UNITED STATES 
                       SECURITIES AND EXCHANGE COMMISSION
                             
  Washington, D.C. 20549

FORM 10-K

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

For the fiscal year
ended December 31, 2005

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

For the transition
period from ______ to ______

Commission File Number
1-31680

BRADLEY
PHARMACEUTICALS, INC.              (Exact name of registrant as specified in its charter)

| | DELAWARE 
                                                   (State or other jurisdiction
of 
                                          incorporation or organization) |  | 22-2581418 
      (I.R.S.
Employer 
        Identification Number) | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------ | 

| | 383
Route 46 W., Fairfield, NJ 
                                              (Address of principal
executive offices) |  | 07004 
 (Zip Code) | 
| | ---------------------------------------------------------------------------------------------------------------------- |  | ------------------ | 

Registrants telephone number,
including area code: 973-882-1505

Securities Registered
Pursuant to Section 12(b) of the Act:

| | Title
of each class 
                                    Common Stock, $.01 Par Value Per Share |  | Name
of each exchange on which registered 
                New York Stock Exchange | 
| | ----------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------- | 

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
      Yes ___   No  X

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes ___   No  X

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

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

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

Large accelerated filer  __        
       Accelerated filer  X                    Non-accelerated filer  __

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

The aggregate market value of the
voting common stock held by nonaffiliates of the Registrant as of June 30, 2005 was
approximately $157,778,417 (calculated by excluding all shares held by executive
officers, directors and holders known to the registrant of five percent or more of the
voting power of the registrants common stock, without conceding that such persons are
affiliates of the registrant for purposes of the federal securities laws). This amount
does not include any value for the Class B common stock, for which there is no
established United States public trading market.

As of April 14, 2006, there were
outstanding 16,845,084 shares of common stock, $.01 par value, and 429,752 shares of
Class B common stock, $.01 par value.

| |  | 
| |  | 

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TABLE OF CONTENTS

|PART I   |  | Page Numbers                                                            
|-------- |  | ------------------------------------------------------------------------
|         |  | ITEM 1: Business                                                        
|         |  | ITEM 1A: Risk Factors                                                   
|         |  | ITEM 1B: Unresolved Staff Comments                                      
|         |  | ITEM 2: Properties                                                      
|         |  | ITEM 3: Legal Proceedings                                               
|         |  | ITEM 4: Submission of Matters to a Vote of Security Holders             
|PART II  | 
|         |  | ITEM 5: Market For Registrants Common Equity,  Related Security Holders
|         |  | Matters and Issuer Purchases of Equity Securities                       
|         |  | ITEM 6: Selected Financial Data                                         
|         |  | ITEM 7: Managements Discussion and Analysis of Financial Condition and 
|         |  | Results of Operations                                                   
|         |  | ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk     
|         |  | ITEM 8: Financial Statements and Supplementary Data                     
|         |  | ITEM 9: Changes in and Disagreements with Accountants on Accounting and 
|         |  | Financial Disclosure                                                    
|         |  | ITEM 9A: Controls and Procedures                                        
|         |  | ITEM 9B: Other Information                                              
|PART III | 
|         |  | ITEM 10: Directors and Executive Officers of the Registrant             
|         |  | ITEM 11: Executive Compensation                                         
|         |  | ITEM 12: Security Ownership of Certain Beneficial Owners and Management 
|         |  | and Related Stockholder Matters                                         
|         |  | ITEM 13: Certain Relationships and Related Transactions                 
|         |  | ITEM 14: Principal Accountant Fees and Services                         
|PART IV  | 
|         |  | ITEM 15: Exhibits and Financial Statement Schedules                     

| | 2 | 
| | - | 

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PART I

FORWARD-LOOKING
STATEMENTS

Some of the statements under the
captions Risk Factors, Managements Discussion and Analysis of Financial Condition and
Results of Operations or Business or contained or incorporated by reference in this
Form 10-K constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements include
statements that address activities, events or developments that we expect, believe or
anticipate will or may occur in the future, including:

| |  |  | our
plans to execute our Acquire, Enhance, Grow strategy;
| | - |  | ---------------------------------------------------------

| |  |  | market
acceptance of our products;
| | - |  | ----------------------------------

| |  |  | our
plans to launch new and enhanced products;
| | - |  | ----------------------------------------------

| |  |  | our
ability to maintain or increase sales;
| | - |  | ------------------------------------------

| |  |  | our
ability to adequately estimate for charges against sales, including returns, chargebacks
          and rebates;
| | - |  | -------------------------------------------------------------------------------------------------------------------

| |  |  | our
ability to successfully implement life cycle management techniques;
| | - |  | -----------------------------------------------------------------------

| |  |  | our
ability to secure regulatory consents and approvals, if necessary,        for new
products;
| | - |  | -----------------------------------------------------------------------------------------------

| |  |  | our
ability to obtain new distributors and market       approvals in new countries;
| | - |  | -----------------------------------------------------------------------------------

| |  |  | our
ability to react favorably to changes        in governmental regulations affecting
products we            market;
| | - |  | ---------------------------------------------------------------------------------------------------------------------

| |  |  | our
plans to pursue patents;
| | - |  | ----------------------------

| |  |  | our
ability to successfully compete in the marketplace;
| | - |  | -------------------------------------------------------

| |  |  | our
plans to maintain or expand the size of our sales force;
| | - |  | ------------------------------------------------------------

| |  |  | our
earnings estimates and future financial condition and results of operations;
| | - |  | --------------------------------------------------------------------------------

| |  |  | our
ability to favorably resolve the SECs informal inquiry;
| | - |  | ------------------------------------------------------------

| |  |  | our
ability to favorably resolve state and federal shareholder derivative, and federal
          securities class action, lawsuits;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

| |  |  | our
ability to file our required reports with the SEC in a timely manner;
| | - |  | -------------------------------------------------------------------------

| |  |  | our
ability to remediate our material weaknesses in our internal controls;
| | - |  | --------------------------------------------------------------------------

| |  |  | the
adequacy of our cash, cash equivalents and cash generated from operations to meet our
          working capital requirements for the next twelve months;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | our
ability to satisfy the covenants contained in our senior credit facility;
| | - |  | -----------------------------------------------------------------------------

| |  |  | our
ability to access the capital markets on attractive terms or at all;
| | - |  | ------------------------------------------------------------------------

| |  |  | our
ability to refinance indebtedness, if required, and to comply with the terms and
          conditions of our debt instruments;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------
| |  |  | the impact of the changes in the
accounting rules discussed in this Form 10-K.                                                    

In
some cases, you can also identify forward-looking statements by terminology such as
may, should, could, would, predicts, potential, continue, expects,
anticipates, future, intends, plans, believes, estimates and similar
expressions. All forward-looking statements are based on assumptions that we have made
based on our experience and perception of historical trends, perception of current
conditions, expected future developments and other factors we believe are appropriate
under the circumstances. These statements are subject to numerous risks and
uncertainties, many of which are beyond our control, including the statements set forth
under Risk Factors.

No
forward-looking statement can be guaranteed, and actual results may differ materially
from those projected. We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or otherwise.

| | 3 | 
| | - | 

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ITEM 1: BUSINESS

Overview

We
are a specialty pharmaceutical company that acquires, develops and markets prescription
and over-the-counter products in selected markets. We were incorporated under the laws of
the State of New Jersey in January 1985 and reincorporated under the laws of the State of
Delaware in July 1998.

Our
Doak Dermatologics subsidiary promotes our branded dermatologic and podiatric products,
including our KERALACTM, ZODERM®, LIDAMANTLE®, ROSULA® and SELSEB® product
lines, and our Bioglan Pharmaceuticals subsidiary promotes our branded dermatologic and
podiatric products, including our ADOXA®, SOLARAZE® and ZONALON® product lines, to
dermatologists and podiatrists in the United States through its dedicated sales force of
132 representatives as of May 1, 2006. Our Kenwood Therapeutics division promotes
our branded gastrointestinal products, including ANAMANTLE®HC, PAMINE®, PAMINE®
FORTE and FLORA-Q® to gastroenterologists and colon and rectal surgeons in the United
States through its dedicated sales force of more than 47 representatives as of May
1, 2006. To a lesser extent, Kenwood Therapeutics also markets nutritional supplements
and respiratory products.

Our
products are manufactured by third parties according to our quality control standards and
principally distributed through wholesalers to retail pharmacies and healthcare
institutions throughout the United States and selected international markets.

On
August 10, 2004, we purchased certain assets of Bioglan Pharmaceuticals Company, a
wholly-owned subsidiary of Quintiles Transnational Corp. As part of the transaction, we
acquired certain intellectual property, regulatory filings, and other assets relating to
SOLARAZE®, a topical treatment indicated for the treatment of actinic keratosis;
ADOXA®, an oral antibiotic indicated for the treatment of acne; ZONALON®, a topical
treatment indicated for pruritus; Tx Systems®, a line of advanced topical treatments
used during in-office procedures, and certain other dermatologic products. The total
consideration for the acquisition was approximately $191 million, including acquisition
costs.

We
derive a majority of our net sales from our core branded products: ADOXA®, KERALACTM,
SOLARAZE®, ZODERM®, LIDAMANTLE®, ROSULA®, SELSEB®, ZONALON®, PAMINE®,
ANAMANTLE®HC, FLORA-Q® and GLUTOFAC®-ZX. These core branded products accounted for
a total of approximately 85% of our net sales for 2005 and 75% of our net sales for 2004
(ADOXA®, SOLARAZE® and ZONALON® were acquired by us during 2004).

We
have experienced an increase in generic competition occurring in the Fourth Quarter 2004
and during 2005 against many of our products, including some ADOXA®, KERALACTM,
ZODERM®, LIDAMANTLE®, ROSULA®, and ANAMANTLE®HC products. As a result of generic
competition, the execution of Distribution and Service Agreements with two wholesale
customers in 2005 and a change in these customers market dynamics, we experienced an
increase in product returns from our customers.

In
December 2004, we were advised by the staff of the Securities and Exchange Commission, or
SEC, that it is conducting an informal inquiry to determine whether there have been
violations of the federal securities laws. In connection with the inquiry, the SEC staff
has requested that we provide it with certain information and documents, including with
respect to revenue recognition and capitalization of certain payments. We are cooperating
with this inquiry, however, we are unable at this point to predict the final scope or
outcome of the inquiry.

We
and certain of our officers and directors are also party to a federal securities class
action lawsuit and state and federal shareholder derivative lawsuits which have arisen as
a consequence of the SEC inquiry and the restatement of our financial results for the
quarter ended September 30, 2004. On March 23, 2006, the District Court issued an order
denying our motion to dismiss the federal securities class action lawsuit. We continue to
dispute the allegations set forth in the class action litigation and intend to vigorously
defend ourselves. The state shareholder derivative actions were consolidated and stayed
pending a decision on the motion to dismiss the federal

| | 4 | 
| | - | 

---

securities class action lawsuit.
Plaintiffs in the state shareholder derivative actions have 30 days from the decision
denying our motion to dismiss the federal securities class action lawsuit to file a
consolidated amended derivative complaint. We intend to dismiss the consolidated amended
derivative complaint, if timely filed, in its entirety. The federal shareholder
derivative action was recently filed and service was accepted by us and the other
defendants on April 26, 2006. On May 15, 2006, the plaintiffs in this lawsuit filed a
motion for summary judgment on their claim to compel us to schedule an Annual Meeting of
Stockholders. We and the other defendants intend to move to dismiss the federal
shareholder derivative lawsuit in its entirety and schedule a Joint 2005/2006 Annual
Meeting of Stockholders following the filing of this Annual Report on Form 10-K.

On
January 30, 2006, we entered into a Collaboration and License Agreement with MediGene AG.
Under this agreement, MediGene has granted us the exclusive license, or sublicense in
certain instances, to certain patents, trademarks and other intellectual property for our
use in the commercialization, in the United States, as a prescription product, of any
ointment or other topical formulation containing green tea catechins, developed pursuant
to our agreement with MediGene, for the treatment of dermatological diseases in humans,
including, but not limited to, external genital warts, perianal warts and actinic
keratosis. In the First Quarter 2006, we paid to MediGene $5,000,000 in consideration for
development and registration activities undertaken prior to the date of the agreement. We
will expense the $5,000,000 research and development payment during the First Quarter
2006.

Our Industry

We
target segments of the dermatologic, podiatric and gastrointestinal markets where we
believe that our sales force can effectively reach the groups of physicians who account
for a majority of the prescriptions for conditions treated by our products.

Many
of the pharmaceutical products sold in these specialty markets were originally
discovered, researched or developed by major pharmaceutical companies. Due largely to
industry consolidation, the costs of marketing and regulatory compliance, or lack of
strategic fit, these types of products often do not justify continued promotion by major
pharmaceutical companies. Major pharmaceutical companies typically focus on so-called
blockbuster drugs, which are often described as having the potential to generate annual
sales in excess of $500 million. These companies frequently sell their smaller products
to specialty pharmaceutical companies, like us.

Dermatologic and Podiatric Markets

Based
on data from Wolters Kluwer (formerly known as NDCHealth Corporation), an independent
provider of pharmaceutical prescription data, we estimate the United States market for
prescription dermatologic and podiatric drugs accounted for approximately $7.0 billion in
retail prescription sales for 2005. Within the dermatologic market, approximately 10,000
dermatologists specialize in treating a variety of skin disorders, including acne, eczema
and psoriasis. Our dermatologic products compete in areas such as acne, rosacea, actinic
keratosis, topical anesthetics and xerosis, a segment of the market we estimate accounted
for approximately $3.2 billion in retail prescription sales in 2005. Within the podiatric
market, approximately 15,000 podiatrists treat patients suffering from a range of foot
disorders, including athletes foot and nail disorders that can be treated with
prescription products.

Gastrointestinal Market

Based
on data from Wolters Kluwer, we estimate that the United States market for prescription
gastrointestinal drugs accounted for approximately $19.6 billion in retail prescription
sales for 2005. Within the gastrointestinal market, approximately 12,000
gastroenterologists specialize in treating a variety of stomach and intestinal disorders.
We estimate that the segment of this market that focuses on the lower gastrointestinal
tract, excluding heartburn related disorders, accounted for approximately $3.0 billion in
retail prescription sales for 2005. Many of the drugs in this segment treat conditions
such as constipation, hemorrhoids and colitis. Our drugs address principally hemorrhoids
and symptoms associated with irritable bowel syndrome, specifically gastrointestinal pain
and cramping.

Our Strategy

Our
primary objective is to be a leading specialty pharmaceutical company focused on selected
pharmaceutical needs within the dermatologic, podiatric and gastrointestinal markets.
Following our strategy of Acquire, Enhance, Grow, we seek to fulfill unmet needs in our
selected markets:

| | 5 | 
| | - | 

---

| |  |  | AcquireWe have acquired, and intend to acquire, rights to manufacture and market
pharmaceutical and health related products with demonstrated safety and
effectiveness and an established presence in the market. To date, our ideal
product acquisition candidates have not been actively promoted, and did not
compete directly with products offered by major pharmaceutical companies. We also
focus on candidates that have barriers to entry for competitive products,
including patent protection, complexity of manufacturing processes and
patient and physician loyalty. As we grow, we may also seek acquisitions of
more established products or products that have recently received drug agency
approval.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | EnhanceWe enhance our product brands by extending their useful lives by broadening
their list of approved indications, developing additional dosage strengths,
producing convenient packaging sizes and developing novel product formulations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | GrowOur goal is to grow by increasing net sales. We seek to increase net sales
by aggressively promoting our branded products through our nationwide sales and
marketing force to key groups of physicians, principally in the dermatologic,
podiatric and gastrointestinal fields, who write a high volume of prescriptions
for our types of products. We supplement the activities of our sales force
with direct mail, telemarketing campaigns, journal advertising and by providing
samples of our products to physicians. We also selectively contract with third
parties to promote our products in order to target a broader physician audience.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
Acquire, Enhance, Grow strategy also encompasses the introduction of new products through
modest research and development efforts relating to improving compounds already in use,
as well as the acquisition of compounds in late stages of clinical development. In
addition, we regularly review opportunities to acquire businesses that market products or
have products under development that may complement or expand our areas of therapeutic
focus.

Our Products

The
following is a list of major branded products, by therapeutic category, that we currently
distribute.

|Dermatologic and Podiatric              | Company | Strength | Primary Uses                             
|--------------------------------------- | ------- | -------- | -----------------------------------------
|                                        |         |          |                                          
|Acne/Roseaca                            |         |          |                                          
|ADOXA®                                  |         |          |                                          
|ADOXA®Tablets 50mg, 75mg and 100mg      | Bioglan | Rx       | Acne                                     
|ADOXAPak® 75mg and 150mg                | Bioglan | Rx       | Acne                                     
|ZODERM®                                 |         |          |                                          
|ZODERM® CLEANSER
  4.5%, 6.5% and 8.5%  | Doak    | Rx       | Acne                                     
|ZODERM®
  CREAM 4.5%, 6.5% and 8.5%     | Doak    | Rx       | Acne                                     
|ZODERM®
  GEL 4.5%, 6.5% and 8.5%       | Doak    | Rx       | Acne                                     
|ZODERM®
  REDI-PADS 4.5%, 6.5% and 8.5% | Doak    | Rx       | Acne                                     
|ROSULA®                                 |         |          |                                          
|ROSULA®
  AQUEOUS CLEANSER              | Doak    | Rx       | Rosacea and acne                         
|ROSULA®AQUEOUS
  GEL                    | Doak    | Rx       | Rosacea and acne                         
|                                        |         |          |                                          
|ROSULA®
  NS PADS                       | Doak    | Rx       | Antibacterial                            
|                                        |         |          |                                          
|Keratolytic                             |         |          |                                          
|KERALACTM                               |         |          |                                          
|KERALACTM CREAM                         | Doak    | Rx       | Mild to severe dry skin                  
|KERALACTM
  LOTION                      | Doak    | Rx       | Mild to severe dry skin                  
|KERALACTM GEL                           | Doak    | Rx       | Mild to severe dry skin,
  nail disorders
|KERALACTM NAILSTIK                      | Doak    | Rx       | Mild to severe dry skin,
  nail disorders

| | 6 | 
| | - | 

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|KERALACTMOINTMENT                   | Doak    | Rx                   | Mild to severe dry skin                                  
|----------------------------------- | ------- | -------------------- | ---------------------------------------------------------
|CARMOL®                             |         |                      |                                                          
|CARMOL®40                           | Doak    | Rx                   | Mild to severe dry skin,
  xerosis, nail disorders       
|CARMOL®HC                           | Doak    | Rx                   | Inflammatory skin
  conditions                           
|CARMOL®10,
  20                     | Doak    | OTC                  | Dry skin                                                 
|                                    |         |                      |                                                          
|Actinic Keratoses                   |         |                      |                                                          
|SOLARAZE®                           | Bioglan | Rx                   | Actinic keratoses,
  pre-cancerous skin lesions          
|                                    |         |                      |                                                          
|Anesthetics                         |         |                      |                                                          
|LIDAMANTLE®                         |         |                      |                                                          
|LIDAMANTLE®HC                       | Doak    | Rx                   | Topical anesthetic and
  anti-inflammatory               
|LIDAMANTLE®                         | Doak    | Rx                   | Topical anesthetic                                       
|ACIDMANTLE®                         | Doak    | Cosmetic             | Skin pH balancer                                         
|ZONALON®                            | Bioglan | Rx                   | Topical anesthetic                                       
|                                    |         |                      |                                                          
|Scalp                               |         |                      |                                                          
|SELSEB®                             | Doak    | Rx                   | Dandruff                                                 
|CARMOL®SCALP
  LOTION               | Doak    | Rx                   | Dandruff                                                 
|                                    |         |                      |                                                          
|Cosmeceutical                       |         |                      |                                                          
|TRANS-VER-SAL®                      | Doak    | OTC                  | Warts                                                    
|AFIRM®                              | Bioglan | Professionaluse only | In office
  procedure for chemical peels                 
|BETA-LIFT®                          | Bioglan | Professionaluse only | In office
  procedure for chemical peels                 
|                                    |         |                      |                                                          
|Gastrointestinal                    |         |                      |                                                          
|ANAMANTLE®HC                        |         |                      |                                                          
|ANAMANTLE®HC 14                     | Kenwood | Rx                   | Hemorrhoids and anal
  fissures                          
|ANAMANTLE
  HC CREAM KIT 20S       | Kenwood | Rx                   | Hemorrhoids and anal
  fissures                          
|ANAMANTLE®HC
  FORTE                | Kenwood | Rx                   | Hemorrhoids and anal
  fissures                          
|PAMINE®, PAMINE®
  FORTE            | Kenwood | Rx                   | Relief of gastrointestinal
  symptoms                    
|FLORA-Q®
  (nutritional supplement) | Kenwood | OTC                  | Bacteria strains for proper
  balance of intestinal flora
|                                    |         |                      |                                                          
|Nutritional                         |         |                      |                                                          
|GLUTOFAC®-ZX                        | Kenwood | Rx                   | Multi-vitamin/multi-mineral
  supplement                 
|                                    |         |                      |                                                          
|Respiratory                         |         |                      |                                                          
|DECONAMINE®                         | Kenwood | Rx                   | Antihistamine and
  decongestant                         
|ENTSOL®                             | Kenwood | OTC                  | Nasal wash                                               

Our
core branded products that we actively promote in the dermatologic, podiatric and
gastrointestinal markets are described below:

ADOXA®
is a member of the tetracycline family of antibiotics and is available in 150mg, 100mg,
75mg and 50mg tablets as doxycycline monohydrate. ADOXA® is available in bottles of
tablets and as ADOXA Pak®, a convenient package that may help and simplify patient
compliance and encourage physician prescribing. The tetracycline family of antibiotics is
useful adjunctive therapy for the treatment of severe acne. These medications work by
suppressing the common bacteria, P. acnes (the causative agent

| | 7 | 
| | - | 

---

for acne), on the skin. They are
often used in conjunction with topical therapies as part of an overall acne treatment
regimen. ADOXA® is one of several branded tetracycline products for acne treatment.
Adoxas commercial success is based on factors such as its small, easy-to-swallow tablet
form and doxycyclines proven safety profile. During December 2005, we granted Par
Pharmaceutical, Inc. the right to market authorized generic versions or our ADOXA® 50mg
and 100mg tablets in bottles. We launched ADOXA® 150mg in the Fourth Quarter 2005.
Based on data from Wolters Kluwer, we estimate that, as of December 31, 2005, ADOXA®
has approximately 21% or $59 million of the market for the oral antibiotic treatment for
acne.

KERALACTM
is a prescription urea-based topical moisturizing therapy with keratolytic properties
(helps to remove the surface layer of dead cells). KERALACTM is currently available in
five formulations a lotion, cream, nail gel, ointment and a unique NailstikTM.
KERALACTM LOTION, launched in the Second Quarter 2004, is marketed for mild to moderate
dry skin, KERALACTM CREAM, launched in the First Quarter 2005, is marketed for moderate
to severe dry skin, and KERALACTM GEL, launched in the Second Quarter 2004, is marketed
for site-specific dry skin, nail debridement and as a nail softener. KERALACTM
NAILSTIK, launched in the Third Quarter 2005, is a patient-friendly application to treat
diseased and damaged nails. KERALACTM OINTMENT, launched in Fourth Quarter 2005, is
site-specific treatment for dry skin relief. We developed KERALACTM as an enhancement
to our CARMOL®40 products. We estimate that KERALACTM and CARMOL®40 has
approximately 29% or $34 million, based upon data from Wolters Kluwer, of the urea-based
prescription severe dry skin and damaged nails market, as of December 31, 2005.

SOLARAZE®
Gel is the first FDA-approved dermatological product containing the nonsteroidal anti-
inflammatory diclofenac sodium in a 3% topical formulation. SOLARAZE® Gel is used to
treat actinic keratosis. Actinic keratoses are common, pre-cancerous skin lesions
affecting a large proportion of fair-skinned individuals. Actinic keratosis skin lesions
are caused by over-exposure to the sun. Prior to the introduction of SOLARAZE® Gel,
dermatology treatment options typically included cryosurgery, 5-fluorouracil and
aminolevulinic acid HCl. SOLARAZE® Gels commercial success is based on factors such as
its efficacy, tolerability/side-effect profile and its convenient, easy-to-apply
non-greasy gel form. SOLARAZE® Gel is also the only topical treatment for actinic
keratosis that is approved for use on other parts of the body besides the face and scalp.
We estimate that SOLARAZE® has approximately 15% or $21 million, based upon data from
Wolters Kluwer, of the topical treatment for actinic keratosis market, as of December 31,
2005.

