of third parties. In particular, we have an agreement with L’Assistance Publique-Hopitaux De Paris, pursuant to which L’Assistance Publique-Hopitaux De Paris has granted us exclusive rights to use two jointly owned patents relating to Embosphere Microspheres. We also have an agreement with Dr. Shinichi Hori pursuant to which we have an exclusive royalty-bearing license to Japanese patent rights for our HepaSphere Microsphere product. We also have an agreement with Archimmed SARL pursuant to which we have an exclusive royalty-bearing license to patent rights for our MR-Embosphere Microsphere product, which is in development. Each of these agreements can be terminated on short notice by the licensor if we default on our obligations under the license and fail to cure such default after notice is provided. These licenses impose commercialization, sublicensing, royalty, insurance and other obligations on us. Our failure, or any third party’s failure, to comply with the terms of any of these licenses could result in our losing our rights to the license, which could result in our being unable to develop, manufacture or sell products which contain the licensed technology.

Risks Relating to the Production and Supply of Our Products

If we experience manufacturing delays or interruptions in production, then we may experience customer dissatisfaction and our reputation could suffer.

If we fail to produce enough products at our own manufacturing facility or at a third-party manufacturing facility, we may be unable to deliver products to our customers on a timely basis, which could lead to customer dissatisfaction and could harm our reputation and ability to compete. We currently produce and package all of our microsphere products in one manufacturing facility in France. In the United States, we have engaged Brivant Medical Engineering and Radius Medical Technologies, Inc. to supply our guidewire products and Concert Medical to supply and package our catheter product. Either we or any third-party manufacturer would likely experience significant delays or cessation in producing our products if a labor strike, natural disaster, local or regional conflict or other supply disruption were to occur. If we are unable to manufacture and package our products at our facility in France, we may be required to enter into arrangements with one or more alternative contract manufacturing companies.

Even if we are able to identify alternative facilities to manufacture our products, if necessary, we may experience disruption in the supply of our products until such facilities are available. Although we believe we possess adequate insurance for damage to our property and the disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses and may not be available to us on acceptable terms or at all. Our failure to deliver products on a timely basis could lead to customer dissatisfaction and damage our reputation. In addition, if we are required to depend on third-party manufacturers, our profit margins may be lower, which will make it more difficult for us to achieve profitability.

Medical device manufacturers must adhere to the Quality System Regulation, or QSR, 21 Code of Federal Regulation Part 820, which is enforced by the FDA through its inspection program. The manufacturers may not be able to comply or maintain compliance. If any third-party manufacturers we engage fail to comply, their noncompliance could significantly delay our receipt of new product premarket approvals or result in FDA enforcement action, including an embargo on imported devices. For a premarket approval device, if we change our manufacturing facility or switch to a third-party manufacturer, we will be required to submit a premarket approval application supplement before the change is implemented.

Because we rely on a limited number of suppliers, we may experience difficulty in meeting our customers’ demands for our products in a timely manner or within budget.

We currently purchase key components and services with respect to our microspheres, catheters and guidewires from approximately ten third-party vendors, including Radius Medical, from whom we purchase guidewires for our Segway Guidewire product, Concert Medical, from whom we purchase catheters for our EmboCath Infusion Catheters product, and Brivant Medical Engineering, from whom we purchase guidewires for our Sequitor Steerable Guidewire product. We generally do not have long-term agreements with any of our suppliers. Our reliance on our suppliers exposes us to risks, including:

· the possibility that one or more of our suppliers could terminate their services at any time without penalty;

· the potential inability of our suppliers to obtain required components;

· the potential delays and expenses of seeking alternative sources of supply;

· reduced control over pricing, quality and timely delivery due to difficulties in switching to alternative suppliers; and

· the possibility that one or more of our suppliers could fail to be compliant with Quality System Regulations, 21 CFR Part 820.

Consequently, in the event that our suppliers delay or interrupt the supply of components for any reason, our ability to produce and supply our products could be impaired, which could lead to customer dissatisfaction and be harmful to our reputation.

Risks Relating to Our Foreign Operations

If we are unable to meet the operational, legal and financial challenges that we encounter in our international operations, we may not be able to grow our business.

Our worldwide manufacturing and European sales operations are currently conducted primarily through our French subsidiary. Furthermore, we currently derive a portion of our revenues from the sale of our microspheres and other products in the European Union. For the nine months ended September 30, 2006 and the year ended December 31, 2005, approximately 22% and 27%, respectively, of our revenues were derived from sales of our microspheres and other products in the European Union. We are increasingly subject to a number of challenges that specifically relate to our international business activities. Our international operations may not be successful if we are unable to meet and overcome these challenges, which would limit the growth of our business. These challenges include:

· failure of local laws to provide the same degree of protection against infringement of our intellectual property;

· protectionist laws and business practices that favor local competitors, which could slow our growth in international markets;

· the requirement that we obtain regulatory approval or clearance in each country in which we choose to offer and sell our products;

· in some jurisdictions, strict government regulated price controls;

· complex reimbursement procedures;

· potentially longer sales cycles to sell products, which could slow our revenue growth from international sales; and

· potentially longer accounts receivable payment cycles and difficulties in collecting accounts receivable.

Because we translate foreign currency from international sales into U.S. dollars and are required to make foreign currency payments, we may incur losses due to fluctuations in foreign currency exchange rates.

A significant portion of our business is conducted in the European Union Euro. We recognize foreign currency gains or losses arising from our operations in the period incurred. As a result, currency fluctuations between the U.S. dollar and the currencies in which we do business will cause foreign currency translation gains and losses, which may cause fluctuations in our future operating results. We do not currently engage in foreign exchange hedging transactions to manage our foreign currency exposure.

Risk Relating to Our Stock Price

Because the market price of our stock is highly volatile, investments in our stock could rapidly lose their value and we may incur significant costs from class action litigation.

The market price of our stock is highly volatile. From January 1, 2004 through November 1, 2006, the price of our common stock has ranged from a low of $2.12 to a high of $9.43. As a result of this volatility, investments in our stock could rapidly lose their value. In addition, the stock market often experiences extreme price and volume fluctuations, which affect the market price of many medical device companies and which are often unrelated to the operating performance of these companies.

When the market price of a stock has been as volatile as our stock price has been, holders of that stock may institute securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit of this type against us, even if the lawsuit is without merit, we could incur substantial costs in defending the lawsuit. The lawsuit could also divert the time and attention of our management.

ITEM 6. EXHIBITS

The exhibits listed in the accompanying exhibit index are filed as part of this Quarterly Report on Form 10-Q.

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.

Date: November 13, 2006		BIOSPHERE MEDICAL, INC.


		/s/ RICHARD J. FALESCHINI
		Richard J. Faleschini
		Chief Executive Officer
		(principal executive officer)

Date: November 13, 2006		/s/ MARTIN J. JOYCE
		Martin J. Joyce
		Chief Financial Officer
		(principal financial and accounting officer)

EXHIBIT INDEX

Exhibit Number		Description
10.1		Amendment No. 1 to 2006 Stock Incentive Plan (incorporated by reference in the Company’s Current Report on Form 8-K filed with the SEC on August 9, 2006).

31.1*		Certification of the principal executive officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of the principal financial officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of the principal executive officer pursuant to pursuant to Rule 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of the principal financial officer pursuant to pursuant to Rule 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.