ZODERM®
CLEANSER, ZODERM® CREAM, ZODERM® GEL and ZODERM® REDI-PADSTM are internally
developed benzoyl peroxide topical prescription products that help treat acne. We
launched ZODERM® CLEANSER, ZODERM® CREAM and ZODERM® GEL 4.5% and 8.5% active
ingredient strengths in the First Quarter 2004 and ZODERM® CLEANSER, ZODERM® CREAM
and ZODERM® GEL 6.5% active ingredient strength in the Third Quarter 2004. We launched
ZODERM® REDI-PADS in all strengths in the Third Quarter 2005. The active ingredient in
all ZODERM® products is benzoyl peroxide, which has antibacterial properties that are
effective in treating acne.

LIDAMANTLE®
and LIDAMANTLE®HC, available in cream and lotion formulations, are prescription
products with a topical anesthetic (lidocaine) that help relieve pain, soreness, itching
and irritation caused by insect bites, eczema and other skin conditions. LIDAMANTLE®
and LIDAMANTLE®HC are formulated in a special base which mimics the pH of healthy skin,
thus providing an environment that facilitates healing, protects against infections and
alleviates irritation. LIDAMANTLE®HC also contains hydrocortisone, which helps to
reduce inflammation. We launched the lotion formulation of LIDAMANTLE® and
LIDAMANTLE®HC in November 2003.

ROSULA®
AQUEOUS CLEANSER, ROSULA® AQUEOUS GEL and ROSULA® NS PADS are internally developed
topical prescription products that treat skin conditions, including acne and rosacea. We
launched ROSULA® AQUEOUS GEL in January 2003 and ROSULA® AQUEOUS CLEANSER in July
2003. The active ingredients in ROSULA® AQUEOUS GEL and ROSULA® AQUEOUS CLEANSER,
sodium sulfacetamide and sulfur, have antibacterial properties that are effective against
acne and reduce the redness (erythema) and lesions associated with rosacea. The active
ingredient in ROSULA® NS PADS, sodium sulfacetamide, also acts as an antibacterial that
is effective for acne and rosacea. ROSULA® NS PADS were launched in the Third Quarter
2004.

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SELSEB®,
launched in December 2004, is a prescription antifungal shampoo used to treat seborrheic
dermatitis of the scalp, tinea versicolor and dandruff. The active ingredient selenium
sulfide has been proven to effectively reduce the type of fungus that causes seborrheic
dermatitis. SELSEB® Shampoo provides relief from scalp conditions in a convenient,
non-steroidal formulation.

ZONALON®
CREAM is a prescription cream that helps relieve itch for the management of moderate
itching associated with atopic dermatitis.

ANAMANTLE
HC®, launched in January 2003, is a prescription cream containing a topical anesthetic
(lidocaine) and hydrocortisone (an anti-inflammatory), which treats hemorrhoids and anal
fissures. Because ANAMANTLE HC® is formulated in a pH-balanced base, it can encourage a
pH that facilitates healing, reduce swelling and soothe irritation. ANAMANTLE HC® cream
is packaged as 14 single-use, disposable dispensers with an applicator (ANAMANTLE HC®
14). In December 2004, we introduced ANAMANTLE HC® CREAM KIT to the marketplace. This
new and enhanced kit contains 20 single-use units, each containing a single-use tube and
applicator, as well as a soothing cleansing wipe. In July 2005, we launched ANAMANTLE
HC® FORTE which delivers twice the anti-inflammatory medication of the original
ANAMANTLE HC® 14 and contains mucoadhesive properties that is designed to promote
better adhesion to affected areas.

PAMINE®
and PAMINE®FORTE are prescription lactose-free, antispasmodic oral therapies that are
indicated for the adjunctive therapy of peptic ulcer. PAMINE® FORTE contains twice the
amount of the active ingredient of PAMINE® and may be taken less frequently than
PAMINE®, which we believe may promote greater patient compliance. Because both
PAMINE® and PAMINE® FORTE have limited ability to cross the blood-brain barrier
(BBB), they cause fewer side effects, such as dizziness and blurred vision, than
comparable drugs that cross the BBB.

FLORA-Q®,
launched in March 2004, is an over-the-counter nutritional supplement blend of bacterial
strains designed to promote the proper balance of natural healthful bacteria in the
intestines, often referred to as probiotics. FLORA-Q® contains four proprietary strains
of probiotic bacteria in a novel delivery system that ensures safe passage of the
probiotic strains through the stomach and high potency delivery to the intestinal tract,
where its beneficial effect is realized. Additionally, FLORA-Q® requires no
refrigeration and is available in a convenient capsule form.

GLUTOFAC®ZX
is a prescription nutritional supplement that helps to replenish the bodys reserves of
vitamins and minerals.

Our
net sales volume percentages by category for 2003, 2004 and 2005 were as follows:

|                         |  | Year Ended
December 31,
|------------------------ |  | -----------------------
|                         |  | 2003                   
|Dermatology and Podiatry |  | 76                     
|Gastrointestinal         |  | 12                     
|Respiratory              |  | 9                      
|Nutritional              |  | 3                      

Financial
information for 2003, 2004 and 2005 are presented in our consolidated financial
statements included as part of this Annual Report on Form 10-K.

Raw Materials

We,
and the manufacturers of our products, rely on suppliers of raw materials used in the
production of our products. Some of these materials, including the active ingredient in
PAMINE® and PAMINE® FORTE, are available from only a limited number of sources and
others may become available from only one source or a limited number of sources.

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Products In Development

We
have developed and obtained rights to pharmaceutical agents in various stages of
development. We have a variety of products under development, ranging from new products
to existing product line extensions and reformulations of existing products. As a result
of our previous growth, we have begun adding longer-term projects to our development
pipeline and may even add more longer-term projects with inherently greater risk in the
future.

On
January 30, 2006, we entered into a Collaboration and License Agreement with MediGene AG.
Under this agreement, MediGene has granted to us the exclusive license, or sublicense in
certain instances, to certain patents, trademarks and other intellectual property for our
use in the commercialization, in the United States, as a prescription product, of any
ointment or other topical formulation containing green tea catechins, developed pursuant
to our agreement with MediGene, for the treatment of dermatological diseases in humans,
including, but not limited to, external genital warts, perianal warts and actinic
keratosis. MediGene has also granted to us the non-exclusive license, or sublicense in
certain instances, to certain patents, trademarks and other intellectual property to
manufacture those products outside of the United States. In the First Quarter 2006, we
paid to MediGene $5,000,000 in consideration for development and registration activities
undertaken prior to the date of the agreement. We will expense the $5,000,000 research
and development payment during the First Quarter 2006.

Sales and Marketing

We
market and sell our products primarily through our full-time sales personnel and
wholesalers, respectively. As of December 31, 2005, we employed a national sales force,
including district managers, of more than 180 representatives, which seeks to cultivate
relationships of trust and confidence with dermatologists, podiatrists and
gastroenterologists who issue a high volume of prescriptions in our core market segments.
Our marketing and sales promotions principally target these doctors through visits where
our representatives provide information and product samples to encourage them to
prescribe our products. In addition, we use a variety of marketing techniques to promote
our products, including journal advertising, promotional materials, specialty
publications, convention participation, focus groups, educational conferences,
telemarketing and informational websites.

As
of December 31, 2005, Doak Dermatologics had 135 representatives and district managers
who call on dermatologists and podiatrists throughout the United States. As of December
31, 2005, our Kenwood Therapeutics division had 47 representatives and district managers
who call on gastroenterologists in the United States. We believe we have created an
attractive incentive program for our sales force that is based upon goals in prescription
growth, market share improvement and growth in value for our shareholders.

During
June 2005, we entered into an agreement with Mission Pharmacal, a  privately-held
pharmaceutical company specializing in Womens Health, to  promote ANAMANTLE®HC and
ANAMANTLE®HC FORTE, to OB/GYN physicians. During  February 2006, we and Mission agreed
to terminate this agreement.

We
began promoting ANAMANTLE®HC 14 to OB/GYNs in July 2003 through a co-promotion
agreement with Ventiv Health, Inc. ANAMANTLE®HC was promoted by Ventiv Health until
February 2005.

To
facilitate sales of our products internationally, we have, as of December 31, 2005,
entered into agreements with approximately 25 international marketing and distribution
partners to provide for distribution and promotion of our products in more than 35
countries. Net sales from our international business were approximately 2% for 2005, 2%
for 2004 and 2% for 2003.

On
June 30, 2004, we entered into a distribution agreement with Dermik Laboratories, a
division of Aventis Pharmaceuticals, Inc., a wholly owned subsidiary of Aventis Pharma
AG, to acquire exclusive distribution and marketing rights in selected international
markets to the prescription acne and rosacea products Benzamycin®, Klaron® and
Noritate®, and three additional products, Hytone®, Sulfacet R® and Zetar®
Shampoo. Pursuant to this agreement, we have exclusive distribution and marketing rights
to these products for eight years in Australia, Japan, the countries comprising the
former Soviet Union, Saudi

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Arabia, the United Arab Emirates,
Kuwait and Egypt in the Middle East, and Vietnam, Thailand and Cambodia in Southeast
Asia. We are responsible for securing the necessary approvals to market these products in
these countries.

We
intend to seek new markets in which to promote our product lines and will continue
expansion of our field force as product growth and/or product acquisitions warrant. We
also continue to seek new international wholesalers and currently are in the process of
obtaining market approvals in new countries. Although we anticipate receiving the
necessary approvals to market our products in these countries, there can be no assurance
that these approvals will be received.

Customers

We
sell our products primarily to wholesalers, who, in turn, supply the nations pharmacy
retailers. Our customers include several of the nations leading wholesalers, such as
AmerisourceBergen Corporation, Cardinal Health, Inc., McKesson Corporation, Quality King
Distributors, Inc. and other major wholesalers and drug chains. Our four largest
customers listed below accounted for an aggregate of approximately 90% of our gross trade
accounts receivable at December 31, 2005 and 91% of our gross trade accounts receivable
at December 31, 2004. The following table presents a summary of our sales to significant
customers, who all are also wholesalers, as a percentage of our total gross sales:

|                               
|-------------------------------
|Customer*                      
|AmerisourceBergen Corporation  
|Cardinal Health, Inc.          
|McKesson Corporation           
|Quality King Distributors, Inc.

---

|* | No
other customer had a percentage of the Companys total gross            sales greater
than 5% during the periods.
|- | --------------------------------------------------------------------------------------------------------------------

We
have two principal types of arrangements with wholesalers of our products: (a)
traditional arrangements with health benefit providers, such as managed care contractors
and pharmacy benefit managers (Standard Arrangements), and (b) Inventory Management or
Distribution Service Agreements (collectively, DSAs) with our two largest wholesalers,
Cardinal Health and McKesson. Pursuant to Standard Arrangements, we provide discounts to
various health benefit providers nationwide for purchases of our products, although such
providers have no obligation to order any products at any time and we are under no
obligation to offer or provide the discounts. We have utilized Standard Arrangements for
several years and expect to continue to do so in the future.

During
March 2005, we entered into a DSA with Cardinal Health, having an effective date of July
2004, and during September 2005, we entered into a DSA with McKesson having an effective
date of October 2004. Under the terms of each of these DSAs, we have agreed to pay, under
certain circumstances, a fee in exchange for certain product distribution, inventory
management, and administrative services. We believe that these agreements will, among
other things, improve our knowledge of demand for our products and reduce the level of
wholesale inventories of our products.

Entering
into these DSAs adversely affected sales and increased returns of some of our products,
as McKesson and Cardinal reduced their inventory levels of these products to achieve
agreed upon inventory levels. Also, pursuant to these DSAs, we provide purchase price
discounts for purchases of our products in order to provide incentives to stabilize and
manage inventory levels, which, in turn, allows us to better control our inventory
pipeline.

Third Party Payors

Our
operating results and business success depend in large part on the availability of
adequate third party payor reimbursement to patients for our branded prescription
products. These payors include pharmacy benefit management organizations, governmental
entities, managed care organizations and

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private health insurers. We strive
to achieve the following strategic objectives for our branded prescription products with
these payors:

| |  |  | increased
patient access;
| | - |  | -------------------------

| |  |  | preferred
formulary placement;
| | - |  | ------------------------------

| |  |  | growth
in market share.
| | - |  | -----------------------

We
have initiated a marketing campaign to raise the awareness of our brands to third party
payors. The campaign involves regularly scheduled targeted product mailings, private
meetings and attendance at industry conferences. We have entered into reimbursement
agreements with nationally recognized pharmacy benefit management organizations and we
added a major health insurance company to the list of leading national managed care
organizations participating in reimbursement agreements with us. We intend to continue
expanding our existing base of national and regional relationships with third party
payors.

Manufacturers and
Suppliers

We
do not own or operate any manufacturing or production facilities. Instead, approximately
10 independent companies manufacture and supply the vast majority of our products. For
2005, two vendors that manufacture and package products for us accounted for
approximately 21% and 15% of our cost of sales. For 2004, two vendors that manufacture
and package products for us accounted for approximately 35% and 12% of our cost of sales.

With
respect to our actively marketed products, ADOXA®, KERALACTM, SOLARAZE®, ZODERM®,
LIDAMANTLE®, LIDAMANTLE®HC, ROSULA®, SELSEB®, ZONALON®, ANAMANTLE® HC,
PAMINE® and FLORA-Q®, we have licensing, manufacturing or other supply agreements
with our manufacturers or suppliers.

On
December 13, 2005, we entered into a licensing and distribution agreement with Par
Pharmaceutical pursuant to which we granted Par an exclusive, royalty-bearing license to
manufacture and distribute in the United States authorized generic versions of ADOXA®
in such strengths and dosage forms as we approve, excluding 50mg and 100mg capsules.
Under this agreement, Par is obligated to pay us 50% of its net profits from its sales of
our authorized generic versions of ADOXA®. To date, we have authorized Par to market
only 50mg and 100mg tablets of our authorized generic versions of ADOXA® in bottles.

Intellectual Property

A
majority of our products are not patent protected, and we cannot assure you that any of
our patents, if challenged, would be held enforceable. In addition, competitors may
independently develop similar technologies or design around patented aspects of our
technology. During October 2004 and February 2005, generic competitors introduced less
expensive comparable products to ANAMANTLE®HC 14 and ANAMANTLE®HC CREAM KIT,
respectively, that contain the same active ingredient. During January 2005, a generic
competitor introduced less expensive comparable products to KERALACTM LOTION and NAIL
GEL, and in July 2005, a generic competitor introduced a less expensive comparable
product to KERALACTM CREAM. In addition, during April 2005, another generic competitor
introduced less expensive comparable products to ROSULA® AQUEOUS GEL and ROSULA®
AQUEOUS CLEANSER. Further, during December 2005, another competitor introduced a generic
version of ADOXA® 50mg and 100mg tablets in bottles. The introduction of these
competing products will likely result in reduced demand for ANAMANTLE® HC, KERALACTM
LOTION, NAIL GEL and CREAM, ROSULA® AQUEOUS GEL and CLEANSER, and for ADOXA® tablets.
We have been issued a patent from the U.S. Patent and Trademark Office covering the use
of ROSULA® AQUEOUS GEL and CLEANSER for dermatological conditions and currently have a
patent pending in the U.S. Patent and Trademark Office covering a packaging component of
our ANAMANTLE®HC products and a second patent pending with respect to KERALACTM NAIL
GEL and CREAM. With respect to our issued patent, and with respect to those patents that
are pending, if they issue, we intend to seek legal remedies, including monetary damages,
against these competitors. The timing of the issuance of our pending patents, if at all,
is uncertain. Further, even if these

| | 12 | 
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pending patents issue, our issued
and pending patents may not provide significant protection and may be challenged as to
their validity or enforceability.

We
own trademarks associated with our products, including several national and foreign
trademark registrations, or common law rights, for each of our material products. We
cannot provide any assurance as to the extent or scope of the trademarks or other
proprietary protection secured by us on our products. To our knowledge, none of our
trademarks infringes any trademarks owned or used by others.

We
rely principally on unpatented proprietary technologies in the development and
commercialization of our products. We also depend upon the unpatentable skills, knowledge
and experience of our scientific and technical personnel, as well as those of our
advisors, consultants and other contractors. To help protect our proprietary know how
that is not patentable, and for inventions for which patents may be difficult to enforce,
we often use trade secret protection and confidentiality agreements to protect our
interests. To this end, we typically require employees, consultants and advisors to enter
into agreements that prohibit the disclosure of confidential information and, where
applicable, require disclosure and assignment to us of the ideas, developments,
discoveries and inventions that arise from their activities for us. Additionally, these
confidentiality agreements require that our employees, consultants and advisors do not
bring to us, or use without proper authorization, any third partys proprietary
technology.

Competition

The
pharmaceutical industry is highly competitive. We compete primarily in the dermatologic,
podiatric and gastrointestinal markets. We believe that competition for product sales is
based primarily on brand awareness, price, availability, product efficacy and customer
service. Additionally, since our current products generally are established and commonly
sold, they are subject to competition from products with similar qualities. Our
pharmaceutical products may be subject to competition from alternate therapies during the
patent protection period, if applicable, and thereafter from generic equivalents.

Many
of our competitors are large, well-established companies in the pharmaceutical, chemical,
cosmetic and health care fields and may have greater resources than we do to devote to
manufacturing, marketing, sales, research and development and acquisitions. Our
competitors include AstraZeneca, Sanofi-Aventis, Axcan Pharma, Bristol-Myers Squibb,
Connetics, Ferndale Laboratories, First Horizon Pharmaceuticals, Galderma,
GlaxoSmithKline, Valeant Pharmaceuticals, Medicis Pharmaceutical, Ortho Pharmaceuticals,
Pfizer, Salix Pharmaceuticals, Schering Plough, Schwarz Pharma, Upsher-Smith,
Warner-Chilcott and others.

During
the Second Quarter 2003, a competitor launched a competing product with the same active
ingredient as CARMOL® 40 CREAM. During the Fourth Quarter 2003, generic competitors
introduced less expensive comparable products to CARMOL® 40 CREAM, LOTION and GEL, also
with the same active ingredient. These introductions of competing products resulted in a
reduction in demand for our CARMOL® 40 CREAM, LOTION and GEL products during the three
and twelve months ended December 31, 2004 in comparison to the same periods in the prior
year. In order to minimize a reduction in our overall Net Sales arising from increased
competition related to the CARMOL® 40 products, we have implemented life cycle
management techniques, including launching new products- KERALACTM LOTION and GEL in
the Second Quarter 2004, KERALACTM CREAM in the First Quarter 2005 and KERALACTM
NAILSTIK and OINTMENT during the Fourth Quarter 2005.

During
October 2004 and February 2005, generic competitors introduced less expensive comparable
products to ANAMANTLE®HC 14 and ANAMANTLE®HC CREAM KIT, respectively. As a result of
the increased competition for ANAMANTLE®HC 14 and ANAMANTLE®HC CREAM KIT based on
price, we expect lower Net Sales for ANAMANTLE®HC 14 and ANAMANTLE®HC CREAM KIT. In
order to minimize a reduction in Net Sales related to increased competition for
ANAMANTLE®HC, we have implemented life cycle management techniques, including launching
ANAMANTLE®HC FORTE.

During
January 2005, a generic competitor introduced less expensive comparable products to
KERALACTM LOTION and NAIL GEL with the same active ingredient. These introductions of
competing products will most likely result in reduced demand for our KERALACTM LOTION
and NAIL GEL. During July 2005, generic competitors introduced less expensive comparable
products to KERALACTM CREAM, with the same active ingredient. These introductions of
these competing products will most likely result in reduced demand for our KERALACTM
CREAM. We have a patent application

| | 13 | 
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pending with respect to our
KERALACTM products. If this patent issues, we intend to seek legal remedies against the
generic competitor, including seeking monetary damages. The timing of the issuance of
this patent, if at all, is uncertain. Further, even if the patent issues, the patent may
not provide significant protection and may be challenged as to its validity or
enforceability. In order to minimize a reduction in Net Sales related to increased
competition for KERALACTM products, we launched additional line extensions of
KERALACTM NAILSTIK in September 2005 and KERALACTM OINTMENT in October 2005.

During
June 2005, a generic competitor introduced less expensive comparable products to our
ZODERM® products. These competing products will most likely result in reduced Net Sales
for our ZODERM® product line.

During
December 2005, a generic competitor introduced less expensive products of ADOXA® 100mg
and ADOXA® 50mg tablets. These introductions will most likely result in reduced Net
Sales for those impacted ADOXA® lines. To minimize lost profits as a result of generic
competition against ADOXA®, we entered into a Licensing and Distribution Agreement with
Par Pharmaceutical. Under this agreement, we granted Par an exclusive, royalty-bearing
license to manufacture and distribute in the United States authorized generic versions of
ADOXA® in such strengths and dosage forms as we approve, excluding 50mg and 100mg
capsules. Under this agreement, Par is obligated to pay us 50% of its net profits from
its sales of our authorized generic versions of ADOXA®. To date, we have authorized Par
to market only 50mg and 100mg tablets of our authorized generic versions of ADOXA® in
bottles. In addition to entering into our agreement with Par, we have implemented life
cycle management techniques for ADOXA®, including launching ADOXA Paks®, designed to
enhance patient compliance and physician prescribing, in January 2005 and ADOXA® 150mg
tablets in late 2005.

In
addition to increased generic competition mentioned above for CARMOL® 40,
ANAMANTLE®HC, KERALACTM, ZODERM® and ADOXA® 50mg and 100mg tablets, we have
experienced generic competition against LIDAMANTLE® Lotion and LIDAMANTLE® HC Lotion
in November 2004 and ROSULA® Aqueous Gel and ROSULA® Aqueous Cleanser in April 2005.

There
is no proprietary protection for most of our products, and therefore our products face
competition from generic or comparable products that are sold by other pharmaceutical
companies. Increased competition from the sale of generic or comparable products may
cause a decrease in sales of our products. Further, if there are decreases in sales of
any other material product line, including ZODERM®, KERALACTM, ANAMANTLE®HC,
PAMINE®, ADOXA® or our other products, as a result of increased competition,
wholesaler buying patterns, physicians prescribing habits or for any other reason and we
fail to replace those sales, our revenues and profitability would decrease.

Government Regulation

Virtually
all aspects of our activities are regulated by federal and state statutes and
regulations, and government agencies. The research, development, manufacturing,
processing, packaging, labeling, distribution, sale, advertising and promotion of our
products, and disposal of waste products arising from these activities, are subject to
regulation by one or more federal agencies and their state equivalents, including the
FDA, the Drug Enforcement Administration, the Federal Trade Commission, the Consumer
Product Safety Commission, the United States Department of Agriculture, the Occupational
Safety and Health Administration and the Environmental Protection Agency, as well as by
governmental authorities in those foreign countries in which we distribute some of our
products.

Noncompliance
with applicable regulatory policies or requirements of the FDA or other governmental
authorities could subject us to enforcement actions, such as suspensions of product
distribution, seizure of products, product recalls, civil monetary and other penalties,
criminal prosecution and penalties, injunctions, whistleblower lawsuits, failure to
approve pending drug product applications or total or partial suspension of product
marketing approvals. Similar civil or criminal penalties could be imposed by other
government agencies or the agencies of the states and localities in which our products
are manufactured, sold or distributed, and could have ramifications for our contracts
with government agencies, such as our contract with the Veterans Administration and the
Department of Defense. These enforcement actions would detract from managements ability
to focus on our daily business and would

| | 14 | 
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have an adverse effect on the way we
conduct our daily business, which could severely impact future profitability.

Pharmaceutical Products

In
the United States, all manufacturers, marketers and distributors of human pharmaceutical
products are subject to regulation by the FDA. For innovative, or non-generic, new drugs,
an FDA-approved new drug application, or NDA, is required before the drugs may be
marketed in the United States. The NDA must contain data to demonstrate that the drug is
safe and effective for its labeled uses, and that it will be manufactured to appropriate
quality standards. In order to demonstrate safety and effectiveness, an NDA typically
must include or reference pre-clinical data from animal and laboratory testing and
clinical data from controlled trials in humans. For a new chemical entity, this generally
means that lengthy, uncertain and rigorous pre-clinical and clinical testing must be
conducted. For compounds that have a record of prior or current use, it may be possible
to utilize existing data or medical literature and limited new testing to support an NDA.
Any pre-clinical laboratory and animal testing must comply with FDAs good laboratory
practice and other requirements. Clinical testing in human subjects must be conducted in
accordance with FDAs good clinical practice and other requirements. In order to initiate
a clinical trial, the sponsor must submit an investigational new drug application, or
IND, to the FDA or meet one of the narrow exemptions that exist from the IND requirement.
Clinical research must also be reviewed and approved by independent institutional review
boards, or IRBs, at the sites where the research will take place, and the study subjects
must provide informed consent.

The
FDA can, and does, reject new drug applications, require additional clinical trials, or
grant approvals on only a restricted basis even when product candidates performed well in
clinical trials. The FDA regulates and typically inspects manufacturing facilities,
equipment and processes used in the manufacturing of pharmaceutical products before
granting approval to market any drug. Each NDA submission requires a substantial user fee
payment, unless a waiver or exemption applies. FDA has committed generally to review and
make a decision concerning approval on an NDA within 10 months, and on a new priority
drug within six months. However, final FDA action on the NDA can take substantially
longer, and where novel issues are presented there may be review and recommendation by an
independent FDA advisory committee. The FDA can also refuse to file and review an NDA it
deems incomplete or not properly reviewable.

Generic
drugs are approved through an abbreviated process based on the submission to FDA of an
abbreviated new drug application, or ANDA. The ANDA must seek approval of a drug product
that has the same active ingredient(s), dosage form, strength, route of administration,
and labeling as a so-called reference listed drug approved under an NDA, although some
limited exceptions may be permitted. The ANDA also generally contains limited clinical
data to demonstrate that the product covered by the ANDA is absorbed in the body at the
same rate and to the same extent as the reference listed drug. This is known as
bioequivalence. In addition, the ANDA must contain information regarding the
manufacturing processes and facilities that will be used to ensure product quality, and
must contain certifications to patents listed with the FDA for the reference listed drug.
Special procedures apply when an ANDA contains certifications stating that a listed
patent is invalid or not infringed, and if the owner of the patent or the NDA for the
reference listed drug brings a patent infringement suit within a specified time, an
automatic stay bars FDA approval of the ANDA for a specified period of time pending
resolution of the suit or other action by the court. The amount of testing and effort
that is required to prepare and submit an ANDA is generally substantially less than that
required for an NDA.

The
FDA continues to review marketed products even after approval. If previously unknown
problems are discovered or if there is a failure to comply with applicable regulatory
requirements, the FDA may restrict the marketing of an approved product, cause the
withdrawal of the product from the market, or under certain circumstances seek recalls,
seizures, injunctions or criminal sanctions. For example, the FDA may require an approved
marketing application or additional studies for any marketed drug product if new
information reveals questions about a drugs safety or effectiveness. In addition,
changes to the product, the manufacturing methods or locations, or labeling are subject
to additional FDA approval, which may or may not be received, and which may be subject to
a lengthy FDA review process.

Over-the-counter,
or OTC, drugs may be sold either under an approved NDA or ANDA, or under special
regulations of the FDA known as OTC monographs. FDA issues OTC monographs for particular

| | 15 | 
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product categories, such as
cough-cold products. The monographs specify permissible active ingredients, labeling and
indications, and a product may be marketed under a monograph without receiving a separate
FDA approval. Once FDA has determined that a drug should be sold on an OTC basis for a
particular use, it is generally considered unlawful to continue marketing that drug on a
prescription basis for that use. Therefore, once the FDA issues a final OTC monograph, a
prescription product covered by the monograph must generally convert from prescription
status to OTC status.

Certain
drugs that we and others market are not the subject of an approved NDA or ANDA, or an OTC
monograph. FDA has recognized that there are numerous, perhaps thousands, of such drug
products currently on the market without FDA approvals or authorizations. These include
principally products that first came on the market without an NDA prior to changes in the
food and drug laws in 1962, and new products that have come on the market since that time
on the grounds that they are identical, similar, or related to pre-1962 products. FDA has
stated that these unapproved products are new drugs under the Federal Food, Drug, and
Cosmetic Act and thus require an effective approval in order to be introduced into
interstate commerce. However, FDA also acknowledges that many of these products have been
marketed and prescribed for years without raising any safety or effectiveness issues, and
thus has established policies stating the circumstances under which it will exercise its
enforcement discretion and not take action against an otherwise unapproved new drug.
Under these policies, FDA states that it will exercise its enforcement discretion with
respect to drugs marketed without a required FDA approval and focus its enforcement
resources on drugs that (1) present potential safety risks, (2) lack evidence of
effectiveness, and/or (3) constitute health fraud drugs. FDA also states in these
policies that the agency considers drugs presenting a challenge to the drug approval or
OTC monograph system as falling into one or all of these categories. This means, among
other things, that FDA will give higher enforcement priority where one company obtains
approval of an NDA and other companies are marketing the product without approval, or
where drugs are marketed in violation of a final OTC monograph. We market a number of our
products under these FDA enforcement policies on the basis that they are equivalent to
products first marketed prior to 1962. Any change in the FDAs enforcement discretion
and/or policies could alter the way we have to conduct our business and any such change
could severely impact our future profitability.

Whether
or not approved under an NDA, all drugs must be manufactured in conformity with current
Good Manufacturing Practices and other FDA regulations and requirements, and drug
products subject to an approved application must be manufactured, processed, packaged,
labeled and promoted in accordance with the approved application. Certain of our products
must also be packaged with child-resistant and senior friendly packaging under the Poison
Prevention Packaging Act and Consumer Product Safety Commission regulations. Products
that do not comply with these requirements can be considered misbranded and subject to
seizure, recall, monetary fines, and other penalties. Our third-party manufacturers must
comply with Good Manufacturing Practices and product specific regulations enforced by the
FDA, and are continually subject to inspection by the FDA and other governmental
agencies. Manufacturing operations could be interrupted or halted in any of those
facilities if a government or regulatory authority determines that our contract
manufacturers do not comply with applicable regulations or as a result of an
unsatisfactory inspection. Any interruptions of this type could stop or slow the delivery
of our products to our customers and affect adversely our results of operations.

The
distribution of prescription pharmaceutical products is subject to the Prescription Drug
Marketing Act, or PDMA, which regulates the distribution of drugs and drug samples at the
federal level, and sets minimum standards for the registration and regulation of drug
distributors by the states. States require the registration of manufacturers and
distributors who provide pharmaceuticals, including in certain states even if these
manufacturers or distributors have no place of business within the state but satisfy
other nexus requirements, for example, the shipment of products into such state. Both the
PDMA and state laws limit the distribution of prescription drug product samples to
licensed practitioners and impose other requirements to ensure accountability in the
distribution of samples.

Other
reporting and recordkeeping requirements also apply for marketed drugs, including for
most products requirements to review and report cases of adverse events. Product
advertising and promotion are subject to FDA and state regulation, including requirements
that promotional claims conform to any applicable FDA approval, and be appropriately
balanced and substantiated. OTC drug advertising is also regulated by the Federal Trade
Commission. Our sales, marketing and scientific/educational programs must comply with
applicable requirements of the anti-kickback provisions of the Social Security Act, the

| | 16 | 
| | -- | 

---

False Claims Act, the Veterans
Healthcare Act, and the implementing regulations and policies of the United States Health
and Human Services Office of Inspector General and United States Department of Justice,
as well as similar state laws. Our pricing and rebate programs must comply with
applicable pricing and reimbursement rules, including the Medicaid drug rebate
requirements of the Omnibus Budget Reconciliation Act of 1990. If products are made
available to authorized users of the Federal Supply Schedule of the General Services
Administration, additional laws and requirements apply. All of our activities are
potentially subject to federal and state consumer protection and unfair competition laws.

Nutritional Supplements

The
FDA regulates nutritional supplements, including vitamins, minerals and herbs,
principally under the Dietary Supplement Health and Education Act of 1994, or DSHEA.
DSHEA defines dietary supplements as vitamins, minerals, herbs, other botanicals, amino
acids and other dietary substances for human use to supplement the diet, as well as
concentrates, metabolites, constituents, extracts or combinations of such dietary
ingredients. Generally, under DSHEA, dietary ingredients that were on the market before
October 15, 1994 may be used in dietary supplements without notifying the FDA. However, a
dietary ingredient that was not marketed in the United States before October 15, 1994
must be the subject of a notification submitted to the FDA unless the ingredient has been
present in the food supply as an article used for food without the food being chemically
altered. A new dietary ingredient notification must provide the FDA evidence of a history
of use or other evidence of safety, and must be submitted to FDA at least 75 days before
the initial marketing of the new dietary ingredient.

DSHEA
permits statements of nutritional support to be included in labeling for dietary
supplements without FDA pre-approval. Such statements may describe how a particular
dietary ingredient affects the structure, function or well-being, but may not state that
a dietary supplement will diagnose, cure, mitigate, treat, or prevent a disease unless
such claim has been reviewed and approved by the FDA. A company that uses a statement of
nutritional support in labeling must possess evidence substantiating that the statement
is truthful and not misleading. In some circumstances it is necessary to disclose on the
label that the FDA has not evaluated the statement, to disclose the product is not
intended to diagnose, treat, cure or prevent a disease, and to notify the FDA about the
use of the statement within 30 days of marketing the product.

Dietary
supplements are subject to the current good manufacturing practices, or GMP, requirements
that apply to ordinary foods. In addition, as authorized by DSHEA, the FDA proposed GMP
requirements specifically for dietary supplements. If these regulations are finalized,
they will be more detailed than the requirements that currently apply.

FDAs
regulation of marketed nutritional supplements includes monitoring safety, through
measures such as voluntary dietary supplement adverse event reporting, and product
information, such as labeling, claims, package inserts, and accompanying literature. The
Federal Trade Commission regulates dietary supplement advertising.

Product Liability
Insurance

We
maintain product liability insurance on our products that provides coverage of up to
$10,000,000 in the aggregate per year. This insurance is in addition to required product
liability insurance maintained by the manufacturers of our products. We cannot assure you
that product liability claims against us will not exceed that coverage. To date, no
product liability claim has been made against us and we are not aware of any pending or
threatened claim.

Employees

As
of December 31, 2005, we had approximately 311 employees. We also maintain active
independent contractor relationships with various individuals with whom we have
consulting agreements. We believe that our relationships with our employees are good.
None of our employees are subject to a collective bargaining agreement.

Web Site Access to
Filings with the Securities and Exchange Commission

All
of our electronic filings with the Securities and Exchange Commission, including our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments to these reports filed or furnished pursuant to Sections 13(a) or 15(d) of
the Securities Exchange Act of 1934,

| | 17 | 
| | -- | 

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are made available at no cost
through our web site, www.bradpharm.com, as soon as reasonably practicable after we file
such material with, or furnish it to, the SEC. Our SEC filings are also available through
the SECs web site at www.sec.gov.

ITEM 1A:  RISK FACTORS

We
provide the following discussion of risks and uncertainties relevant to our business.
These are factors that we think could cause our actual results to differ materially from
expected and historical results. We could also be adversely affected by other factors in
addition to those listed here.

RISKS RELATED TO OUR
BUSINESS

We derive a majority of our net
sales from our core branded products, and any factor that hurts our sales of these
products could reduce our revenues and profitability.

We
derive a majority of our net sales from our core branded products: ADOXA®, KERALACTM,
SOLARAZE®, ZODERM®, LIDAMANTLE®, ROSULA®, SELSEB®, ZONALON®, PAMINE®,
ANAMANTLE®HC, FLORA-Q® and GLUTOFAC®-ZX. These core branded products accounted for
a total of approximately 85% of our net sales for 2005 and approximately 75% of our net
sales for 2004 (ADOXA®, SOLARAZE® and ZONALON® were acquired by us on August 10,
2004). We believe that the net sales of these products, along with sales of any product
to be developed in connection with our collaboration and license agreement with Medigene
and possible line extensions, will constitute the majority of our overall net sales for
the foreseeable future. Accordingly, any factor that hurts our sales of these core
products, individually or collectively, could reduce our revenues and profitability. Many
of our core branded products are subject to generic or comparable product competition
currently or may be in the near future. Each of our core branded products could be
rendered obsolete or uneconomical by regulatory or competitive changes. Net sales of our
core branded products could also be adversely affected by other factors, including:

| |  |  | Manufacturing
or supply interruptions;
| | - |  | --------------------------------------

| |  |  | the
development of new competitive pharmaceuticals and technological advances to treat the
              conditions addressed by our core branded products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | marketing
or pricing actions by one or more of our competitors;
| | - |  | ---------------------------------------------------------------

| |  |  | effectiveness of our
sales and marketing efforts;
| | - |  | -------------------------------------------------

| |  |  | legal or regulatory          action by the FDA and other
government regulatory agencies;
| | - |  | ----------------------------------------------------------------------------------------

| |  |  | changes          in the prescribing practices of
dermatologists, podiatrists and/or               gastroenterologists;
| | - |  | ----------------------------------------------------------------------------------------------------------------------

| |  |  | restrictions
on travel affecting the ability of our sales force to market to prescribing
            physicians in person;
| | - |  | --------------------------------------------------------------------------------------------------------------------------

| |  |  | changes
in the reimbursement or substitution policies of third party payers or retail
            pharmacies;
| | - |  | -------------------------------------------------------------------------------------------------------------

| |  |  | product
liability claims;
| | - |  | -------------------------

| |  |  | the
outcome of disputes relating to trademarks, patents, license agreements and other
              rights.
| | - |  | -----------------------------------------------------------------------------------------------------------

Failure to maintain
ADOXA® net sales would reduce our revenues and profitability.

On
August 10, 2004, we purchased certain assets of Bioglan Pharmaceuticals. As part of the
transaction, we acquired certain intellectual property, regulatory filings, and other
assets relating to ADOXA®, an oral antibiotic indicated for the treatment of acne that
is currently not patent protected. ADOXA® accounted for approximately 34% and 13% of
our net sales for 2005 and 2004, respectively. The concentration of our net sales in a
single product line makes us particularly dependent on that line. If demand for the
ADOXA® or any other material product line decreases and we fail to replace those sales,
our revenues and profitability would decrease.

We
rely on unpatented technologies for ADOXA®. During December 2005, a generic competitor
introduced less expensive versions of ADOXA® 100mg and ADOXA® 50mg tablets in
bottles. These

| | 18 | 
| | -- | 

---

introductions of competing products
will most likely result in reduced Net Sales for those impacted ADOXA® products. To
minimize lost profits as a result of generic competition against ADOXA®, we entered
into a Licensing and Distribution Agreement with Par Pharmaceutical to manufacture and
distribute in the United States authorized generic versions of ADOXA® in such strengths
and dosage forms as we approve. In addition to entering into our agreement with Par, we
have implemented life cycle management techniques for ADOXA®, including launching ADOXA
Paks®, designed to enhance patient compliance and physician prescribing, in January
2005 and ADOXA® 150mg tablets in late 2005. These strategies might not be successful,
and ADOXA® is susceptible to further potential generic competition and sales erosion.
We also depend upon the unpatentable skills, knowledge and experience of our scientific
and technical personnel, as well as those of our advisors, consultants and other
contractors, none of which might provide effective protection for ADOXA®. We cannot
assure you that we will be able to maintain our net sales or profit levels for ADOXA®
products or that they will not decrease.

Net sales of KERALACTM and
CARMOL®40 have been, and may continue to be, adversely affected by the introduction of
competitive products and net sales of ADOXA® may be affected by the recent introduction
of competitive products.

In
the second quarter of 2003, a competitor launched a competing product with the same
active ingredient as CARMOL® 40 CREAM. During the fourth quarter of 2003, generic
competitors introduced less expensive comparable products to CARMOL® 40 CREAM, LOTION
and GEL, also with the same active ingredient. These introductions of competing products
resulted in reduced demand for our CARMOL® 40 CREAM, LOTION and GEL products during the
year ended December 31, 2004 in comparison to the same periods in the prior year. The
total net sales for CARMOL®40 CREAM, LOTION and GEL for the year ended 2005 were
$6,085,620, a decrease of $7,417,649 from the year ended December 31, 2004.

During
January 2005, a generic competitor introduced less expensive comparable products to
KERALACTM LOTION and NAIL GEL with the same active ingredient. These introductions of
competing products will most likely result in reduced demand for our KERALACTM LOTION
and NAIL GEL products in the upcoming quarters. During July 2005, generic competitors
introduced less expensive comparable products to KERALACTM CREAM, with the same active
ingredient. These introductions of these competing products will most likely result in
reduced demand for our KERALACTM CREAM products in upcoming quarters.

We
rely on unpatented technologies for ADOXA®. During December 2005, a competitor
introduced generic versions of ADOXA® 50mg and 100mg tablets. We expect that the
introduction of these products and the possible future introduction of other competing
products will result in reduced demand for ADOXA®.

If
aggregate demand for CARMOL® 40, KERALACTM, ADOXA® or any other material product
line decreases and we fail to replace those sales, our revenues and profitability would
decrease. We cannot assure you that we will be able to maintain our net sales levels for
CARMOL® 40, KERALACTM and ADOXA®, or that they will not decrease.

Our growth depends upon our ability
to develop new products, including products, if any, to be developed in connection with
our collaboration and license agreement with Medigene.

We
have acquired the rights to a potential ointment or other topical formulation containing
green tea catechins, developed pursuant to our agreement with MediGene, for the treatment
of dermatological diseases in humans, including, but not limited to, external genital
warts, perianal warts and actinic keratosis. We cannot assure you that we will be able to
develop any products or technology, including any products to be developed under the
Medigene research and development project or pharmaceutical line extensions of our
existing brands, in a timely manner, or at all. Delays in the research, development,
testing or regulatory approval processes will cause a corresponding delay in revenue
generation from those products. Regardless of whether they are ever released to the
market, the expense of such processes will have already been incurred. We cannot assure
you that the FDA will approve any products or line extensions we develop, including any
products developed under the MediGene research and development project, in a timely
fashion, or at all.

| | 19 | 
| | -- | 

---



We
reevaluate our research and development efforts regularly to assess whether our efforts
to develop a particular product or technology are progressing at a rate that justifies
our continued expenditures. On the basis of these reevaluations, we have abandoned in the
past, and may abandon in the future, our efforts on a particular product or technology.
Products that we research or develop may not be successfully commercialized. If we fail
to take a product or technology from the development stage to market on a timely basis,
we may incur significant expenses without a near-term financial return.

We
may in the future, supplement our internal research and development by entering into
research and development agreements with other pharmaceutical companies. We may, upon
entering into such agreements, be required to make significant up-front payments to fund
the projects. We cannot be sure, however, that we will be able to locate adequate
research partners or that supplemental research will be available on terms acceptable to
us in the future. Even if we are able to enter into collaborations, we cannot assure you
that these arrangements will result in successful product development or
commercialization.

Failure of our products to gain, or
otherwise maintain, market acceptance would hurt our revenues and profitability.

There
is a risk that our products may not gain, or otherwise maintain, market acceptance among
physicians, patients and the medical community generally. The degree of market acceptance
of any product that we develop will depend on a number of factors, including demonstrated
clinical efficacy and safety, cost-effectiveness, potential advantages over alternative
products, and our marketing and distribution capabilities. Physicians may elect to not
recommend using them for any number of other reasons, including whether our products best
meet the particular needs of the individual patient.

We do not have proprietary
protection for most of our branded pharmaceutical products, and our sales could suffer
from competition by generic or comparable products.

There
is no proprietary protection for most of our branded pharmaceutical products, and
competing generic or comparable products for most of these products are sold by other
pharmaceutical companies. In addition, governmental and other pressure to reduce
pharmaceutical costs may result in physicians prescribing products for which there are
generic or comparable products. Increased competition from the sale of generic
pharmaceutical or comparable products may cause a decrease in revenue from our branded
products, which could have an adverse effect on our business, financial condition and
results of operations, which would likely negatively affect the market price of our
stock. In addition, our branded products for which there are no generic or comparable
forms available, may face competition from different therapeutic treatments used for the
same indications for which our branded products are used.

Our intellectual
property rights might not afford us with meaningful protection.

Other
than patents with respect to SOLARAZE®, we do not have meaningful patents or patent
applications pending with respect to any other material products currently sold by us.
The ownership of a patent or an interest in a patent does not always provide significant
protection and the patents and applications in which we have an interest may be
challenged as to their validity or enforceability. Others may independently develop
similar technologies or design around the patented aspects of our technology. Challenges
may result in significant harm to our business. The cost of responding to these
challenges and the inherent costs to defend the validity of our patents, including the
prosecution of infringements and the related litigation, could be substantial. Such
litigation also could require a substantial commitment of managements time, which would
detract from the time available to be spent maintaining and developing our business.

We
mainly rely on unpatented proprietary technologies in the development and
commercialization of our products. We also depend upon the unpatentable skills, knowledge
and experience of our scientific and technical personnel, as well as those of our
advisors, consultants and other contractors. To help protect our proprietary know-how
that is not patentable, and for inventions for which patents may be difficult to enforce,
we often use trade secret protection and confidentiality agreements to protect our
interests. These agreements may not effectively prevent disclosure of confidential
information or result in the effective assignment to us of intellectual property, and may
not provide an adequate remedy to us in the event of unauthorized disclosure of
confidential information or other breaches of the agreements. In addition, others may
independently develop similar or equivalent trade secrets or know-how.

| | 20 | 
| | -- | 

---

During
2005, generic competitors introduced less expensive comparable products to ANAMANTLE®HC
CREAM KIT and KERALACTM LOTION, CREAM and NAIL GEL. In addition, during 2005, another
generic competitor introduced less expensive comparable products to ROSULA® AQUEOUS GEL
and CLEANSER. We have been issued a U.S. patent with respect to our ROSULA® AQUEOUS GEL
and CLEANSER products and have a patent application pending with respect to our
KERALACTM products. With respect to our issued patent, and our pending patent, if this
patent issues, we intend to seek legal remedies against the generic competitors,
including seeking monetary damages. The timing of the issuance of our pending patent, if
at all, is uncertain. Further, even if the pending patent issues, our issued and pending
patents may not provide significant protection and may be challenged as to their validity
or enforceability.

Generic competition
and introductions by us of line extensions of our existing products or new products may
require that we make unexpected changes in our estimates for future product returns and
reserves for obsolete inventory which would adversely affect our operating results.

Part
of our operating plan includes the introduction of line extensions of our existing
products to create marketing advantages and extend the life cycles of our products. From
time-to-time we may seek to introduce line extensions on an expedited basis before we are
able to reduce the levels of inventories of product which may be rendered obsolete or
otherwise adversely affected by the line extension. This may require us to increase our
estimate for returns of product on hand at wholesalers, which is recorded as a reduction
of our net sales, and increase our reserve for inventory in our warehouse which is
recorded as a cost of sales. Accordingly, generic competition and the introduction of
line extensions may adversely affect our operating results.

The restatement of our
consolidated financial statements for the Third Quarter 2004 and SEC inquiry have, and
will continue to have, an adverse impact on us, including increased costs and the
increased possibility of legal or administrative proceedings.

As
a result of the restatement of our consolidated financial statements for the Third
Quarter 2004 and the SEC inquiry, we have become subject to a number of additional risks
and uncertainties, including:

| |  |  | We
have incurred substantial unanticipated costs for accounting, legal         and financing
fees in connection with the restatement. Although the         restatement is complete, we
expect to continue to incur such costs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We
and certain of our officers and directors have also been named defendants in federal
        securities class action and federal and state shareholder derivative lawsuits.
 The plaintiffs         in these lawsuits may make additional claims, expand existing
claims and/or expand the time         periods covered by the complaints and other
plaintiffs may bring additional actions with other         claims.  We expect to incur
additional substantial defense costs regardless of the outcome of         these lawsuits.
 Likewise, such events have caused, and will likely continue to cause, a
        diversion of our managements time and attention.  If we do not prevail in any
such actions, we         could be required to pay substantial damages or settlement costs
which may not be covered by         insurance.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
SEC has instituted an informal inquiry which has resulted in, and           will likely
to continue to result in, a diversion of our managements           time and attention
and the incurrence of increased costs. The inquiry           could lead to a formal SEC
investigation. The inquiry may also result           in civil penalties or criminal
proceedings, including fines,           injunctions or orders with respect to future
activities, all of which           would result in further substantial costs and
diversion of management           time and attention.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under our $110 million
senior credit facility, we are required to continually satisfy certain financial and
other covenants. If we were unable to maintain these covenants and payment obligations
under this credit facility were to become immediately due and payable, we may be unable
to repay these amounts which could adversely affect our financial condition.

| | 21 | 
| | -- | 

---

As
of December 31, 2005, our cash and cash equivalents, restricted cash and short-term
investments were approximately $65 million. As of that date, we had a total of $78
million outstanding under our $110 million senior credit facility. If we are unable to
continually satisfy the financial and other covenants set forth under our $110 million
credit facility, and amounts outstanding under this facility were declared due and
payable, we may be unable to repay those amounts and our lenders could proceed against
the collateral granted to them to secure the indebtedness. The result of these actions
would have a significantly negative impact on our results of operations and financial
condition.

We may need additional
financing to implement our business strategy, which may not be available on terms
acceptable to us.

In
order to implement our business strategy, and to grow through acquisitions and product
enhancement, we may need additional financing. Our ability to grow is dependent upon, and
may be limited by, among other things, the availability of satisfactory financing
arrangements. Our existing loan agreement with syndicated banks restricts our ability to
incur indebtedness and our ability to grant liens upon, and security interests in, our
assets, including our intellectual property. As a result, we may not be able to obtain
the additional capital necessary to pursue our business strategy. In addition, even if we
can obtain additional financing, that financing may not be on terms that are satisfactory
to us. Any indebtedness that we incur will rank senior to the interest of the holders of
our common stock. We will need to finance any new acquisitions from one or more of the
following:

| |  |  | our
acquisition of a credit facility with the syndicated banks;
| | - |  | ---------------------------------------------------------------

| |  |  | existing
working capital and positive cash flow from operations;
| | - |  | ----------------------------------------------------------------

| |  |  | new
         borrowings;
| | - |  | ------------------------

| |  |  | issuing
equity securities.
| | - |  | --------------------------

We have identified
material weaknesses in our internal control over financial reporting, and our business
and stock price may be adversely affected if we do not adequately address those
weaknesses or if we have other material weaknesses or significant deficiencies in our
internal control over financial reporting.

We
did not adequately implement certain controls over information technology used in our
core business and financial reporting. These areas included logical access security
controls to financial applications and change management procedures, and we have
therefore identified a material weakness in our information technology general controls
as of December 31, 2005. In addition, we did not adequately implement certain controls
relating to our review and verification of internally prepared reports and analyses
utilized in the financial closing process, and we have therefore identified a material
weakness in our internal control over financial reporting relating to the financial closing
process as of December 31, 2005. The existence of these or one or more other material
weaknesses or significant deficiencies could result in errors in our financial
statements, and substantial costs and resources may be required to rectify any internal
control deficiencies. If we cannot produce reliable financial reports, investors could
lose confidence in our reported financial information, the market price of our stock
could decline significantly, we may be unable to obtain additional financing to operate
and expand our business, and our business and financial condition could be harmed.

We may incur charges
for intangible asset impairment.

When
we acquire or license the rights to sell a product, we record intangible assets. If
applicable, we use the assistance of valuation experts to help us allocate the purchase
price to the fair value of the various intangible assets we have acquired. Then, we must
estimate the economic useful life of each of these intangible assets in order to amortize
their cost as an expense in our statement of operations over the estimated economic
useful life of the related asset. The factors that drive the actual economic useful life
of a pharmaceutical product are inherently uncertain, and include patent protection,
physician loyalty and prescribing patterns, competition by products prescribed for
similar indications, future introductions of competing products not yet FDA approved, the
impact of promotional efforts and many other issues. We

| | 23 | 
| | -- | 

---

use all of these factors in
initially estimating the economic useful lives of our products, and we also continuously
monitor these factors for indications of appropriate revisions.

In
assessing the recoverability of our intangible assets, we must make assumptions regarding
estimated undiscounted future cash flows and other factors. If the estimated undiscounted
future cash flows do not exceed the carrying value of the intangible assets we must
determine the fair value of the intangible assets. If the fair value of the intangible
assets is less than its carrying value, an impairment loss will be recognized in an
amount equal to the difference. If these estimates or their related assumptions change in
the future, we may be required to record impairment changes for these assets. We review
intangible assets for impairment at least annually and whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If we
determine that an intangible asset is impaired, a non-cash impairment charge would be
recognized.

As
circumstances after an acquisition can change, the value of intangible assets may not be
realized by us. If we determine that an impairment has occurred, we would be required to
write-off the impaired portion of the unamortized intangible assets, which could have a
material adverse effect on our results of operations in the period in which the write-off
occurs. In addition, in the event of a sale of any of our assets, we cannot be certain
that our recorded value of such intangible assets would be recovered.

Our operating results
and financial condition may fluctuate which could negatively affect the price of our
stock.

Our
operating results and financial condition may fluctuate from quarter to quarter and year
to year depending upon the relative timing of events or uncertainties that may arise. The
following events or occurrences, among others, could cause fluctuations in our financial
performance from period to period, which could negatively affect the price of our stock:

| |  |  | changes
in the amount we spend to develop, acquire or license new products, technologies or
             businesses;
| | - |  | --------------------------------------------------------------------------------------------------------------------

| |  |  | changes
in the amount we spend to promote our products;
| | - |  | -------------------------------------------------------

| |  |  | delays
between our expenditures to acquire new products,              technologies or businesses
and the generation of revenues from              those acquired products, technologies or
businesses, including              delays in the regulatory approval process for new
products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | changes
in treatment practices of physicians that currently prescribe          our products;
| | - |  | --------------------------------------------------------------------------------------------

| |  |  | changes
in wholesale and retail customers purchases and         returns of our products;
| | - |  | ----------------------------------------------------------------------------------------

| |  |  | changes
in reimbursement policies of health         plans and other similar health insurers,
             including changes that affect newly developed or newly acquired
        products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | increases
in the cost of raw materials used to manufacture         our products;
| | - |  | --------------------------------------------------------------------------------

| |  |  | manufacturing
and supply interruptions, including any         failure by our manufacturers to
             comply with manufacturing specifications;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | development
of new         competitive products by others;
| | - |  | ----------------------------------------------------------

| |  |  | the
mix of products that we sell         during any time period;
| | - |  | ----------------------------------------------------------------

| |  |  | our
responses to price competition;
| | - |  | -----------------------------------

| |  |  | market
        acceptance of our products;
| | - |  | ------------------------------------------

| |  |  | the
impairment and write-down of goodwill          or other intangible assets;
| | - |  | ------------------------------------------------------------------------------

| |  |  | implementation
of new or revised accounting, securities, tax or corporate responsibility
             rules, policies, regulations or laws;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | disposition
of non-core products, technologies and other rights;
| | - |  | ----------------------------------------------------------------

| |  |  | expenditures
as a result of legal actions;
| | - |  | ------------------------------------------

| |  |  | termination
or expiration of, or the outcome of disputes relating to, trademarks, patents,
             license agreements and other rights;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | increases
in insurance rates for existing products and the cost of insurance for new
             products;
| | - |  | -----------------------------------------------------------------------------------------------------------

| |  |  | general
economic and industry conditions, including changes in              interest rates
affecting returns on cash balances and investments,              that affect customer
demand;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | lack
of effectiveness of our sales and marketing endeavors;
| | - |  | -----------------------------------------------------------

| |  |  | seasonality
of demand for our products;
| | - |  | ---------------------------------------

| |  |  | our
level of research and development activities.
| | - |  | -------------------------------------------------

| | 23 | 
| | -- | 

---

We have outstanding
indebtedness, which could adversely affect our financial condition.

Our
total consolidated long term debt, arising solely from the term loan portion of our $110
million credit facility, was approximately $78 million as of December 31, 2005. Under our
$110 million credit facility, we and our operating subsidiaries, Doak Dermatologics,
Bioglan Pharmaceuticals Corp. and A. Aarons, Inc., are able to obtain an additional $30
million of borrowings after we file our Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2006 and when we are (i) not in default under, and (ii) in
compliance with, all the other terms and conditions in our credit facility. In addition,
under our credit facility, we have granted to the lenders a lien on substantially all of
our current and future property, including our intellectual property.

The
degree to which we are indebted could have important consequences to you because, among
other things:

| |  |  | a
substantial portion of our cash flow from operations could be            required to be
dedicated to interest and principal payments and            may not be available for
operations, working capital, capital            expenditures, expansion, acquisitions or
general corporate or            other purposes;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | our
ability to obtain financing in the future may be impaired;
| | - |  | --------------------------------------------------------------

| |  |  | our
ability to pay dividends to holders of our common stock may be restricted;
| | - |  | ------------------------------------------------------------------------------

| |  |  | we
may be more highly leveraged than some of our competitors, which may place us at a
           competitive disadvantage;
| | - |  | --------------------------------------------------------------------------------------------------------------------------

| |  |  | our
flexibility in planning for, or reacting to, changes in our business and industry may
           be limited;
| | - |  | ----------------------------------------------------------------------------------------------------------------

| |  |  | we
may be more vulnerable in the event of a downturn in our business, our industry or the
           economy in general.
| | - |  | ------------------------------------------------------------------------------------------------------------------------

Our
ability to make payments on and, if necessary, to refinance our debt will depend upon our
ability to generate cash in the future, which may be influenced by general economic,
business, financial, competitive, legislative, regulatory and other factors beyond our
control.

We
cannot assure you that our business will generate sufficient cash flow from operations or
that future borrowings will be available in an amount sufficient to enable us to pay our
debt or to fund our other liquidity needs. We may need to refinance all or a portion of
our debt as a result of a default, or otherwise, on or before maturity. We cannot assure
you that we would be able to refinance any of our debt, including the debt under our
credit facility, on commercially reasonable terms or at all.

Because we rely on
independent manufacturers for our products, any regulatory or production problems could
affect our product supply.

We
do not own or operate any manufacturing or production facilities. Independent companies
manufacture and supply our products. Many of these companies also manufacture and supply
products for some of our competitors. We do not have licensing or other supply agreements
with some of these manufacturers or suppliers for our products, and therefore, some of
them could terminate their relationship with us at any time, thereby hampering our
ability to deliver and sell the manufactured product to our customers and negatively
affecting our operating margins. From time to time, we have experienced delays in
shipments from some of our vendors due to production management problems. Although we
believe we can obtain replacement manufacturers, the absence of such agreements with our
present suppliers may interrupt our ability to sell our products and seriously affect our
present and future sales. Currently, all of our ADOXA®, KERALACTM, SOLARAZE®,
ZODERM®, LIDAMANTLE®, ROSULA®, SELSEB®, ZONALON®, PAMINE®, ANAMANTLE®HC,
FLORA-Q® and GLUTOFAC®-ZX are contract manufactured. Any delays in manufacturing or
shipping products, including any customs or related issues, may affect our product supply
and ultimately have a negative impact on our sales and profitability.

Under
the Federal Food, Drug and Cosmetic Act and the regulations of the Food and Drug
Administration, or FDA, all manufacturers of pharmaceutical products sold in the United
States must comply with current good manufacturing practices, or cGMP, requirements.
Manufacturing operations and processes are subject to FDA inspection, and failure to
comply with cGMP requirements can lead to the

| | 24 | 
| | -- | 

---

shutdown of a facility, the seizure
of product distributed that the facility, and other sanctions. The cGMP validation of a
new facility and the approval of that manufacturer for a new drug product may take a year
or more before manufacture can begin at the facility. If we wish or need to identify an
alternate manufacturer, delays in obtaining FDA approval of the replacement manufacturing
facility could cause an interruption in the supply of our products. Although we have
business interruption insurance covering the loss of income for up to $4,060,000, this
insurance may not be sufficient to compensate us for any interruption of this kind. As a
result, the loss of a manufacturer could cause a reduction in our sales, margins and
market share, as well as harm our overall business and financial results.

Our reliance on third
party manufacturers and suppliers can be disruptive to our inventory supply.

We,
and the manufacturers of our products, rely on suppliers of raw materials used in the
production of our products. Some of these materials, including the active ingredient in
PAMINE® and PAMINE® FORTE, are available from only one source or a limited number of
sources and others may become available from only one source or a limited number of
sources. Any disruption in the supply of raw materials or an increase in the cost of raw
materials to our manufacturers could have a significant effect on their ability to supply
us with our products.

We
try to maintain inventory levels that are no greater than necessary to meet our current
projections. Any interruption in the supply of finished products could hinder our ability
to timely distribute finished products. If we are unable to obtain adequate product
supplies to satisfy our customers orders, we may lose those orders and our customers may
cancel other orders and stock and sell competing products. This, in turn, could cause a
loss of our market share and reduce our revenues.

We
cannot be certain that supply interruptions will not occur or that our inventory will
always be adequate. Numerous factors could cause interruptions in the supply of our
finished products including:

| |  |  | timing,
scheduling and prioritization of production by our current manufacturers;
| | - |  | ---------------------------------------------------------------------------------

| |  |  | labor
interruptions;
| | - |  | --------------------

| |  |  | changes
in our sources for manufacturing;
| | - |  | -----------------------------------------

| |  |  | the
timing and delivery of domestic and international shipments;
| | - |  | ----------------------------------------------------------------

| |  |  | failure
to meet regulatory requirements for imports or exports;
| | - |  | ---------------------------------------------------------------

| |  |  | our
         failure to locate and obtain replacement manufacturers as needed on a
         timely basis;
| | - |  | ---------------------------------------------------------------------------------------------------------

| |  |  | conditions
affecting the cost and availability of raw          materials.
| | - |  | -------------------------------------------------------------------------

If we cannot purchase
or integrate new products or companies, our business may suffer.

Our
principal strategy is to continue to expand our business by acquiring or licensing new
products, late stage development products and companies, developing product line
extensions of acquired brands, producing new products through modest research and
development of compounds already in use, and successfully promoting our products by
utilizing our sales force. There are several factors that could limit or restrict our
ability to implement our acquisition strategy successfully:

| |  |  | we
may not have the financing to acquire an available or late stage          development
product;
| | - |  | -------------------------------------------------------------------------------------------------

| |  |  | we
may not be able to make acquisitions because          other bidders may have greater
financial               resources;
| | - |  | --------------------------------------------------------------------------------------------------------------------------

| |  |  | we
may be unable to locate suitable acquisition candidates;
| | - |  | -----------------------------------------------------------

| |  |  | we
may not be able to achieve our targeted profit margins with some of the products
              available for acquisition;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------

| |  |  | we
must be able to maintain adequate operational, financial and               management
information systems and motivate and effectively manage               an increasing
number of employees, and as a result, we may not               manage our acquisitions
effectively;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | we
may not be able to retain or hire the necessary qualified employees.
| | - |  | -----------------------------------------------------------------------

Sales
of newly acquired or licensed products or internally developed products or line
extensions may not be profitable and we may not achieve anticipated sales levels for such
products. Moreover, while we anticipate making future acquisitions in accordance with our
strategic plan, we might be unable to

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| | -- | 

---

consummate any future acquisitions,
and we may not be able to achieve the same rates of return and historical sales levels of
any acquired product. Our failure to do so could have a negative effect on the growth of
our sales and profitability, and on our operations.

We could be sued
regarding the intellectual and proprietary rights of others, which could seriously harm
our business and cost us a significant amount of time and money.

Historically,
we have only conducted patent searches on a limited basis due to the maturity of our
products. As a result, the products and technologies we currently market, and those we
may market in the future may infringe on patents and other rights owned by others. If we
are unsuccessful in any challenge to the marketing and sale of our products or
technologies, we may be required to license the disputed rights, if the holder of those
rights is willing, or to cease marketing the challenged products, or to modify our
products to avoid infringing upon those rights.

Patents
and patent applications to which we have rights may be subject to claims of rights by
third parties. If there are conflicting claims to the same patent or patent application,
we may not prevail and, even if we do have some rights in a patent or application, those
rights may not be sufficient for the marketing and distribution of products covered by
the patent or application.

In
addition, we conduct trademark searches. However, the products we currently market, and
those we may market in the future, may infringe on trademarks and other rights owned by
others. If we are unsuccessful in any challenge to the marketing and sale of our
products, we may be required to license the disputed rights, if the holder of those
rights is willing, or to cease marketing the challenged products under that brand name to
avoid infringing upon those rights.

Although
we believe that our product lines and brand names do not infringe on the intellectual
property rights of others, infringement claims may be asserted against us in the future,
and if asserted, an infringement claim might not be successfully defended. The costs of
responding to infringement claims could be substantial and could require a substantial
commitment of managements time and resources.

We depend on a limited
number of customers, and if we lose any of them, our business could be harmed.

Our
four largest customers, who are all wholesalers, accounted for an aggregate of
approximately 90% of our gross trade accounts receivable at December 31, 2005 and 91% of
our gross trade accounts receivable at December 31, 2004. The following table presents a
summary of sales to our four largest customers as a percentage of our total gross sales:

|                               
|-------------------------------
|Customer*                      
|AmerisourceBergen Corporation  
|Cardinal Health, Inc.          
|McKesson Corporation           
|Quality King Distributors, Inc.

---

|* | No
other customer had a percentage of the Companys total gross            sales greater
than 5% during the periods.
|- | --------------------------------------------------------------------------------------------------------------------

The
loss of any of these customers accounts or a reduction in their purchases could harm our
business, financial condition or results of operations. In addition, we may face pricing
pressures from these and other large customers.

Distribution Service
Agreements (DSAs) with our wholesalers have affected our sales and product returns and
may result in us paying an additional service fee to the wholesalers in the future.

We
have entered into DSAs with our two major wholesale customers, McKesson and Cardinal,
which became effective during 2004. The terms of these DSAs require us to pay quarterly
fees which are offset

| | 26 | 
| | -- | 

---

by any price appreciation of the
inventory that these wholesalers have on hand and also by any discounts that we give them
for new product promotions. In return for these fees, these wholesalers are obligated,
generally, to maintain their inventory levels to the agreed upon months-on-hand and to
provide us with monthly inventory and sales reports. The increased visibility afforded by
these DSAs provides us with greater sales and inventory predictability and the improved
ability to match sales with underlying demand. As a result of executing its respective
DSA with us, Cardinal and McKesson each reduced its inventory of our products. As such,
the majority of the impact of these DSAs on our operations was felt as our sales to
McKesson and Cardinal decreased and returns increased. In addition, as a result of the
DSAs, the Company accrued an aggregate of $750,963 in fees for these two wholesale
customers during 2005.

Consolidation of
wholesalers of pharmaceutical products can negatively affect our distribution terms and
sales of our products.

In
recent years, the distribution network for pharmaceutical products has been subject to
increasing consolidation. As a result, a few large wholesalers control a significant
share of the market. As a consequence, there are fewer channels for wholesale and retail
pharmaceutical distribution than were historically available. Accordingly, we depend on
fewer wholesalers for our products and we are less able to negotiate price terms with
wholesalers. Although we believe that this consolidation among wholesalers will
ultimately reduce our distribution costs, our inability to aggressively negotiate price
terms with them over the long term could inhibit our efforts to improve our profit
margins or sales levels. The continued or future consolidation among pharmaceutical
wholesalers could limit our ability to compete effectively. In addition, the number of
independent and small chain drug stores has decreased as retail consolidation has
occurred. Further consolidation among, or any financial difficulties of, wholesalers or
retailers could result in the combination or elimination of warehouses which may result
in product returns to our company, cause a reduction in the inventory levels of
wholesalers and retailers, or otherwise result in reductions in purchases of our
products, any of which could harm our business, financial condition and results of
operations.

Elimination of buying
and selling among wholesalers affects our sales and returns of our products.

Prior
to 2005, major drug wholesalers, including McKesson, Cardinal, AmerisourceBergen and
Quality King, and some chain drug stores, bought and sold pharmaceutical products with
each other in order to take advantage of selling and buying pharmaceutical products below
the pharmaceutical companies wholesale prices. Because of new regulations designed to
eliminate counterfeit drugs, wholesalers now have certain pedigree requirements that
require them to purchase drugs directly from pharmaceutical companies. Therefore, the
practice of buying and selling among drug wholesalers and chain drug stores has been
eliminated.

As
a result of eliminating buying and selling among drug wholesalers and chain drug stores,
the wholesalers and drug stores that had been engaged in speculative buying have now
experienced a reduction in resale locations, and therefore, less demand for speculative
purchases and an increase in our returns.

We may be subject to
product liability claims, in which case we may not have adequate insurance coverage, we
could face substantial losses and legal costs, and our reputation could suffer.

Pharmaceutical
and health related products, such as those we market, may carry health risks.
Consequently, consumers may bring product liability claims against us. We maintain
product liability insurance on our products that provides coverage of up to $10,000,000
in the aggregate per year. This insurance is in addition to the required product
liability insurance maintained by the manufacturers of our products. We cannot assure
that product liability claims will not exceed that coverage or that our reputation will
not suffer as a result of any claims. If insurance does not fully fund any product
liability claim, or if we are unable to recover damages from the manufacturer of a
product that may have caused such injury, we must pay such claims from our own funds. We
may also incur substantial litigation costs to defend such claims, even if the claims are
without merit. Any such payment or costs could have a detrimental effect on our financial
condition. In addition, we may not be able to maintain our liability insurance at
reasonable premium rates, if at all.

We are subject to
chargebacks and rebates when our products are resold to or reimbursed by governmental
agencies and managed care buying groups, which may reduce our future profit margins.

| | 27 | 
| | -- | 

---

Chargebacks
and rebates are the difference between the prices at which we sell our products to
wholesalers and the price that third party payors, such as governmental agencies and
managed care buying groups, ultimately pay pursuant to fixed price contracts. Medicare,
Medicaid and reimbursement legislation or programs regulate drug coverage and
reimbursement levels for most of the population in the United States. Federal law
requires all pharmaceutical manufacturers to rebate a percentage of their revenue arising
from Medicaid-reimbursed drug sales to individual states. Some of our products are
subject to rebates of up to the greater of 15.1% of the average manufacturer price or the
difference between the average manufacturer price and the lowest manufacturer price
during a specified period. We record an estimate of the amount either to be charged back
to us or rebated to the end-users at the time of sale to the wholesaler. Over recent
years, the pharmaceutical industry in general has accepted the managed care system of
chargebacks and rebates. Managed care organizations increasingly began using these
chargebacks and rebates as a method to reduce overall costs in drug procurement. Levels
of chargebacks and rebates have increased momentum and caused a greater need for more
sophisticated tracking and data gathering to confirm sales at contract prices to
third-party payors with respect to related sales to wholesalers. We record an accrual for
chargebacks and rebates based upon factors including current contract prices, historical
chargeback rates and actual chargebacks claimed. The amount of actual chargebacks claimed
could, however, be higher than the amounts we accrue, and could reduce our profit margins
during the period in which claims are made.

Rising insurance costs
could negatively impact profitability.

The
cost of insurance, including workers compensation, product liability and general
liability insurance, has  risen significantly in recent years and may increase in the
future. In addition, as a result of the SEC inquiry, the restatement of our financial
results for the quarter ended September 30, 2004, the federal securities class action
lawsuit and federal and state derivative shareholder lawsuits, the cost of insurance for
our directors and officers insurance will increase. In response, we may increase
deductibles and/or decrease certain coverages to mitigate these costs. These increases,
and our increased risk due to increased deductibles and reduced coverages, could have a
negative impact on our results of operations, financial condition and cash flows.

If we suffer negative
publicity concerning the safety of our products, our sales may be harmed and we may be
forced to withdraw products.

Physicians
and potential patients may have a number of concerns about the safety of our products,
whether or not such concerns have a basis in generally accepted science or peer-reviewed
scientific research. Negative publicity, whether accurate or inaccurate, concerning our
products could reduce market or governmental acceptance of our products and could result
in decreased product demand or product withdrawal. In addition, significant negative
publicity could result in an increased number of product liability claims.

We selectively
outsource some of our non-sales and non-marketing services, and cannot assure you that we
will be able to obtain adequate supplies of these services on acceptable terms.

To
enable us to focus on our core marketing and sales activities, we selectively outsource
non-sales and non-marketing functions, such as product and clinical research,
manufacturing and warehousing. As we expand our activities in these areas, we expect to
use additional financial resources. Typically, we do not enter into long-term contracts
for our non-sales and non-marketing functions. Whether or not long-term contracts exist,
we cannot assure you that we will be able to obtain adequate supplies of these services
or products in a timely fashion, on acceptable terms, or at all.

The loss of our key
personnel could limit our ability to operate our business successfully.

We
are highly dependent on the principal members of our management staff, the loss of whose
services we believe would impede the achievement of our acquisition and development
objectives. We may not be able to attract and retain key personnel on acceptable terms.
Many of our key managerial, operational, scientific and development personnel, including
Daniel Glassman, our President, Chief Executive Officer and Chairman, would be difficult
to replace. The loss of our personnels services could delay the development of contracts
and products and limit our ability to operate our business successfully.

Shareholder lawsuits
could have a material adverse effect on our results of operations and liquidity.

| | 28 | 
| | -- | 

---

We,
along with certain of our officers and directors, were named defendants in thirteen
federal securities lawsuits that were consolidated on May 5, 2005 in the United States
District Court for the District of New Jersey. The plaintiffs allege violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,
arising out of disclosures made to the market that plaintiffs allege were materially
false and misleading. Plaintiffs also allege that we and the individual defendants
falsely recognized revenue. Additionally, two related New Jersey state court shareholder
derivative actions were filed on April 29, 2005 and May 11, 2005 against certain of our
officers and directors alleging breach of fiduciary duty and other claims arising out of
substantially the same allegations made in the federal securities class action. Further,
a federal shareholder derivative action was recently filed against us and certain of our
officers and directors alleging breach of fiduciary duties arising out of the SEC inquiry
and the restatement of our financial results for the quarter ended September 30, 2004 and
violations of Delaware law regarding annual meetings. These proceedings have resulted,
and are expected to continue to result, in a diversion of managements attention and
resources and in significant professional fees. These professional fees have
substantially increased, and in the near term may continue to substantially increase, our
cash needs.

We
have certain obligations to indemnify our officers and directors and to advance expenses
to such officers and directors. Although we have purchased liability insurance for our
directors and officers, if our insurance carriers should deny coverage, or if the
indemnification costs exceed the insurance coverage, we may be forced to bear some or all
of these indemnification costs directly, which could be substantial and may have an
adverse effect on our business, financial condition, results of operations and cash
flows. If the cost of our liability insurance increases significantly, or if this
insurance becomes unavailable, we may not be able to maintain or increase our levels of
insurance coverage for our directors and officers, which could make it difficult to
attract or retain qualified directors and officers.

We
are not able to estimate the amount of any damages that may arise from these legal
proceedings and the internal efforts associated with defending ourselves and our officers
and directors. If we are unsuccessful in defending ourselves, these lawsuits could
adversely affect our business, financial condition, results of operations and cash flows
as a result of the damages that we would be required to pay. It is possible that our
insurance policies either may not cover potential claims of this type or may not be
adequate to indemnify us for all liability that may be imposed. While we believe that the
allegations and claims made in these lawsuits are wholly without merit and intend to
defend these actions vigorously, we cannot be certain that we will be successful in any
or all of these actions.

Concerns
with respect to the circumstances surrounding our pending litigations may have created
uncertainty regarding our ability to focus on our business operations and remain
competitive with other companies in our industry. Because of this uncertainty, we may
have difficulty retaining critical personnel or replacing personnel who leave us.

We could be subject to
fines, penalties, or other sanctions as a result of the inquiry by the SEC.

In
December 2004, we were advised by the staff of the Securities and Exchange Commission
that it is conducting an informal inquiry relating to us to determine whether there have
been violations of the federal securities laws. In connection with the inquiry, the SEC
staff has requested that we provide it with certain information and documents, including
with respect to revenue recognition and capitalization of certain payments. We are
cooperating with this inquiry, however, we are unable at this point to predict the final
scope or outcome of the inquiry, and it is possible it could result in civil injunctive
or criminal proceedings, the imposition of fines and penalties, and/or other remedies and
sanctions. The conduct of these proceedings could negatively impact our stock price.
Since we cannot predict the outcome of this matter and its impact on us, we have made no
provision relating to this matter in our financial statements. In addition, we expect to
continue to incur expenses associated with the SEC inquiry and its repercussions,
regardless of the outcome of the SEC inquiry, and it may divert the efforts and attention
of our management team from normal business operations.

We could face adverse
consequences as a result of our late SEC filings.

We
failed to timely file this Form 10-K as well as other reports with the SEC. As a result,
we will not be eligible to use a short form registration statement on Form S-3 for a
period of 12 months after becoming current in our filings. Our inability to use a short
form registration statement for a period of 12

| | 29 | 
| | -- | 

---

months after becoming current in our
SEC reporting obligations may impair our ability or increase the costs and complexity of
our efforts, to raise funds in the public markets or use our stock as consideration in
acquisitions should we desire to do so. In addition, we may face additional adverse
consequences, including an inability to have a registration statement under the
Securities Act of 1933 covering a public offering of securities declared effective by the
SEC, an inability to make offerings pursuant to existing registration statements
(including registration statements on Form S-8 covering employee stock plans), and
limitations on the ability of our affiliates to sell our securities pursuant to Rule 144
under the Securities Act. These restrictions and adverse consequences may negatively
affect our ability to attract and retain key employees and may further impair our ability
to raise funds in the public markets should we desire to do so or use our stock as
consideration in acquisitions.

In
addition, our future success depends largely upon the support of our customers, suppliers
and investors. The late SEC filings have resulted in negative publicity and may have a
negative impact on the market price of our common stock. The effects of the late SEC
filings could cause some of our customers or potential customers to refrain from
purchasing or defer decisions to purchase our products. Additionally, current or
potential suppliers and other parties may re-examine their willingness to do business
with us. Any of these developments could have a material adverse effect on our financial
and business prospects.

Because we were unable
to obtain a waiver from the SEC of the requirement to include pre-March 22, 2002
statements of income and cash flows for Bioglan Pharmaceuticals, we are currently
prevented from having registration statements for public offerings of our securities
declared effective by the SEC.

Due
to the significance of the acquisition of Bioglan Pharmaceuticals on August 10, 2004,
among other factors, we were unable to obtain a waiver from the SEC of the requirement to
include Bioglan Pharmaceuticals pre-March 22, 2002 statements of income and cash flows
in our Form 8-K filed with respect to the acquisition. We intend to again seek a waiver
from the SEC concerning our omission of those financial statements, which is a
requirement for us to have future registration statements for our securities declared
effective by the SEC. However, we cannot assure whether or when that waiver may be
granted. Until we are able to have registration statements for public offerings of our
securities declared effective by the SEC, we would need to pursue additional borrowings
or private placements of securities if we desired to conduct a financing, which could
result in increased costs or other less favorable terms compared to public offerings.

If we cannot sell our
products in amounts greater than our minimum purchase requirements under some of our
supply agreements or sell our products in accordance with our forecasts, our results of
operations and cash flows may be adversely affected.

Some
of our supply agreements require us to purchase certain minimum levels of active
ingredients or finished goods. If we are unable to maintain market exclusivity for our
products, if our product life-cycle management is not successful, if we fail to sell our
products in accordance with the forecasts we develop as required by our supply agreements
or if we do not terminate supply agreements at optimal times for us, we may incur losses
in connection with the purchase commitments under the supply agreements or purchase
orders. In the event we incur losses in connection with the purchase commitments under
the supply agreements or purchase orders, there may be a material adverse effect upon our
results of operations and cash flows.

RISKS RELATED TO OUR
INDUSTRY

We face significant
competition within our industry.

The
pharmaceutical industry is highly competitive. Many of our competitors are large,
well-established companies in the pharmaceutical, chemical, cosmetic and health care
fields. Our competitors include AstraZeneca, Sanofi-Aventis, Axcan Pharma, Bristol-Myers
Squibb, Connetics, Ferndale Laboratories, First Horizon Pharmaceuticals, Galderma,
GlaxoSmithKline, Valeant Pharmaceuticals, Medicis Pharmaceutical, Ortho Pharmaceuticals,
Pfizer, Salix Pharmaceuticals, Schering Plough, Schwarz Pharma, Upsher-Smith,
Warner-Chilcott and others. Many of these companies have greater resources than we do to
devote to marketing, sales, research and development and acquisitions. As a result, they
have a

| | 30 | 
| | -- | 

---

greater ability than us to undertake
more extensive research and development, marketing and pricing policy programs. In
addition, many of these competitors have greater name-recognition than we do among
purchasers of pharmaceutical products, and in some cases, they have a reputation for
producing highly-effective products.

In
addition to competition from existing products, it is also possible that our competitors
may develop and bring new products to market before us, or may develop new technologies
that improve existing products, new products that provide the same benefits as existing
products at less cost, or new products that provide benefits superior to those of
existing products. These competitors also may develop products that make our current or
future products obsolete. Our competitors may also make technological advances reducing
their cost of production so that they may engage in price competition through aggressive
pricing policies to secure a greater market share to our detriment. Any of these events
could have a significant negative impact on our business and financial results, including
reductions in our market share and gross margins.

Failure to comply with
government regulations could affect our ability to operate our business.

Virtually
all aspects of our activities are regulated by federal and state statutes and government
agencies. The research, manufacturing, processing, formulation, packaging, labeling,
distribution, advertising and marketing of our products, and disposal of waste products
arising from these activities, are subject to regulation by one or more federal agencies,
including the FDA, the Federal Trade Commission, the Consumer Product Safety Commission,
the United States Department of Agriculture, the Occupational Safety and Health
Administration, and the Environmental Protection Agency, as well as by foreign
governments in countries where we distribute some of our products.

Noncompliance
with applicable FDA or other government policies or requirements could subject us to
enforcement actions, such as suspensions of distribution, seizure of products, product
recalls, fines, whistleblower lawsuits, criminal penalties, injunctions, failure to
approve pending drug product applications or withdrawal of product marketing approvals.
Similar civil or criminal penalties could be imposed by other government agencies or
various agencies of the states and localities in which our products are manufactured,
sold or distributed and could have ramifications for our contracts with government
agencies, such as the contract we have with the Veterans Administration and the
Department of Defense. These enforcement actions would detract from managements ability
to focus on our daily business and would have an adverse effect on the way we conduct our
daily business, which could severely impact future profitability.

The FDA may change its
enforcement policies and take action against products marketed without an approved
application such as some of our products.

New
prescription drugs must be the subject of an FDA-approved application before they may be
marketed in the United States. Certain other drugs may be marketed over the counter, or
OTC, under special regulations issued by the FDA known as OTC monographs. Certain drugs
that we and others market are not the subject of an approved application or an OTC
monograph.

FDA
has recognized that there are numerous, perhaps thousands, of such drug products
currently on the market without FDA approvals or authorizations. These include
principally products that first came on the market without an NDA prior to changes in the
food and drug laws in 1962, and new products that have come on the market since that time
on the grounds that they are identical, similar, or related to pre-1962 products. FDA has
stated that these unapproved products are new drugs under the Federal Food, Drug, and
Cosmetic Act and thus require an effective approval in order to be introduced into
interstate commerce. However, FDA also acknowledges that many of these products have been
marketed and prescribed for years without raising any safety or effectiveness issues, and
thus has established policies stating the circumstances under which it will exercise its
enforcement discretion and not take action against an otherwise unapproved new drug.

Several
of our products, including KERALAC®, CARMOL®40, ROSULA®, ZODERM® CARMOL® SCALP
TREATMENT, SELSEB®, LIDAMANTLE®, LIDAMANTLE® HC and ANAMANTLE®HC, are marketed in
the United States without an FDA-approved marketing application under FDAs established
enforcement policies on the grounds that they are identical, related, or similar to
products that existed on the market prior to 1962. Any change in the FDAs enforcement
discretion and/or policies could prevent us

| | 31 | 
| | -- | 

---

from continuing to market these
products without incurring the expense and delay of obtaining an approval, alter the way
we have to conduct our business, and severely affect our future profitability. In
addition, if a competitor submits a new drug application to the FDA for any of these
drugs, the FDA may require us also to file a new drug application or an abbreviated new
drug application for that same drug in order to continue marketing it in the United
States. Similarly, if FDA issues a final OTC monograph covering one of the products we
currently market on a prescription basis, we may be required to sell the product under
the monograph on an OTC basis, which could significantly affect our future profitability.

If we market products
in a manner that violates health care fraud and abuse laws, we may be subject to civil or
criminal penalties.

Federal
health care program anti-kickback statutes prohibit, among other things, knowingly and
willfully offering, paying, soliciting or receiving remuneration to induce, or in return
for purchasing, leasing, ordering or arranging for the purchase, lease or order of any
health care item or service reimbursable under Medicare, Medicaid, or other federally
financed health care programs. This statute has been interpreted to apply to arrangements
between pharmaceutical manufacturers on one hand and prescribers, patients, purchasers
and formulary managers on the other. Although there are a number of statutory exemptions
and regulatory safe harbors protecting certain common activities from prosecution, the
exemptions and safe harbors are drawn narrowly, and practices that involve remuneration
intended to induce prescribing, purchasing, or recommending may be subject to scrutiny if
they do not qualify for an exemption or safe harbor.

Federal
false claims laws prohibit any person from knowingly presenting, or causing to be
presented, a false claim for payment to the federal government, or knowingly making, or
causing to be made, a false statement to get a false claim paid. Pharmaceutical companies
have been prosecuted under these laws for a variety of alleged promotional and marketing
activities, such as allegedly providing free product to customers with the expectation
that the customers would bill federal programs for the product; reporting to pricing
services inflated average wholesale prices that were then used by federal programs to set
reimbursement rates; engaging in promotion for uses that the FDA has not approved, or
off-label uses, that caused claims to be submitted to Medicaid for non-covered off-label
uses; and submitting inflated best price information to the Medicaid Rebate Program.

The
majority of states also have statutes or regulations similar to the federal anti-kickback
law and false claims laws, which apply to items and services reimbursed under Medicaid
and other state programs, or, in several states, apply regardless of the payor. Sanctions
under these federal and state laws may include civil monetary penalties, exclusion of a
manufacturers products from reimbursement under government programs, criminal fines, and
imprisonment. Even if we are not determined to have violated these laws, government
investigations into these issues typically require the expenditure of significant
resources and generate negative publicity, which would also harm our financial condition.
Because of the breadth of these laws and the narrowness of the safe harbors, it is
possible that some of our business activities could be subject to challenge under one or
more of such laws.

State pharmaceutical
marketing compliance and reporting requirements may expose us to regulatory and legal
action by state governments or other government authorities.

In
recent years, several states and localities, including California, the District of
Columbia, Maine, Minnesota, New Mexico, Vermont, and West Virginia, have enacted
legislation requiring pharmaceutical companies to establish marketing compliance
programs, and file periodic reports with the state or make periodic public disclosures on
sales, marketing, pricing, clinical trials, and other activities. Similar legislation is
being considered in other states. Many of these requirements are new and uncertain, and
the penalties for failure to comply with these requirements are unclear. We are not aware
of any companies against which fines or penalties have been assessed under these special
state reporting and disclosure laws to date. We are currently in the process of
developing a formal compliance infrastructure and standard operating procedures to comply
with such laws. Unless we are in full compliance with these laws, we could face
enforcement action and fines and other penalties, and could receive adverse publicity.

Changes in the
reimbursement policies of managed care organizations and other third party payors may
reduce our gross margins.

| | 32 | 
| | -- | 

---

Our
operating results and business success depend in large part on the availability of
adequate third party payor reimbursement to patients for our prescription brand products.
These third party payors include governmental entities, such as Medicaid, private health
insurers and managed care organizations. A majority of the United States population now
participates in some version of managed care. Because of the size of the patient
population covered by managed care organizations, marketing of prescription drugs to them
and the pharmacy benefit managers that serve many of these organizations has become
important to our business. Managed care organizations and other third party payors try to
negotiate the pricing of medical services and products to control their costs. Managed
care organizations and pharmacy benefit managers typically develop formularies to reduce
their cost for medications. Formularies can be based on the prices and therapeutic
benefits of the available products. Due to their lower costs, generic products are often
favored. The breadth of the products covered by formularies varies considerably from one
managed care organization to another, and many formularies include alternative and
competitive products for treatment of particular medical conditions. Exclusion of a
product from a formulary can lead to its sharply reduced usage in the managed care
organization patient population. Payment or reimbursement of only a portion of the cost
of our prescription products could make our products less attractive to patients,
suppliers and prescribing physicians. Changes in the reimbursement policies of these
entities could prevent our branded pharmaceutical products from competing on a price
basis. If our products are not included within an adequate number of formularies or if
adequate reimbursement levels are not provided, or if reimbursement policies increasingly
favor generic products, our market share, our gross margins and our overall business and
financial condition could be negatively affected. We began to focus on the inclusion of
our products in these formularies relatively recently and, therefore, other specialty
pharmaceutical companies may have a competitive advantage with respect to this marketing
channel.

Moreover,
some of our products are not of a type generally eligible for reimbursement, primarily
due to either the products market share being too low to be considered, cheaper generics
being available, or because the product is available without a prescription. It is also
possible that products manufactured by others could have the same effects as our products
and be subject to reimbursement. If this were the case, some of our products might become
too costly to patients.

New legislation or
regulatory proposals may adversely affect our revenues.

A
number of legislative and regulatory proposals aimed at changing or amending the way in
which health care services and products are provided and paid for in the United States,
including the cost of prescription products, importation and reimportation of
prescription products from countries outside the United States and changes in the amounts
at which pharmaceutical companies are reimbursed for sales of their products, have been
proposed. While we cannot predict when or whether any of these proposals will be adopted,
or the effect these proposals may have on our business, the pending nature of these
proposals, as well as the adoption of any amendment or change in existing applicable laws
and regulations, may exacerbate industry-wide pricing pressures and could have a material
adverse effect on our business, financial condition, results of operations and cash
flows. For example, in 2000, Congress directed the Department of Health and Human
Services to issue regulations allowing the reimportation of approved drugs originally
manufactured in the United States back into the United States from other countries where
the drugs were sold at a lower price. Although the Secretary of Health and Human Services
has not acted to implement this directive, the House of Representatives passed a similar
bill in January 2003 that would have permitted reimporation to take effect without the
action of the Secretary of the Department of Health and Human Services. This bill as well
as other reimportation bills have not yet resulted in any new laws or regulations.
Enactment of any of these proposed bills and other initiatives could decrease the
reimbursement amount we receive for our products.

Additionally
sales of our products in the United States could be adversely affected by the importation
into the U.S, of foreign manufactured products that some may deem equivalent to our
product and that are available outside the United States at lower prices than in the
United States. Most of these foreign imports into the U.S. are illegal under current law.
However, the volume of imports continues to rise due to the limited enforcement resources
of the FDA and the U.S. Customs Service, and there is increased political pressure to
permit the imports as a mechanism for expanding access to lower priced medicines. In
addition, state and local governments have suggested that they may import or facilitate
the import of drugs from

| | 33 | 
| | -- | 

---

Canada for employees covered by
state health plans or others, and some already have put such plans in place.

Changes
in Medicare, Medicaid or similar governmental programs or the amounts paid by those
programs for our products may also adversely affect our earnings. These programs are
highly regulated, and subject to frequent and substantial changes and cost containment
measures. In recent years, changes in these programs have limited and reduced
reimbursement to providers. The Medicare Prescription Drug, Improvement and Modernization
Act of 2003 or MMA, created a new, voluntary prescription drug benefit under the Social
Security Act, or Part D Medicare Drug Benefit. Beginning in 2006, Medicare beneficiaries
entitled to Part A or enrolled in Part B, as well as certain other Medicare enrollees,
are eligible for the Part D Medicare Drug Benefit. Regulations implementing the Part D
Medicare Drug Benefit were issued in January 2005 and the impact of these regulations and
how they will be enforced is not yet fully understood by the industry. In addition, the
MMA requires that the Federal Trade Commission conduct a study and make recommendations
regarding additional legislation that may be needed concerning the Medicare Drug Benefit.
We are unable at this time to predict or estimate the financial impact of this new
legislation or these regulations.

RISKS RELATED TO OUR
COMMON STOCK

Because our Class B
common stock has the right, as a class, to elect a majority of our Board of Directors and
has disparate voting rights with respect to all other matters on which our stockholders
vote, your voting rights will be limited and the market price of our common stock may be
affected adversely.

Holders
of our common stock are entitled to one vote per share on matters on which our
stockholders vote generally. As long as there are at least 325,000 shares of our Class B
common stock outstanding, holders of our Class B common stock vote, as a class, to elect
a majority of our board of directors. In addition, shares of our Class B common stock are
entitled to five votes per share on all other matters to be voted on by stockholders in
general. The ability of the holders of our Class B common stock to elect a majority of
our directors and the differential in the voting rights between the common stock and the
Class B common stock could affect adversely the market price of our common stock. All of
the outstanding shares of our Class B common stock are currently held by Daniel Glassman,
our founder and Chairman of the Board, President and Chief Executive Officer, Iris
Glassman and Bradley Glassman.

Our founder and
Chairman of the Board, President and Chief Executive Officer exercises substantial
control over our affairs.

At
December 31, 2005, Daniel Glassman, our founder and Chairman of the Board, President and
Chief Executive Officer, and members of his immediate family (including Iris Glassman and
Bradley Glassman), were the beneficial owners of approximately 11% or 2,039,455 shares of
our outstanding common stock, including the possible beneficial conversion of all
outstanding shares of Class B common stock. The Class B common stock currently votes, as
a class, to elect a majority of our board of directors, and has five votes per share or
approximately 18% of the total voting power, with respect to all other matters on which
our stockholders are entitled to vote other than the election of the board of directors.
As a result, Mr. Glassman exercises control over the election of our board of directors
and significantly influences all of our corporate actions. The interests of Mr. Glassman
and his family may differ from yours and they may be able to take actions that advance
their respective interests to your detriment. Mr. Glassmans ability to exercise control
over the election of the board of directors may discourage, delay or prevent a merger or
acquisition and could discourage any bids for our common stock at a premium over the
market price.

Our certificate of
incorporation and Delaware law may delay or prevent our change of control, even if
beneficial to investors.

Our
charter authorizes us to issue up to 2,000,000 shares of preferred stock with such
designations, rights and preferences as the board of directors may determine from time to
time. This authority empowers the board of directors, without further stockholder
approval, to issue preferred shares with dividend, liquidation, conversion, voting or
other rights that could decrease the voting power or other rights of the

| | 34 | 
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---

holders of our common stock. The
issuance of such preferred stock could, under some circumstances, discourage, delay or
prevent a change of control. To date, we have not issued any shares of preferred stock.
In addition, we are and will continue to be, subject to the anti-takeover provisions of
the Delaware General Corporation Law, which could delay or prevent a change of control.

Our stock price has
fluctuated considerably and may decline.

Stock prices of emerging growth
pharmaceutical and small-cap companies such as ours fluctuate significantly. In
particular, our stock price per share since January 1, 2003, has fluctuated from a low of
$7.47 to a high of $32.50. A variety of factors that could cause the price of our common
stock to fluctuate, perhaps substantially, include:

| |  |  | announcements
of developments related to our business;
| | - |  | ------------------------------------------------------

| |  |  | quarterly
         fluctuations in our actual or anticipated operating results;
| | - |  | -------------------------------------------------------------------------------

| |  |  | general
         conditions in the pharmaceutical and health care industries;
| | - |  | -----------------------------------------------------------------------------

| |  |  | our
         ability to react favorably to changes in governmental regulations
         affecting products we               market;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

| |  |  | new
products or product enhancements by us or our competitors;
| | - |  | --------------------------------------------------------------

| |  |  | developments
in patents or other intellectual property rights and          litigation;
| | - |  | --------------------------------------------------------------------------------------

| |  |  | developments
in our relationships with our customers and          suppliers;
| | - |  | ----------------------------------------------------------------------------

| |  |  | current
events affecting the political, economic and          social situation in the United
States               and other countries where our subsidiaries operate;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | changes
in financial estimates and recommendations by securities          analysts;
| | - |  | -----------------------------------------------------------------------------------

| |  |  | lack
of an active, liquid trading market for our common          stock;
| | - |  | -----------------------------------------------------------------------

| |  |  | acquisitions
and financings;
| | - |  | ----------------------------

| |  |  | the
operating and stock price          performance of other companies that investors may deem
              comparable;
| | - |  | -----------------------------------------------------------------------------------------------------------------------

| |  |  | class
action and shareholder derivative lawsuits;
| | - |  | -------------------------------------------------

| |  |  | purchases
or sales of blocks of our common stock, including any short-selling activities.
| | - |  | -----------------------------------------------------------------------------------------

We
will not be able to control many of these factors, and we believe that period-to-period
comparisons of our financial results will not necessarily be indicative of our future
performance. If our revenues, if any, in any particular period do not meet expectations,
we may not be able to adjust our expenditures in that period, which could cause our
operating results to suffer further. If our operating results in any future period fall
below the expectations of securities analysts or investors, our stock price may fall by a
significant amount.

In
addition, in recent years there have been extreme fluctuations in the stock market in
general and the market for shares for emerging growth and specialty pharmaceutical
companies in particular. These fluctuations were sometimes unrelated to the operating
performance of these companies. Any such fluctuations in the future could reduce the
market price of our common stock. We do not know whether the market price of our common
stock will decline or not.

Securities class
action and shareholder derivative lawsuits due to stock price volatility or other factors
could cause us to incur substantial costs and divert managements attention and resources.

Securities
class action and shareholder derivative lawsuits have often been brought against
companies following periods of volatility in the market price of their securities and we
are currently the subject of such lawsuits. Due to the volatility of our stock price, we
could be the target of further securities litigation in the future. Securities class
action and shareholder derivative lawsuits are often expensive and time consuming and
their outcome may be uncertain. Any additional claims, whether successful or not, could
require us to devote significant amounts of monetary or human resources to defend
ourselves and could harm our reputation. We may need to spend significant amounts on our
legal defense and senior management may be required to divert their attention from other
portions of our business, which could materially and adversely affect our business,
financial condition and results of operations. If, as a result of any proceeding, a
judgment is rendered or a decree is entered against us, it may materially and adversely
affect our business, financial condition and results of operations and harm our
reputation.

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The exercise of
outstanding warrants and options or the issuance of other shares could reduce the market
price of our stock.

We
currently have outstanding a substantial number of options and warrants to purchase
shares of our common stock. If the holders of all outstanding warrants and options
exercised them, we would have approximately an additional 1,882,076 shares of common
stock issued and outstanding as of December 31, 2005. The sale, or availability for sale,
of such substantial amounts of additional shares of common stock in the public
marketplace could reduce the prevailing market price of our securities and otherwise
impair our ability to raise additional capital through the sale of equity securities.

We may sell equity
securities in the future, which would cause dilution.

We
may sell equity securities in the future to obtain funds for general corporate or other
purposes. We may sell these securities at a discount to the market price. Any future
sales of equity will dilute the holdings of existing stockholders, possibly reducing the
value of their investment.

ITEM 1B:  UNRESOLVED
STAFF COMMENTS

None.

ITEM 2: PROPERTIES

We
lease approximately 33,000 square feet of office and warehouse space at 383 Route 46
West, Fairfield, New Jersey, under a lease expiring on January 31, 2008. The owner and
manager of this property is a limited liability company that is owned and controlled by
Daniel Glassman, our Chairman of the Board, CEO and President, and his spouse, Iris
Glassman, a member of our Board and our Treasurer. At our option, we may extend the term
of this lease for an additional 5 years. The lease provides for a 3% increase in annual
rent per year during the term of the lease.

We
lease an 11,500 square foot warehouse at a different location in Fairfield, New Jersey.
This lease has an initial term of three years expiring in January 2007 and has a two-year
renewal at our option.

We
also have a distribution arrangement with a third party public warehouse located in
Tennessee to warehouse and distribute substantially all of our products. This arrangement
provides that we will be billed based on invoiced sales of the products distributed by
such party, plus an additional charge per order.

On
August 10, 2004, we acquired certain assets and assumed certain liabilities of Bioglan
Pharmaceuticals Company and certain subsidiaries. Included in the acquisition was a
Bioglan lease for facilities in Malvern, Pennsylvania which had a term through December
31, 2006. This lease was assigned to us with the consent of the landlord. At the time of
the acquisition, our plan was to maintain the Malvern facilities until November 1, 2004.
Specifically, our plan was to sub-lease the Malvern facilities, and we expected that
future sub-lease rentals would substantially offset lease costs under the existing
Bioglan agreement, and no liability would be recognized. On July 15, 2005, after
unsuccessful attempts to secure a sub-tenant, we entered into a lease termination
agreement with the landlord. This agreement included payment of minimum annual rents and
operating costs through the July 15, 2005 termination date, plus the sum of $507,479 as a
lease termination payment. The termination payment was recorded as an acquisition cost to
goodwill during 2005.

We
believe that our existing leased facilities are sufficient to meet our current
requirements. However, we anticipate that as we grow, we may require additional
facilities.

ITEM 3: LEGAL
PROCEEDINGS

DPT Litigation

On
February 25, 2003, we filed an action in the United States District Court for the
District of New Jersey against DPT Lakewood, Inc., an affiliate of DPT Laboratories Ltd.
In this lawsuit, we alleged, among other things, that DPT Lakewood breached a
confidentiality agreement and misappropriated our

| | 36 | 
| | -- | 

---

trade secrets relating to
CARMOL®40 CREAM. Among other things, we sought damages from DPT Lakewood for
misappropriation of our trade secrets. DPT Lakewood counterclaimed against us seeking a
declaration of invalidity and non-infringement of the patents in question and making a
claim for interference with contract and prospective economic advantage. On March 6,
2003, DPT Laboratories filed a lawsuit against us in the Northern District of Texas
alleging defamation arising from our press release announcing commencement of the
litigation against DPT Lakewood. During January 2005, we ended all pending litigation
involving DPT Lakewood and DPT Laboratories. During February 2005, the District Court for
the Northern District of Texas ordered the dismissal of the case with prejudice based on
the settlement previously reached by the parties concerning the Texas action and related
New Jersey action, which was dismissed during June 2004.

Summers Laboratories Litigation

In
December 2004, Summers Laboratories filed a trademark infringement action against us in
the U.S. District Court for the Eastern District of Pennsylvania. Summers principal
claim was that our sale of pharmaceutical products utilizing the KERALACTM trademark
was likely to cause confusion with Summers sale of pharmaceutical products utilizing
Summers KERALYT® trademark. At the time of the commencement of the infringement
action, we and Summers each had pending with the U.S. Patent and Trademark Office
applications to register the marks KERALACTM and KERALYT®, respectively. Summers
sought a permanent injunction to prevent our continued use of the KERALACTM mark and
monetary damages in an unspecified amount. We, at that time, denied that we had infringed
or otherwise caused any damage to Summers.

On
October 6, 2005, we and Summers agreed to settle this case. As part of this settlement,
Summers agreed to dismiss the lawsuit with prejudice, withdraw or dismiss, with
prejudice, its opposition to our registration of our KERALACTM trademark, consent to
the federal registration of our KERALACTM mark, acknowledge the validity of our federal
registration of our KERALACTM mark and consent to our continued use of the KERALACTM
mark and the sale by us of pharmaceutical products utilizing the KERALACTM mark.

Contract Dispute

In
2004, we were named in a Complaint as a defendant in a civil action filed in the Superior
Court of New Jersey alleging breach of contract by us and seeking unspecified monetary
damages. During 2005, we filed an Answer and Counterclaim with respect to this matter,
seeking monetary relief of our own. Discovery with respect to this dispute has not yet
been scheduled by the Court. We believe that we have meritorious defenses to the
plaintiffs allegations and valid bases to assert our counterclaims and demand for
monetary damages.

Shareholder Lawsuits

We,
along with certain of our officers and directors, were named defendants in thirteen
federal securities lawsuits that were consolidated on May 5, 2005 in the United States
District Court for the District of New Jersey. In the amended consolidated complaint,
filed on June 20, 2005, the plaintiffs allege violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, arising out of
disclosures that plaintiffs allege were materially false and misleading. Plaintiffs also
allege that we and the individual defendants falsely recognized revenue. Plaintiffs
sought an unspecified amount of compensatory damages in an amount to be proven at trial.
We and the individual defendants filed our initial response on July 20, 2005 seeking to
dismiss the amended consolidated complaint in its entirety with prejudice. On March 23,
2005, the Court issued an order denying our motion to dismiss the federal securities
class action lawsuit. We continue to dispute the allegations set forth in the class
action lawsuit and intend to vigorously defend ourselves. Discovery in the federal
securities class action lawsuit has not yet been scheduled.

Additionally,
two related New Jersey state court shareholder derivative actions were filed on April 29,
2005 and May 11, 2005 against certain of our officers and directors alleging breach of
fiduciary duty and other claims arising out of substantially the same allegations made in
the federal securities class action lawsuit. Plaintiffs seek an unspecified amount of
damages in addition to attorneys fees. On the parties agreement, these two related
state shareholder derivative actions were consolidated on July 19, 2005 in the Superior
Court of New Jersey and stayed in their entirety pending a decision on the motion to
dismiss the

| | 37 | 
| | -- | 

---

consolidated federal securities
class action lawsuit. Plaintiffs in the state shareholder derivative actions have 30 days
from the decision denying the motion to dismiss the federal securities class action
lawsuit to file a consolidated amended derivative complaint. We dispute the allegations
in the state shareholder derivative lawsuit and intend to move to dismiss the
consolidated amended derivative complaint, if timely filed, in its entirety.

Further,
a federal shareholder derivative action was recently filed in the United States District
Court for the District of New Jersey against us and certain of our officers and
directors. Service of process in this matter was accepted by us and the other defendants
on April 26, 2006. This action alleges breach of fiduciary duties arising out of the SEC
inquiry and the restatement of our financial results for the quarter ended September 30,
2004 and violations of Delaware law regarding annual meetings. Plaintiffs seek an
unspecified amount of damages and attorneys fees and an order compelling us to schedule
an Annual Meeting of Stockholders. We and the other defendants intend to move to dismiss
this action in its entirety and schedule a Joint 2005/2006 Annual Meeting of Stockholders
following the filing of this Annual Report on Form 10-K.

We
expect to incur additional substantial defense costs regardless of the outcome of these
lawsuits. Likewise, such events have caused, and will likely continue to cause, a
diversion of our managements time and attention.

SEC Inquiry

In
December 2004, we were advised by the staff of the SEC that it is conducting an informal
inquiry relating to us to determine whether there have been violations of the federal
securities laws. In connection with the inquiry, the SEC staff has requested that we
provide it with certain information and documents, including with respect to revenue
recognition and capitalization of certain payments. We are cooperating with this inquiry,
however, we are unable at this point to predict the final scope or outcome of the
inquiry, and it is possible the inquiry could result in civil injunctive or criminal
proceedings, the imposition of fines and penalties, and/or other remedies and sanctions.
The conduct of these proceedings could negatively impact our stock price. Since we cannot
predict the outcome of this matter and its impact on us, we have made no provision
relating to this matter in our financial statements. In addition, we expect to continue
to incur expenses associated with the SEC inquiry and its repercussions, regardless of
the outcome of the SEC inquiry, and the inquiry may divert the efforts and attention of
our management team from normal business operations.

General Litigation

We
and our operating subsidiaries are parties to other routine actions and proceedings
incidental to our business. There can be no assurance that an adverse determination on
any such action or proceeding would not have a material adverse effect on our business,
financial condition or results of operations. We disclose the amount or range of
reasonably possible losses in excess of recorded amounts.

ITEM 4: SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS

No
issues were submitted to a vote of our security holders during the Fourth Quarter of 2005.

PART II

ITEM 5: MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED SECURITY HOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES

Shares
of our common stock were traded on The Nasdaq National Market under the symbol BPRX
until May 13, 2003, when they were listed and began trading on the New York Stock
Exchange under the symbol BDY. Our Class B common stock is not publicly traded.

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| | -- | 

---

The
following table sets forth the range of high and low sales prices for shares of our
common stock for the periods indicated. On April 13, 2006, the closing sale price for our
common stock was $13.45 per share, as reported on the New York Stock Exchange.

|                             |  | Price Range
|---------------------------- |  | -----------
|                             |  | High       
|Year Ended December 31, 2004 |  |            
|First quarter                |  | $27.63     
|Second quarter               |  | 30.00      
|Third quarter                |  | 28.14      
|Fourth quarter               |  | 21.04      
|                            
|Year Ended December 31, 2005 | 
|First quarter                |  | $15.92     
|Second quarter               |  | 11.96      
|Third quarter                |  | 12.66      
|Fourth quarter               |  | 13.41      

As
of April 14, 2006, there were 174 registered holders of record of shares of our common
stock.

Dividend Policy

We
have never declared a cash dividend. We intend to retain any earnings to fund future
growth and the operation of our business and, therefore, we do not anticipate paying any
cash dividends in the foreseeable future. In addition, our credit facility limits our
ability to declare cash dividends.

Issuer Purchases of
Equity Securities- Share Buyback Program

The
following table summarizes our repurchases of our common stock since January 1, 2005(1):

|Period                               | Total Number 
of Shares 
Repurchased | Average 
Price Paid 
per Share | Total Number 
of Shares 
Repurchased 
as Part of 
Publicly 
Announced 
Plan | Maximum 
Dollar Value 
That May 
       Yet
Be 
Repurchased 
Under the 
Plan
|------------------------------------ | ------------------------------------ | ------------------------------ | --------------------------------------------------------------------------- | ----------------------------------------------------------------------------
|January 1, 2005 to January 31, 2005  |                                      | 14,000                         |                                                                             | $14.91                                                                      
|February 1, 2005 to January 18, 2006 |                                      |                               |                                                                             | N/A                                                                         

|(1) |  | During September 2004, our
previously announced program to repurchase up to $4 million of outstanding common stock
expired. On October 27, 2004, we announced the approval by our Board of Directors of a
program to repurchase up to $8 million of our common stock, which program expires on
October 26, 2006. However, under the terms of our $110 million credit facility, aggregate
repurchases of stock by us are limited to $3 million during the term of the facility,
unless waived or amended. Stock repurchases under this program may be made from time to
time, on the open market, in block transactions or otherwise, at the discretion of our
management.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 6: SELECTED
FINANCIAL DATA

| | 39 | 
| | -- | 

---

Managements Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere or
incorporated by reference.

|                                          |  | 2001              | 2002 | 2003              | 2004 | 2005             
|----------------------------------------- |  | ----------------- | ---- | ----------------- | ---- | -----------------
|Net sales                                 |  | $ 25,702,966      |      | $ 39,668,973      |      | $ 74,679,251     
|Cost of sales                             |  | 4,168,045         |      | 4,568,461         |      | 6,533,119        
|                                          |  |                   |      |                   |     
|                                          |  |                   |      |                   |      |                  
|Gross profit                              |  | 21,534,921        |      | 35,100,512        |      | 68,146,132       
|Selling, general and administrative       |  | 15,409,108        |      | 21,534,143        |      | 38,946,576       
|Research and development                  |  | 63,951            |      | 356,089           |      | 612,162          
|Depreciation and amortization             |  | 1,169,484         |      | 1,139,531         |      | 1,207,116        
|Interest expense (income), net            |  | (73,588           | )    | (359,261          | )    | 111,847          
|Losses (gains) on short-term investments  |  | 700,000           |      | 49,535            |      | (312,285         
|Write-off of deferred financing costs     |  |                  |      |                  |      |                 
|                                          |  |                   |      |                   |      |                  
|                                          |  |                   |      |                   |     
|Total expenses                            |  | 17,268,955        |      | 22,720,037        |      | 40,565,416       
|                                          |  |                   |      |                   |      |                  
|Income before income tax expense          |  | 4,265,966         |      | 12,380,475        |      | 27,580,716       
|Income tax expense                        |  | 654,000           |      | 4,746,000         |      | 10,756,000       
|Net income                                |  | $   3,611,966     |      | $   7,634,475     |      | $ 16,824,716     
|                                          |  |                   |      |                   |      |                  
|Basic net income per common share         |  | $            0.42 |      | $            0.73 |      | $            1.55
|                                          |  |                   |      |                   |      |                  
|Diluted net income per common share       |  | $            0.37 |      | $            0.67 |      | $            1.35
|                                          |  |                   |      |                   |      |                  
|Shares used in computing basic net income | 
|per common share                          |  | 8,570,000         |      | 10,470,000        |      | 10,820,000       
|                                          |  |                   |      |                   |      |                  
|Shares used in computing diluted net      | 
|income  per common share                  |  | 9,660,000         |      | 11,440,000        |      | 12,840,000       
|                                          |  |                   |      |                   |      |                  

---

|(1) |  | Gives
effect to interest and other expenses, net of tax effects, relating      to our 4%
convertible notes. On November 14, 2005, we repaid all amounts      due under the 4%
notes and the related indenture, including all default      interest and other fees.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 40 | 
| | -- | 

---

|                      |      |             |                                 |             |     
|--------------------- | ---- | ----------- | ------------------------------- | ----------- | ----
|Balance Sheet Data    | 2001 | 2002        | As of December  
      31,
2003 | 2004        | 2005
|Working capital       |      | $19,310,242 |                                 | $28,162,830 |     
|Total assets          |      | 35,601,433  |                                 | 43,917,100  |     
|Long term liabilities |      | 305,739     |                                 | 155,362     |     
|Stockholders equity   |      | 30,170,283  |                                 | 38,193,716  |     

ITEM 7: 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 audited consolidated financial statements and related notes. The
following discussion and analysis contains forward-looking statements regarding our
future performance. All forward-looking information is inherently uncertain and actual
results may differ materially from the assumptions, estimates or expectations reflected
or contained in the forward-looking statements. See Forward-Looking Statements and
Risk Factors.

Overview

We
are a specialty pharmaceutical company that acquires, develops and markets prescription
and over-the-counter products in selected markets.

On
August 10, 2004, we purchased certain assets of Bioglan Pharmaceuticals, a wholly-owned
subsidiary of Quintiles Transnational Corp. As part of the transaction, we acquired
certain intellectual property, regulatory filings, and other assets relating to
SOLARAZE®, a topical treatment indicated for the treatment of actinic keratosis,
ADOXA®, an oral antibiotic indicated for the treatment of acne, ZONALON®, a topical
treatment indicated for pruritus, Tx Systems®, a line of advanced topical treatments
used during in-office procedures, and certain other dermatologic products. The total
consideration was approximately $191 million, including acquisition costs.

In
connection with this acquisition, we hired certain sales representatives and other
personnel of Bioglan and entered into a $50 million bridge loan, which replaced our then
existing credit facility. We funded the purchase price for the acquisition through the
proceeds of the bridge loan and working capital. On September 28, 2004, we replaced the
bridge loan with a $125 million credit facility (the Old Facility), consisting of a $75
million term loan and a $50 million revolving line of credit. On November 14, 2005, we
replaced this $125 million Old Facility with a new $110 million facility (the New
Facility), consisting of an $80 million term loan and a $30 million revolving line of
credit.

Concurrently
with the closing of this $110 million New Facility, we repaid all amounts due under our
4% senior subordinated convertible notes (the Notes) and the related indenture (the
Indenture), including all default interest and other payments, and paid all fees and
expenses in connection with the New Facility. The New Facilitys term loan and revolver
both mature on November 14, 2010 and are secured by a lien upon substantially all of our
assets, including those of our subsidiaries, and is guaranteed by our domestic
subsidiaries. The New Facility was subsequently amended on January 26, 2006 and May 15,
2006, as described below.

Our
Doak Dermatologics subsidiary promotes our branded dermatologic and podiatric products,
including our KERALACTM, ZODERM®, LIDAMANTLE®, ROSULA® and SELSEB® product
lines, and our Bioglan Pharmaceuticals subsidiary promotes our branded dermatologic and
podiatric products, including our ADOXA®, SOLARAZE® and ZONALON® product lines, to
dermatologists and podiatrists in the United States through its dedicated sales force of
132 representatives as of May 1, 2006. Our Kenwood Therapeutics division promotes
our branded gastrointestinal products, including ANAMANTLE®HC, PAMINE®, PAMINE®
FORTE and FLORA-Q® to gastroenterologists and colon and rectal surgeons in the United
States through its dedicated sales force of more than 47 representatives as of

| | 41 | 
| | -- | 

---

May  1, 2006. To a lesser
extent, Kenwood Therapeutics also markets nutritional supplements and respiratory
products.

We
derive a majority of our net sales from our core branded products: ADOXA®, KERALACTM,
SOLARAZE®, ZODERM®, LIDAMANTLE®, ROSULA®, SELSEB®, ZONALON®, PAMINE®,
ANAMANTLE®HC, FLORA-Q® and GLUTOFAC®-ZX. These core branded products accounted for
a total of approximately 85% of our net sales for 2005 and approximately 75% of our net
sales for 2004 (ADOXA®, SOLARAZE® and ZONALON® were acquired by us during 2004).

We
have experienced an increase in generic competition occurring in the Fourth Quarter 2004
and during 2005 against many of our products, including some ADOXA®, KERALACTM,
ZODERM®, LIDAMANTLE®, ROSULA®, and ANAMANTLE®HC products. As a result of generic
competition, the execution of Distribution and Service Agreements with two wholesale
customers in 2005 and a change in these customers market dynamics, we experienced an
increase in product returns from our customers.

In
December 2004, we were advised by the staff of the SEC that it is conducting an informal
inquiry to determine whether there have been violations of the federal securities laws.
In connection with the inquiry, the SEC staff has requested that we provide it with
certain information and documents, including with respect to revenue recognition and
capitalization of certain payments. We are cooperating with this inquiry, however, we are
unable at this point to predict the final scope or outcome of the inquiry. We are also
party to a federal securities class action lawsuit and federal and state shareholder
derivative lawsuits which have arisen as a consequence of the SEC inquiry and restatement
of our financial results for the quarter ended September 30, 2004.

On
January 30, 2006, we entered into a Collaboration and License Agreement with MediGene AG.
Under the Agreement, MediGene has granted us the exclusive license, or sublicense in
certain instances, to certain patents, trademarks and other intellectual property for our
use in the commercialization, in the United States, as a prescription product, of any
ointment or other topical formulation containing green tea catechins, developed pursuant
to our agreement with MediGene, for the treatment of dermatological diseases in humans,
including but not limited to external genital warts, perianal warts and actinic
keratosis. In the First Quarter 2006, the Company paid to MediGene $5,000,000 in
consideration for development and registration activities undertaken prior to the date of
the Agreement. The Company will expense the $5 million research and development payment
during the First Quarter 2006.

Restatement of
Previously Issued Financial Statements for the Quarter Ended September 30, 2004

The
restatement of the previously issued financial statements for the quarter ended September
30, 2004 was a result of a transaction previously recorded as a sale not meeting the
criteria for being a sale. The transaction consisted of a sale of approximately $1
million of Deconamine® Syrup shipped and paid for in the Third Quarter 2004. The
previously recorded sale was modified after the customer expressed its intentions to
return the product in that we would accept all unsold product as of February 1, 2005,
with credit granted against other trade amounts owed by the customer. As a result of the
non-recognition of the transaction as a sale, our consolidated statement of income for
the Third Quarter 2004 was adjusted and restated to reduce net sales by $1,043,907 to
$27,452,698, net income by $613,594 to $3,047,789, and diluted net income per common
share by $0.03 to $0.18 and our consolidated balance sheet as of September 30, 2004 was
adjusted and restated to record $1,043,907 of deferred revenue.

We
subsequently restated our Quarterly Report on Form 10-Q for the quarter ended September
30, 2004, which we filed with the SEC on January 27, 2006. All amounts referenced in this
Annual Report reflect the relevant amounts on a restated basis. The originally issued
financial statements for the quarter ended September 30, 2004 should no longer be relied
upon.

| | 42 | 
| | -- | 

---

Results of Operations

Percentage of Net
Revenues

The
following table sets forth certain data as a percentage of net sales for the periods
indicated.

|                     
|---------------------
|2003                 
|Net sales            
|Gross profit         
|Operating expenses   
|Operating income     
|Interest expense, net
|Income tax expense   
|                     
|Net income           
|                     

Year Ended December
31, 2005 Compared to Year Ended December 31, 2004

Net
sales for 2005 were $133,382,194, representing an increase of $36,688,207, or
approximately 38%, from $96,693,987 for 2004. The following table sets forth certain net
sales data for the periods indicated.

|Therapeutic Category by Company | 2004 | 2005         | Increase/ 
(Decrease)
|------------------------------- | ---- | ------------ | ---------------------
|Dermatology & Podiatry          |      |              |                      
|Doak Dermatologics, Inc.        |     
|Keratolytic                     |      | $ 32,713,699 |                      
|Acne/Roseaca                    |      | 14,997,922   |                      
|Anesthetics                     |      | 5,659,398    |                      
|Scalp                           |      | 1,420,237    |                      
|Cosmeceuticals                  |      | 1,900,343    |                      
|Other                           |      | 170,965      |                      
|                                |      |              |                      
|Total Doak Dermatologics, Inc.  |      | 56,862,564   |                      
|                                |     
|Bioglan Pharmaceuticals         |     
|Acne/Roseaca                    |      | 12,288,556   |                      
|Actinic Keratoses               |      | 2,421,150    |                      
|Anesthetics                     |      | 601,181      |                      
|Cosmeceuticals                  |      | 712,900      |                      
|Authorized Generic              |      |             |                      
|                                |      |              |                      
|Total Bioglan Pharmaceuticals   |      | 16,023,787   |                      
|                               
|Total Dermatology & Podiatry    |      | 72,886,351   |                      

| | 43 | 
| | -- | 

---



|Kenwood Therapeutics                | 
|----------------------------------- | 
|Gastrointestinal                    | 
|Respiratory                         | 
|Nutritional                         | 
|Other                               | 
|                                    | 
|Total Kenwood Therapeutics          | 
|Total Bradley Pharmaceuticals, Inc. | 
|                                    | 

For
2005, Doak Dermatologics net sales were $45,207,780, representing a decrease of
$11,654,784, or 20%, from $56,862,564 for 2004. The decrease in net sales was led by the
keratolytic line of products of $8,980,155, acne/roseaca line of products of $818,550 and
anesthetics line of products of $2,305,502. The keratolytic line of products decrease was
led by a decrease in CARMOL® products of $6,464,950 and KERALACTM products of
$2,515,205. The KERALACTM products decrease was partially offset by new product
launches from KERALACTM CREAM, launched in the First Quarter 2005, of $7,502,281,
KERALACTM NAILSTIK, launched in the Third Quarter 2005, of $1,437,105 and KERALACTM
OINTMENT, launched in the Fourth Quarter 2005, of $366,259. The anesthetics line of
products decrease was led by a decrease in LIDAMANTLE®HC of $1,511,985.

For
2005, Kenwood Therapeutics net sales were $23,037,323, representing a decrease of
$770,313, or approximately 3%, from $23,807,636 for 2004. The decrease in net sales was
led by a decrease in gastrointestinal products of $639,381. The decrease in
gastrointestinal products was primarily due to a decrease in ANAMANTLE®HC of
$8,297,795, which was partially offset by new product launches of ANAMANTLE® HC FORTE,
launched in Third Quarter 2005, of $2,675,882. The decrease in gastrointestinal products
was partially offset by an increase in PAMINE® of $3,640,137 and FLORA-Q® of
$1,347,769.

On
August 10, 2004, we acquired certain assets of Bioglan Pharmaceuticals. Bioglan net sales
for 2005 were $65,137,091, representing an increase of $49,113,304 or 307%, from
$16,023,787 for 2004. The increase was primarily due to the Bioglan results being a
partial period last year and the new product sales of ADOXA®150mg, launched in the
Fourth Quarter 2005, of $881,360.

Net
sales during 2005 were negatively impacted by primarily the following:

| |  |  | An
increase in generic or therapeutically equivalent products competing on price.  In
particular, 2005                      was negatively impacted by the introduction of
generic competition for CARMOL®40 (Fourth                      Quarter 2003),
ANAMANTLE® HC 14 (Fourth Quarter 2004), LIDAMANTLE® and LIDAMANTLE®HC (Fourth
                     Quarter 2004), ANAMANTLE® HC CREAM KIT (First Quarter 2005),
KERALACTM GEL and LOTION (First                      Quarter 2005), ZODERM® (Second
Quarter 2005), ROSULA® AQUEOUS GEL and ROSULA® AQUEOUS                      CLEANSER
(Second Quarter 2005), KERALACTM CREAM (Third Quarter 2005) and ADOXA® 50mg and
                     100mg (Fourth Quarter 2005). As a result of the generic competition
noted above, we expect                      our future sales of the above products to be
negatively impacted by generic or                      therapeutically equivalent
products.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We
entered into DSAs with our two largest wholesale                      customers with
effective dates covering 2005. We and the                      wholesale customers agreed
that the wholesale customers                      would maintain lower inventory
quantities than they had                      on-hand. As a result, the
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 44 | 
| | -- | 

---

| | DSAs
contributed to decreased Net                      Sales due to reduced purchases of our
products and                      increased product returns.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Previous
to 2005, major drug wholesalers and some chain drug stores bought and sold with each
other in                      order to take advantages of selling and buying
pharmaceutical products below the                      pharmaceutical companies
wholesale prices.  These lower prices were available due to the                      drug
wholesalers speculative buying before price increases, creating lower cost inventory
                     in comparison to pharmaceutical companies then existing wholesale
prices.  With the goal of                      eliminating any possible counterfeit
drugs, the wholesalers now have certain pedigree                      requirements in
their sourcing of drugs directly from pharmaceutical companies, and
                     therefore, they have substantially eliminated buying and selling
among drug wholesalers.                      Chain drug stores have also implemented the
same programs.  In particular, in addition to                      the increase in
generic competition noted above, our sales to Quality King decreased as a
                     result of its decrease in potential resale locations.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
noted above, some of the increases in our net sales for 2005 were the result of new
product launches. Further, some of the new product sales were the result of initial
stocking sales, which, historically, have resulted in reduced product sales for
subsequent quarters.

As
of December 31, 2005, we had $1,134,668 of orders on backorder as a result of us being
out of stock, which were subsequently shipped and recognized in the First Quarter 2006.

We
estimate our prescription demand, net of charges against sales, based upon information
received from Wolters Kluwer, for 2005, to be approximately $147 million. Our
prescription net sales recorded during 2005 was approximately $128 million, which
includes initial stocking by our customers for newly launched products. The approximate
$19 million difference between the prescription demand and our recorded net sales for
2005 is primarily due to our wholesale customers decreasing their inventory of our
products in accordance with the DSAs and the substantial elimination of buying and
selling among drug wholesalers.

The
following table summarizes the changes in the return reserve during 2005 and 2004:

|                                    | 
|----------------------------------- | 
|Year 2004                           | 
|Return reserve at January 1, 2004   | 
|Product returns during 2004         | 
|Acquired Bioglan return reserve     | 
|Provision                           | 
|                                    | 
|Return reserve at December 31, 2004 | 
|                                    | 
|Year 2005                           | 
|Return reserve at January 1, 2005   | 
|Product returns during 2005         | 
|Provision                           | 
|                                    | 
|Return reserve at December 31, 2005 | 



During the Fourth Quarter of 2005,
we increased our return reserve provision by approximately $10,867,000 primarily due to
an increase in our estimated inventory of our products at the wholesalers and retailers
as a result of additional actual product return experience in the first four months of
2006 and an increase in the rate of return for certain products. This resulted in an
increase to the return reserve accrual by approximately $3,615,000.

As
of December 31, 2005, based upon wholesale inventory reports and discussions with retail
chains and wholesalers, we estimate the total monthly inventory of our products at the
wholesalers and retailers to be 2.6 months. After applying the December 31, 2005 return
reserve, we estimate the unreserved monthly inventory of our products at the wholesalers
and retailers to be .7 months.

We
recorded, in the Fourth Quarter 2004, an increase in our reserves for charges against
sales, primarily relating to returns. The increase in the returns portion of this reserve
was a result, among other factors, of the execution during 2005 of the DSAs with two
wholesale customers which became effective during 2004, our obtaining customer inventory
data from our four largest customers during the Fourth Quarter 2004 and First Quarter
2005, a change in these customers market dynamics becoming evident

| | 45 | 
| | -- | 

---

during 2005, our having subsequent
return visibility relating to 2004 and prior during 2005, and our having increased
generic competition occurring in the Fourth Quarter 2004 and during 2005. The increase in
our reserves for charges against sales, primarily relating to returns, as discussed in
Note M of this 2005 Annual Report of Form 10-K, was $17,926,084.

There
is no proprietary protection for most of our products, and therefore our products face
competition from generic or comparable products that are sold by other pharmaceutical
companies. Increased competition from the sale of generic or comparable products may
cause a decrease in net sales from our products. If net sales of KERALACTM, ADOXA®,
SOLARAZE®, ZODERM®, ROSULA®, ANAMANTLE®HC, PAMINE® or other of our products
decline, as a result of increased competition, government regulations, wholesaler buying
patterns, returns, physicians prescribing habits or for any other reason and we fail to
replace those net sales, our net sales and profitability would decrease.

Cost
of salesfor 2005 were $19,817,676, representing an increase of $6,477,177, or
approximately 49%, from $13,340,499 for 2004. The increase in cost of sales is primarily
due to an increase in net sales. The gross profit percentages for 2005 and 2004 were 85%
and 86%, respectively.

Selling,
general and administrative expensesfor 2005 were $79,638,298, representing an increase
of $17,080,427, or 27%, compared to $62,557,871 for 2004. The increase in selling,
general and administrative expenses reflects increased spending on sales and marketing,
including Bioglan products, to implement our strategy of aggressively marketing our
dermatology, podiatry and gastrointestinal brands and increased professional fees
primarily related to the SEC inquiry. The following table sets forth the increase in
certain expenditures:

|                 
|-----------------
|Payroll Expense  
|Travel and       
|Entertainment*   
|Advertising and  
|Promotional Costs
|Professional Fees

---

|* |  | Increases in
travel and entertainment primarily relate to increased      average number of sales
representatives.
|- |  | -----------------------------------------------------------------------------------------------------------------

During
2005, we expensed $5,626,717 in professional fees relating to the SEC inquiry and the
restatement of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.

Selling,
general and administrative expenses as a percentage of net sales were 60% for 2005,
representing a decrease of 5% compared to 65% for 2004. The decrease in the percentage
was a result of increased net sales.

Depreciation
and amortization expensesfor 2005 were $10,174,989, representing an increase of
$5,359,894 from $4,815,095 for 2004. The increase in depreciation and amortization
expenses was primarily due to the purchase of amortizable intangibles and property and
equipment relating to the Bioglan acquisition on August 10, 2004.

Research
and developmentfor 2005 was $1,515,633 representing an increase of $710,801 from 2004.
The increase in research and development was primarily due to the payment of $638,000 to
Par Pharmaceuticals for the development and approval from the FDA of ADOXA® 150mg
during the Third Quarter 2005.

Gain
on investmentfor 2005 was $103,166, representing an increase of $67,838 from 2004.

Write-off
of deferred financing costsfor 2005 was $3,988,964 and was due to the write-off of the
deferred financing costs relating to the 4% Notes and the $125 million Old Facility
during November 2005. The Notes and the Old Facility were repaid during November 2005.

Interest
incomefor 2005 was $2,149,567, representing a decrease of $29,056 from 2004.

| | 46 | 
| | -- | 

---

Interest
expensefor 2005 was $7,489,857 representing an increase of $3,161,530 from 2004. The
increase in the interest expense was a result of our entering into the $125 million Old
Facility in September 2004 and the subsequent replacement of that facility and the 4%
Notes with the $110 million New Facility in November 2005.

Income
tax expensefor 2005 was $5,048,000, representing a decrease of $59,000 from $5,107,000
for 2004. The effective tax rate used to calculate income tax expense for 2005 and 2004
was approximately 39%.

Net
incomefor 2005 was $7,961,510, representing an increase of $7,196 from $7,954,314 for
2004. Net income as a percentage of Net Sales for 2005 and 2004 was 6% and 8%,
respectively.

Doaks
net loss for 2005 was $865,657, representing a decrease of $9,845,061 from net income of
$8,979,404 for 2004. Kenwoods net income for 2005 was $223,578, representing an increase
of $428,456 from a net loss of $204,878 for 2004. Bioglans net income for 2005 was
$8,603,589, representing an increase from a partial period due to the timing of the
Bioglan acquisition of $9,423,801 from a net loss of $820,212.

Year Ended December
31, 2004 Compared to Year Ended December 31, 2003

Net
sales for 2004 were $96,693,987, representing an increase of $22,014,736, or
approximately 29%, from $74,679,251 for 2003.

For
2004, Doak Dermatologics net sales were $56,862,564, representing an increase of
$245,445, or less than 1%, from $56,617,116 for 2003. The increase in net sales was led
by new product sales from ZODERM® GEL 4.5%, launched in the First Quarter 2004, of
$717,403; ZODERM® GEL 8.5%, launched in the First Quarter 2004, of $604,285; ZODERM®
CREAM 4.5%, launched in the First Quarter 2004, of $1,354,459; ZODERM® CREAM 8.5%,
launched in the First Quarter 2004, of $669,266; ZODERM® CLEANSER 4.5%, launched in the
First Quarter 2004, of $2,672,088; ZODERM® CLEANSER 8.5%, launched in the First Quarter
2004, of $1,355,326; KERALACTM LOTION 7oz, launched in the Second Quarter 2004, of
$3,154,612; KERALACTM LOTION 11oz, launched in the Second Quarter 2004, of $5,510,074;
KERALACTM GEL, launched in the Second Quarter 2004, of $9,057,494; ROSULA®NS,
launched in the Third Quarter 2004, of $2,035,635; ZODERM® GEL 6.5%, launched in the
Third Quarter 2004, of $820,463; ZODERM® CREAM 6.5%, launched in the Third Quarter
2004, of $724,616; ZODERM® CLEANSER 6.5%, launched in the Third Quarter 2004, of
$1,023,631; and SELSEB® SHAMPOO, launched in the Fourth Quarter 2004, of $857,676. In
addition, Doak benefited from an increase in LIDAMANTLE®HC LOTION of $1,289,072 and
LIDAMANTLE® LOTION of $657,452 due to the products being launched in the Fourth Quarter
2003 in comparison to a full year 2004. Doaks new product sales and existing product
increases were partially offset by declines in CARMOL®40 CREAM, LOTION and GEL of
$23,073,688, CARMOL®HC of $1,193,355; LIDAMANTLE® CREAM of $1,378,089,
LIDAMANTLE®HC CREAM of $1,763,424, and ROSULA® AQUEOUS GEL of $2,704,729. The total
net sales for CARMOL®40 CREAM, LOTION and GEL for 2004 were $13,503,270.

For
2004, Kenwood Therapeutics net sales were $23,807,636, representing an increase of
$5,745,504, or approximately 32%, from $18,062,132 for 2003. The increase in net sales
were led by new product sales of FLORA-QTM, launched in First Quarter 2004, of $455,668
and ANAMANTLE®HC CREAM KIT 20s, launched in the Fourth Quarter 2004, of $1,466,550 and
product sales growth from ANAMANTLE®HC 14s of $6,339,956 and PAMINE® FORTE 5mg of
$725,908, which were partially offset by a decline in DECONAMINE® products of
$1,236,353 and GLUTOFAC® ZX of $675,901.

On
August 10, 2004, we acquired certain assets of Bioglan Pharmaceuticals. The Bioglan net
sales for the period from the purchase date through December 31, 2004 were $16,023,787,
which were comprised of Net Sales of ADOXA® of $12,288,556, SOLARAZE® of $2,421,150,
ZONALON® of $601,181 and other products of $712,900. Bioglan net sales during the
period were negatively impacted by lower wholesaler purchases as wholesalers reduced
their inventory levels.

| | 47 | 
| | -- | 

---

in the number of sales
representatives detailing those products to high potential physicians. Initial stocking
sales from ZODERM® products in the First Quarter and Third Quarter 2004, KERALACTM
LOTION and GEL in the Second Quarter 2004, ROSULA®NS in the Third Quarter 2004 and
SELSEB® SHAMPOO and ANAMANTLE®HC CREAM KIT 20s in the Fourth Quarter 2004
significantly contributed to the increased sales in comparison to last year. As a result
of certain ZODERM® products sales initially stocked by our customers during the First
Quarter 2004, ZODERM® sales during Second Quarter, Third Quarter 2004 and Fourth
Quarter 2004 were less than the First Quarter 2004. In addition, as a result of certain
other ZODERM® products and ROSULA®NS being initially stocked by our customers during
the Third Quarter 2004, sales of those products during the Fourth Quarter 2004 were
significantly less than the Third Quarter 2004. Further, as a result of ANAMANTLE®HC
CREAM KIT 20s and SELSEB® SHAMPOO initially stocked by our customers during the Fourth
Quarter 2004, sales of those products during First Quarter 2005 were significantly less
than the Fourth Quarter 2004.

As
of December 31, 2004, we had $698,315 of orders held, which were subsequently shipped and
recognized in the First Quarter 2005. In addition, as of December 31, 2004, we had
$2,324,216 of orders on backorder as a result of us being out of stock, which were
subsequently shipped and recognized in the First Quarter 2005.

During
the Second Quarter 2003, a competitor launched a competing product with the same active
ingredient as CARMOL® 40 CREAM. During the Fourth Quarter 2003, generic competitors
introduced less expensive comparable products to CARMOL® 40 CREAM, LOTION and GEL, also
with the same active ingredient. These introductions of competing products resulted in a
reduction in demand for our CARMOL® 40 CREAM, LOTION and GEL products during the three
and twelve months ended December 31, 2004 in comparison to the same periods in the prior
year. In order to minimize a reduction in our overall net sales arising from increased
competition related to the CARMOL® 40 products, we implemented life cycle management
techniques, including launching new products- KERALACTM LOTION and GEL in the Second
Quarter 2004 and launching KERALACTM CREAM in the First Quarter 2005.

During
October 2004 and February 2005, generic competitors introduced less expensive comparable
products to ANAMANTLE®HC 14 and ANAMANTLE®HC CREAM KIT, respectively. As a result of
the increased competition for ANAMANTLE®HC 14 and ANAMANTLE®HC CREAM KIT based on
price, we experienced lower net sales for ANAMANTLE®HC 14 ANAMANTLE®HC CREAM KIT. In
order to minimize a reduction in net sales related to increased competition for
ANAMANTLE®HC, we implemented life cycle management techniques, including launching
ANAMANTLE®HC FORTE.

During
January 2005, a generic competitor introduced less expensive comparable products to
KERALACTM LOTION and GEL with the same active ingredient. These introductions of
competing products resulted in reduced demand for our KERALACTM LOTION and GEL. During
July 2005, generic competitors introduced less expensive comparable products to
KERALACTM CREAM, with the same active ingredient. These introductions of these
competing products resulted in reduced demand for our KERALACTM CREAM. In order to
minimize a reduction in net sales related to increased competition for KERALACTM
products, we launched additional line extensions of KERALACTM- KERALACTM NAILSTIK in
September 2005 and KERALACTM OINTMENT in October 2005.

During
June 2005, a generic competitor introduced less expensive comparable products to our
ZODERM® products. These introductions of competing products resulted in reduced net
sales for our ZODERM® products.

During
December 2005, a generic competitor introduced less expensive products of ADOXA® 100mg
and ADOXA® 50mg tablets. These introductions of competing products resulted in reduced
net sales for those impacted ADOXA® products. To minimize lost profits as a result of
generic competition against ADOXA®, we entered into a Licensing and Distribution
Agreement with Par Pharmaceutical, Inc. Under this agreement, Par is obligated to pay us
50% of its net profits from its sales of our authorized generic versions of ADOXA®. To
date, we have authorized Par to market only 50mg and 100mg tablets of our authorized
generic versions of ADOXA® in bottles. In addition to entering into our agreement with
Par, we have implemented life cycle management techniques for ADOXA®, including
launching ADOXA Paks®, designed to enhance patient compliance and physician
prescribing, in January 2005 and ADOXA® 150mg tablets in late 2005.

| | 48 | 
| | -- | 

---

In
addition to increased generic competition mentioned above for CARMOL® 40,
ANAMANTLE®HC, KERALACTM, ZODERM®, ADOXA® 100mg and ADOXA® 50mg, we have
experienced generic competition against LIDAMANTLE® Lotion and LIDAMANTLE® HC Lotion
in November 2004 and ROSULA® Aqueous Gel and ROSULA® Aqueous Cleanser in April 2005.

There
is no proprietary protection for most of our products, and therefore our products face
competition from generic or comparable products that are sold by other pharmaceutical
companies. Increased competition from the sale of generic or comparable products may
cause a decrease in sales from our products. Further, if there are decreases in sales of
any other material product line, including ZODERM®, KERALACTM, ANAMANTLE®HC,
PAMINE®, ADOXA® or our other products, as a result of increased competition,
wholesaler buying patterns, physicians prescribing habits or for any other reason and we
fail to replace those sales, our revenues and profitability would decrease.

We
recorded, in the Fourth Quarter 2004, an increase in our reserves for charges against
sales, primarily relating to returns. The increase in the returns portion of this reserve
was a result, among other factors, of the execution during 2005 of the DSAs with two
wholesale customers which became effective during 2004, our obtaining customer inventory
data from our four largest customers during the Fourth Quarter 2004 and First Quarter
2005, a change in these customers market dynamics becoming evident during 2005, our
having subsequent return visibility relating to 2004 and prior during 2005, and our
having increased generic competition occurring in the Fourth Quarter 2004 and during
2005. The increase in our reserves for charges against sales, primarily relating to
returns, as discussed in Note M of our consolidated financial statements, was
$17,926,084, which decreased net sales by $17,926,084.

We
estimate our prescription demand, net of charges against sales, based upon information
received from Wolters Kluwer for 2004, to be approximately $107 million. Our prescription
net sales recorded during 2004 were approximately $90 million, which includes initial
stocking by our customers for newly launched products. As a result of the initial
stocking by our customers during 2004 for our newly launched products, sales of those
products during 2005 were negatively impacted. The approximately $17 million difference
between the prescription demand and our recorded net sales is primarily due to the
increase in our reserves against sales noted above.

Cost
of sales for 2004 were $13,340,499, representing an increase of $6,807,380, or
approximately 104%, from $6,533,119 for 2003. The increase in the cost of sales is
primarily due to an increase in sales. The gross profit percentage for 2004 was 86% in
comparison to 91% for last year. The decrease in the gross profit percentage for 2004 is
principally due to the acquisition of the Bioglan products on August 10, 2004 having
lower gross profit percentage in comparison to our legacy products and increase in our
reserves against sales.

Selling,
general and administrative expenses for 2004 were $63,362,703, representing an increase
of $23,803,965, or 60%, compared to $39,558,738 for 2003. The increase in selling,
general and administrative expenses reflects increased spending on sales and marketing to
implement our strategy of aggressively marketing our dermatology, podiatry and
gastrointestinal brands. The following table sets forth the increase in certain
expenditures:

|                           | Increase in 2004 in
comparison to 2003
|-------------------------- | --------------------------------------
|Payroll Expense            |                                       
|Travel and  Entertainment* |                                       
|Advertising                |                                       
|and  Promotional Costs     |                                       
|Insurance                  |                                       
|Estimated legal            |                                       
|settlements**              |                                       
|Professional Fees          |                                       

---

|* |  | Increases in
travel and entertainment primarily relate to increased number of sales representatives
and travel associated with increased number of conventions attended by Company personnel.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** |  | For more
information on the estimated legal settlements, see Item 3. Legal Proceedings.
|-- |  | ---------------------------------------------------------------------------------------

| | 49 | 
| | -- | 

---

Selling,
general and administrative expenses as a percentage of net sales were 66% for 2004,
representing an increase of 13% compared to 53% for 2003. The increase in the percentage
was primarily a result of increased spending on sales and marketing and the related
payroll, travel and entertainment, advertising and promotional costs and other costs
without the proportionate increase in net sales.

Depreciation
and amortization for 2004 was $4,815,095, representing an increase of $3,607,979 from
$1,207,116 for 2003. The increase in depreciation and amortization expenses was primarily
due to the purchase of amortizable intangibles and property and equipment relating to the
Bioglan acquisition.

Gain
on investment for 2004 was $35,328, representing a decrease of $276,957 from $312,285 for
2003.

Interest
income for 2004 was $2,178,623, representing an increase of $1,242,278 from 2003. The
increase for 2004 was principally due to investment of the net proceeds of $96,205,000
from the issuance of 4.6 million shares of common stock in December 2003, partially
offset by the purchase of Bioglan on August 10, 2004.

Interest
expense for 2004 was $4,328,327, representing an increase of $3,280,135 from 2003. The
increase was principally due to interest expense related to our 4% Notes, bridge loan and
the credit facility which replaced the bridge loan.

Income
tax expense for 2004 was $5,107,000, representing a decrease of $5,649,000 from
$10,756,000 for 2003 caused by the decrease in our income before income tax expense from
2003 to 2004. The effective tax rate used to calculate income tax expense for 2004 and
2003 was approximately 39%.

Net
income for 2004 was $7,954,314 representing a decrease of $8,870,402, or 53%, from
$16,824,716 for 2003. Net income as a percentage of net sales for 2004 was 8%,
representing a decrease of 15% compared to 23% for 2003. The decrease in net income in
the aggregate 2004 was principally due to an increase in reserves against sales, selling,
general and administrative expenses, depreciation and amortization and interest expense,
partially offset by an increase in gross profit and interest income.

Liquidity and Capital
Resources

Our
cash and cash equivalents, short-term investments and restricted cash were $64,798,728 at
December 31, 2005 and $76,331,254 at December 31, 2004. Cash provided by operating
activities for 2005 was $24,802,385. The sources of cash primarily resulted from net
income of $7,961,510, plus non-cash charges for depreciation and amortization of
$10,174,989; tax benefit due to exercise of non-qualified options of $237,995; non-cash
charges for amortization of deferred financing costs of $953,263; the non-cash write-off
of the deferred financing costs associated with the 4% Notes and the $125 million Old
Facility of $3,988,964; an increase in the rebate reserve of $2,078,421, primarily due to
an increase in Medicaid rebates for SOLARAZE® and a slowing of our payments to some
managed care organizations; an increase in the inventory valuation reserve of $34,675; an
increase in allowance for doubtful accounts of $666,585 primarily due to an increase in
short payments from a wholesale customer; a decrease of deferred tax assets of $526,282;
a decrease in inventories of $2,102,373, primarily due to a reduction in purchases by us
for finished inventories; a decrease in prepaid expenses and other of $1,985,158; an
increase in accounts payable of $1,718,433 primarily due to our slower payments to our
vendors; a distribution of treasury stock of $32,888 to fund our 401(k); the accruing of
$750,963 for fee-for-service under a DSA relating to the Fourth Quarter 2005; and an
increase in the return reserve of $859,571. The sources of cash were partially offset by
an increase in accounts receivable of $3,120,337 primarily due to increased sales,
initial new product sales and an increase in short payments from a wholesale customer;
gain on short-term investments of $103,166; a decrease in accrued expenses of $1,405,463
primarily due to the settlement payment to Summers Laboratories, which was previously
accrued; and an increase in prepaid income taxes of $4,640,719 primarily due to an
overpayment of income tax in comparison to actual results during 2005.

Cash
used in investing activities for 2005 was $9,588,361, resulting from a restriction of
cash from entering into the $110 million credit facility of $12,035,193; acquisition
costs relating to the Bioglan acquisition of $547,355; and purchase of property and
equipment of $636,193; partially offset by net sales of short-term investments of
$3,630,380.

| | 50 | 
| | -- | 

---

Cash
used in financing activities for 2005 was $35,326,839, resulting from payments of notes
payable of $70,800; payment of the 4% Notes of $37,000,000; payment of the $125 million
Old Facilitys term loan of $71,250,000; payment of scheduled $110 million New Facilitys
term note of $2,000,000; payment of deferred financing costs associated with the $110
million New Facility of $5,376,875; and the purchase of treasury shares for $208,805;
partially offset by proceeds from the $110 million New Facilitys term loan of
$80,000,000; and the proceeds from the exercise of stock options of $579,641.

On
November 14, 2005, we replaced our $125 million Old Facility with the $110 million New
Facility with a syndicate of lenders led by Wachovia Bank. Concurrently with the closing
of this $110 million New Facility, we repaid all amounts due under our 4% Notes and the
related Indenture, including all default interest and other payments, and paid all fees
and expenses in connection with the New Facility. Our New Facility is comprised of an $80
million term loan and a $30 million revolving line of credit. The New Facilitys term
loan and revolver both mature on November 14, 2010 and are secured by a lien upon
substantially all of our assets, including those of our subsidiaries, and is guaranteed
by our domestic subsidiaries.

In
connection with the closing of the New Facility, the payment of related fees, the
satisfaction of all amounts outstanding under our $125 million Old Facility, and the
repayment of all amounts due under the Notes and the related Indenture, including all
default interest and other payments, we used all of the proceeds of the New Facilitys
term loan and approximately $22 million of our cash-on-hand. As of December 31, 2005, we
had approximately $65 million in cash and short-term investments and $30 million unused
(but currently restricted as set forth in more detail below) under the New Facilitys
revolving line of credit.

Amounts
outstanding under the New Facility accrue interest at our choice from time to time of
either (i) the alternate base rate (which is equal to the greater of the applicable prime
rate or the federal funds effective rate plus 1/2 of 1%) plus 3%; or (ii) a rate equal to
the sum of the applicable LIBOR rate plus 4%. In addition, the lenders under the New
Facility are entitled to customary facility fees based on unused commitments under the
New Facility and outstanding letters of credit.

The
financial covenants under the New Facility require that we maintain (i) a leverage ratio
(which is a ratio of funded debt of us and our subsidiaries to consolidated EBITDA) less
than or equal to 2.50 to 1.00; (ii) a fixed charge coverage ratio (which is a ratio of
(A) consolidated EBITDA minus consolidated capital expenditures made in cash to (B) the
sum of consolidated interest expense made in cash, scheduled funded debt payments, total
federal, state, local and foreign income, value added and similar taxes paid or payable
in cash, and certain restricted payments) greater than or equal to 1.50 to 1.00; (iii)
not less than $25 million of unrestricted cash and cash equivalents on our balance sheet
at all times; and (iv) upon receipt of the audited financial statements for the fiscal
year ended 2004, pro forma for the Bioglan acquisition, consolidated EBITDA of at least
$42.2 million. Further, the New Facility limits our ability to declare and pay cash
dividends.

On
January 3, 2006, we received a notice from the administrative agent under our $110
million New Facility stating that we were in default under the New Facility with the
minimum pro forma consolidated EBITDA covenant for the fiscal year ended December 31,
2004 and the covenant to file with the SEC our 2004 Annual Report on Form 10-K by
December 31, 2005. On January 26, 2006, we received a waiver of these defaults from our
lenders under our New Facility. In connection with this waiver, which also granted us
permission to enter into the Collaboration and License Agreement with MediGene, we agreed
with our lenders to file our Annual Report on Form 10-K for the year ended December 31,
2004 by January 31, 2006, have a minimum audited consolidated EBITDA for the fiscal year
ended December 31, 2004, pro forma for the Bioglan acquisition, of at least $33.22
million, file our Annual Report on Form 10-K for the year ended December 31, 2005 by
April 30, 2006, have a minimum audited consolidated EBITDA for the fiscal year ended
December 31, 2005 of at least $40.0 million (before permitted reductions for
non-recurring costs incurred by us during 2005 in connection with the restatement of our
Third Quarter 2004 financial statements, the SEC inquiry and related lawsuits, including
legal, accounting and other professional fees, and the costs associated with our
elimination of debt during 2005 under the Old Facility and the Notes), satisfy the
leverage ratio and fixed charge coverage ratio tests beginning with the fiscal quarter
ended December 31, 2005 and pay to them waiver, amendment and arrangement fees of
$520,000 in the aggregate. In addition, we agreed with our lenders that until we file our
Quarterly Reports on Form

| | 51 | 
| | -- | 

---

10-Q for the quarters ended March
31, 2005, June 30, 2005 and September 30, 2005, and Annual Report on Form 10-K for the
year ended December 31, 2005, we will increase, from $25 million to $45 million, the
amount of unrestricted cash and cash equivalents we will at all times maintain on our
balance sheet, not incur any borrowings under the revolving credit line portion of the
New Facility and provide them with monthly cash reports. Our lenders ceased their accrual
of default interest under the New Facility concurrently with their delivery to us of the
waiver.

As
a result of our failure to file our Annual Report on Form 10-K for the year ended
December 31, 2005 by April 30, 2006, we triggered a default under the New Facility. On
May 15, 2006, we received a waiver of this default from our lenders under our New
Facility. In connection with this waiver, which also allowed us to continue outstanding
LIBOR Rate Loans under the New Facility, we agreed with our lenders to file our Annual
Report on Form 10-K for the year ended December 31, 2005 by May 31, 2006 and our
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006 by June 30,
2006. Concurrently, our lenders agreed to certain technical amendments to the New
Facility clarifying Permitted Investments which can be utilized in determining our
minimum cash balance (which, until we file our Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2006 and demonstrate compliance with the financial
covenants in the New Facility, must be at least $45 million), allowing us to deliver to
the lenders our 2006 annual budget by June 30, 2006 and allowing us to calculate, for
financial covenant purposes, consolidated EBITDA without giving effect to that portion of
our initial $5 million payment to MediGene that we classify as an expense in accordance
with GAAP. Our lenders acknowledged that provided we file our Annual Report on Form 10-K
for the year ended December 31, 2005 with the SEC by May 31, 2006, we would not be
required to pay default interest under the New Facility; otherwise, default interest
would be payable on a retroactive basis beginning on May 1, 2006.

As
of May 15, 2006, we have $76 million in borrowings under the New Facilitys term loan
outstanding and no amounts under the New Facilitys revolving line of credit outstanding.

As
a result of our failure to file timely our Annual Report on Form 10-K for the year ended
December 31, 2004, the beneficial holders of our 4% Notes had declared the principal of
the Notes and interest thereon to be due and payable. It was a condition to the closing
of the New Facility that we cause all indebtedness, liabilities and other obligations
owing under the Notes and the related Indenture to be repaid in full. Accordingly, on
November 14, 2005, we paid a total of $38,429,898 to the trustee under the Indenture as
payment in full of all amounts due and owing under the Notes and the Indenture, which
amount consisted of $37,000,000 in principal amount of the Notes, and an aggregate of
$1,429,898 for accrued but unpaid interest thereon and payment for liquidated damages
pursuant to the terms of the related Registration Rights Agreement, dated June 11, 2003,
by and among us and UBS Securities LLC and Raymond James & Associates, Inc. Upon
payment to the trustee, the Notes were paid in full and the Indenture was terminated,
except for certain indemnification obligations that survive the termination of the
Indenture.

As
stated in our Form 8-K filed with the SEC on August 12, 2004, statements of income and
cash flows for the Bioglan business for any period prior to March 22, 2002, the date on
which the Bioglan business was acquired by Quintiles, were not available or able to be
produced by Quintiles. Accordingly, we filed by amendment to the Form 8-K on October 22,
2004, audited balance sheets of the Bioglan business as of December 31, 2003 and 2002 and
audited statements of operations, entity equity and cash flows for the periods from March
22, 2002 through December 31, 2002 and January 1, 2003 through December 31, 2003 in
addition to the required June 30, 2003 and 2004 unaudited financial statements. Further,
we filed audited financial statements of the Bioglan business for the period from January
1, 2004 through the closing, which provided more current information than, but are not a
substitute for, the omitted statements of income and cash flows for the pre-March 22,
2002 periods.

Due
to the significance of the acquisition of Bioglan, among other factors, we were unable to
obtain a waiver from the SEC of the requirement to include Bioglans pre-March 22, 2002
statements of income and cash flows in our Form 8-K filed with respect to the
acquisition. However, we believe that those omitted financial statements would not be
particularly meaningful to an understanding of our current and future operations and the
Bioglan business because, among other reasons, we understand that the Bioglan business
was part of an insolvent organization prior to its acquisition by Quintiles and not
operated in the ordinary course of business during the period that would be covered by
those financial statements. We intend to

| | 52 | 
| | -- | 

---

again seek a waiver from the SEC
concerning our omission of those financial statements, which is a requirement for us to
have future registration statements for our securities declared effective by the SEC.
However, we cannot assure whether or when that waiver may be granted. Until we are able
to have registration statements for public offerings of our securities declared effective
by the SEC, we would need to pursue additional borrowings or private placements of
securities if we desire to conduct a financing, which could result in increased costs or
other less favorable terms compared to public offerings.

As
of December 31, 2005, we had the following contractual obligations and commitments:

|Year ending December 31, | Operating 
Leases | Capital 
Leases(a) | $110
million 
Senior 
Credit 
$ Facility | Other 
Debt | Minimum 
Inventory 
Purchases
|------------------------ | ----------------- | ------------------ | ---------------------------------------- | ----------- | -----------------------------
|2006                     | $1,871,452        |                    | $       15,980                           |             | $  9,000,000                 
|2007                     | 1,708,494         |                    | 6,642                                    |             | 13,000,000                   
|2008                     | 1,341,139         |                    | 5,355                                    |             | 17,000,000                   
|2009                     | 814,043           |                    | -0-                                      |             | 21,000,000                   
|2010                     | 41,983            |                    | -0-                                      |             | 18,000,000                   
|Thereafter               | -0-               |                    | -0-                                      |             | -0-                          
|                         |                   |                    |                                          |             |                              
|                         | $5,777,111        |                    | $       27,977                           |             | $78,000,000                  
|                         |                   |                    |                                          |             |                              

---

|(a) |  | Lease
amounts include interest and minimum lease payments.
|--- |  | ----------------------------------------------------------

We
believe that our cash and cash equivalents and cash generated from operations will be
adequate to fund our current working capital requirements for at least the next 12
months. However, if we make or anticipate significant acquisitions, we may need to raise
additional funds through additional borrowings or the issuance of debt or equity
securities.

Critical Accounting
Policies

In
preparing financial statements in conformity with accounting principles generally
accepted in the United States, we are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and expenses
for the relevant reporting period. Actual results could differ from those estimates. We
believe that the following critical accounting policies affect our more significant
estimates used in the preparation of financial statements. Management has discussed the
development and selection of the critical accounting estimates discussed below with our
audit committee, and our audit committee has reviewed our disclosures relating to these
estimates.

Revenue
recognition. Revenue from product sales, net of estimated provisions, is recognized when
the merchandise is shipped to an unrelated third party, as provided in Staff Accounting:
Bulletin No. 104, Revenue Recognition in Financial Statements. Accordingly, revenue is
recognized when all four of the following criteria are met:

| |  |  | persuasive
evidence that an arrangement exists;
| | - |  | -----------------------------------------------

| |  |  | delivery
of the products has occurred;
| | - |  | --------------------------------------

| |  |  | the
selling price is both fixed and determinable;
| | - |  | -------------------------------------------------

| |  |  | collectibility
is reasonably probable.
| | - |  | --------------------------------------

Our
customers consist primarily of large pharmaceutical wholesalers who sell directly into
the retail channel. Provisions for sales discounts, and estimates for chargebacks,
rebates, damaged product returns and exchanges for expired products, are established as a
reduction of product sales revenues at the time revenues are recognized, based on
historical experience adjusted to reflect known changes in the factors

| | 53 | 
| | -- | 

---

that impact these reserves. These
revenue reductions are generally reflected either as a direct reduction to accounts
receivable through an allowance or as an addition to accrued expenses if the payment is
due to a party other than the wholesale or retail customer.

We
do not provide any forms of price protection to wholesale customers other than a
contractual right to two wholesale customers that our price increases and product
purchase discounts offered during each twelve-month period will allow for inventory of
our products then held by these wholesalers to appreciate in the aggregate. We do not,
however, guarantee that our wholesale customers will sell our products at a profit.

Chargebacks
and rebatesare based on the difference between the prices at which we sell our products
to wholesalers and the sales price ultimately paid under fixed price contracts by third
party payers, who are often governmental agencies and managed care buying groups. We
record an estimate of the amount either to be charged back to us, or rebated to the end
user, at the time of sale to the wholesaler. We have recorded reserves for chargebacks
and rebates based upon various factors, including current contract prices, historical
trends and our future expectations. The amount of actual chargebacks and rebates claimed
could be either higher or lower than the amounts we accrued. Changes in our estimates
would be recorded in the income statement in the period of the change.

Product
returns. In the pharmaceutical industry, customers are normally granted the right to
return product for a refund if the product has not been used around its expiration date,
which is typically two to three years from the date of manufacture. Our return policy
typically allows product returns for products within an eighteen-month window from six
months prior to the expiration date and up to twelve months after the expiration date.
Our return policy conforms to industry standard practices. We believe that we have
sufficient data to estimate future returns at the time of sale. Management is required to
estimate the level of sales, which will ultimately be returned pursuant to our return
policy, and record a related reserve at the time of sale. These amounts are deducted from
our gross sales to determine our net sales. Our estimates take into consideration
historical returns of a given product, product specific information provided by our
customers and information obtained regarding the levels of inventory being held by our
customers, as well as overall purchasing patterns by our customers. Management
periodically reviews the reserves established for returns and adjusts them based on
actual experience, including the execution of the DSAs in 2005 (but effective as of
2004), obtaining customer inventory data for our four largest customers, a change in
these customers market dynamics, having subsequent return visibility, and having
increased generic competition. If we over or under estimate the level of sales, which
will ultimately be returned, there may be a material impact to our financial statements.

Intangible
assets. We have made acquisitions of products and businesses that include goodwill,
license agreements, product rights and other identifiable intangible assets. We assess
the impairment of identifiable intangibles, including goodwill, when events or changes in
circumstances indicate that the carrying value may not be recoverable. Some factors we
consider important which could trigger an impairment review include:

| |  |  | significant
underperformance compared to expected historical or projected future operating
             results;
| | - |  | ----------------------------------------------------------------------------------------------------------------

| |  |  | significant
changes in our use of the acquired assets or the strategy for our overall
             business;
| | - |  | ------------------------------------------------------------------------------------------------------------

| |  |  | significant
negative industry or economic trends.
| | - |  | -------------------------------------------------

When
we determine that the carrying value of intangible assets may not be recoverable based
upon the existence of one or more of these factors, we first perform an assessment of the
assets recoverability based on expected undiscounted future net cash flow, and if the
amount is less than the assets value, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management to be
commensurate with the risk inherent in our current business model.

As
of January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, which eliminated the amortization of
purchased goodwill. Adoption of this standard did not have a material effect on our
financial statements. Under SFAS No. 142, goodwill will be tested for impairment at least
annually and more frequently if an event occurs that

| | 54 | 
| | -- | 

---

indicates the goodwill may be
impaired. We performed the test at December 31, 2005, and noted that no impairment
existed.

As
of January 1, 2002, we also adopted SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets, which supersedes SFAS No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of. The
adoption of SFAS No. 144 had no effect on our financial statements.

On
August 10, 2004, we purchased certain assets of Bioglan Pharmaceuticals. As part of the
transaction, we acquired certain intellectual property, regulatory filings, and other
assets relating to SOLARAZE®, a topical treatment indicated for the treatment of
actinic keratosis; ADOXA®, an oral antibiotic indicated for the treatment of acne;
ZONALON®, a topical treatment indicated for pruritus; Tx Systems®, a line of advanced
topical treatments used during in-office procedures, and certain other dermatologic
products. The total consideration was approximately $191 million, including acquisition
costs. With the assistance of valuation experts, we allocated the purchase price to the
fair value of the various intangible assets which we acquired as part of the transaction.
In addition, we assigned useful lives to acquired intangible assets which are not deemed
to have an indefinite life. Intangible assets are amortized on a straight line basis over
their respective useful lives. The intangible assets recorded in connection with the
acquisition are being amortized over periods ranging from 10 to 20 years with a weighted
average amortization period of 19 years. In light of our experience of promoting and
selling dermatologic brands, we carefully evaluated the useful lives assigned to the
intangible assets acquired and whether or not any impairment of any such assets was
indicated. Our best estimate is that the useful lives assigned to the intangible assets
remain appropriate. Our estimate of such useful lives is subject to significant risks and
uncertainties. Among these risks and uncertainties is our ability to develop one or more
new versions of the product, obtain approval from the FDA to market and sell such newly
developed product. SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets states that an impairment loss shall be recognized only if the carrying amount of
a long-lived asset is not recoverable and exceeds its fair value. The undiscounted future
cash flows of the Bioglan acquisition was estimated by us over the remaining useful life
of the product to exceed the carrying amount of the asset and therefore the carrying
amount is estimated to be recoverable. However, the amount recorded as intangible assets
on our balance sheet for the acquired Bioglan assets may be more or less than the fair
value of such assets. Determining the fair value of the intangible asset is inherently
uncertain, and may be dependent in significant part on the success of our revised plans
to promote the Bioglan brands.

Deferred
income taxesare provided for the future tax consequences attributable to the differences
between the carrying amounts of assets and liabilities and their respective tax base.
Deferred tax assets are reduced by a valuation allowance when, in our opinion, it is more
likely than not that some portion of the deferred tax assets will not be realized. As of
December 31, 2005 and December 31, 2004, we determined that no deferred tax asset
valuation allowance was necessary. We believe that our projections of future taxable
income makes it more likely than not that these deferred tax assets will be realized. If
our projections of future taxable income changes in the future, we may be required to
reduce deferred tax assets by a valuation allowance.

Impact of Inflation

We
have experienced only moderate price increases under our agreements with third-party
manufacturers as a result of raw material and labor price increases. We have passed these
price increases along to our customers. However, there can be no assurance that possible
future inflation would not impact our operations.

Recent Accounting
Pronouncements

In
March 2004, the EITF reached a consensus on Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. This
consensus clarifies the meaning of other-than-temporary impairment and its application to
investments classified as either available-for-sale or held-to-maturity under Statement
of Financial Accounting Standard (SFAS) No. 115,Accounting for Certain Investments in
Debt and Equity Securities,and investments accounted for under the cost method or the
equity method. The application of this guidance should be used to determine when an
investment is considered impaired, whether an impairment is other than temporary, and the
measurement of an

| | 55 | 
| | -- | 

---

impairment loss. The guidance also
includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about unrealized losses
that have not been recognized as other-than-temporary impairments. The guidance for
evaluating whether an investment is other-than-temporarily impaired is effective for
evaluations made in reporting periods beginning after June 15, 2004. In September 2004,
the FASB issued FSP
   03-1-1, Effective Date of Paragraphs 10-20 of EITF 03-1, The
Meaning of Other than Temporary Impairment,which delayed certain provisions of EITF
03-1 until the FASB issues further implementation guidance. The application of this
consensus did not have a material impact on our results of operations or financial
position.

In
October 2004, the Emerging Issues Task Force (the EITF) of the FASB reached a consensus
on EITF 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings Per
Share(EITF 04-8), which requires all shares that are contingently issuable under our
outstanding convertible notes to be considered outstanding for its diluted earnings per
share computations, if dilutive, using the if converted method of accounting from the
date of issuance. These shares were only included in the diluted earnings per share
computation if our common stock price has reached certain conversion trigger prices. EITF
04-8 also requires us to retroactively restate its prior periods diluted earnings per
share. EITF 04-8 is effective for periods ending after December 15, 2004. Upon adoption,
EITF 04-8 had no impact on our diluted earnings per share.

In
November 2004, the FASB issued Statement 151, Inventory Costs.The standard clarifies
that abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials should be recognized as current-period charges and requires the allocation of
fixed production overheads to inventory based on the normal capacity of the production
facilities. The standard is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The adoption of SFAS no. 151 is not expected to have a
material impact on our financial position or results of operations.

In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement 153,
Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.The standard is
based on the principle that exchanges of nonmonetary assets should be measured based on
the fair value of the assets exchanged and eliminates the exception under ABP Opinion No.
29 for an exchange of similar productive assets and replaces it with an exception for
exchanges of nonmonetary assets that do not have commercial substance. The standard is
effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15,
2005. The adoption of SFAS No. 153 is not expected to have a material impact on our
financial position or results of operations.

In
December 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment (SFAS
123R). SFAS 123R replaced SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
123), and superseded Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). In March 2005, the U.S. Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 107 (SAB 107), which expresses views of the
SEC staff regarding the interaction between SFAS 123R and certain SEC rules and
regulations, and provides the staffs views regarding the valuation of share-based
payment arrangements for public companies. SFAS 123R will require compensation cost
related to share-based payment transactions to be recognized in the financial statements.
SFAS 123R required public companies to apply SFAS 123R in the first interim or annual
reporting period beginning after June 15, 2005. In April 2005, the SEC approved a new
rule that delays the effective date, requiring public companies to apply SFAS 123R in
their next fiscal year, instead of the next interim reporting period, beginning after
June 15, 2005. As permitted by SFAS 123, we elected to follow the guidance of APB 25,
which allowed companies to use the intrinsic value method of accounting to value their
share-based payment transactions with employees. SFAS 123R allows  measurement of the
cost of share-based payment transactions to employees at the fair value of the award on
the grant date and recognition of expense over the requisite service or vesting period.
SFAS 123R allows implementation using a modified version of prospective application,
under which compensation expense of the unvested portion of previously granted awards and
all new awards will be recognized on or after the date of adoption. SFAS 123R also allows
companies to adopt SFAS 123R by restating previously issued statements, basing the
amounts on the expense previously calculated and reported in their pro forma footnote
disclosures required under SFAS 123. We adopted SFAS 123R in the first interim period of
fiscal 2006 and are currently

| | 56 | 
| | -- | 

---

evaluating the impact that the
adoption of SFAS 123R has on our results of operations and financial position.

In
May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154,
Accounting Changes and Error Corrections (SFAS 154). SFAS 154 requires retrospective
application to prior-period financial statements of changes in accounting principles,
unless it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also redefines restatement as the revising of
previously issued financial statements to reflect the correction of an error. This
statement is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The adoption of SFAS 154 is not expected to have
a material impact on our financial position or results of operations.

ITEM 7A: QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our
operating results and cash flows are subject to fluctuations from changes in foreign
currency exchange rates and interest rates.

Our
purchases of ENTSOL® SPRAY are made in Euros. We expect to make purchases several times
per year. During 2005, our cost of sales relating to ENTSOL® SPRAY was $210,332.

We
purchase finished goods and samples from a Canadian company, Groupe Parima Inc. Our
purchases from Groupe Parima are made in United States dollars, but are subject to  currency
fluctuations if the quarterly average Canadian dollar per United States dollar is outside
of a previously negotiated range. The range has a cap of $1.51 Canadian dollars per
United States dollar and a floor of $1.29 Canadian dollars per United States dollar. If
the average Canadian dollar per United States dollar at the end of each calendar quarter
is less than $1.29, Groupe Parima will invoice us the difference multiplied by the sum of
all invoices initiated during the calendar quarter. If the average Canadian dollar per
United States dollar at the end of each calendar quarter is more than $1.51, we will
invoice Groupe Parima the difference multiplied by the sum of all invoices initiated
during the calendar quarter. During 2005, our expenses, in United States dollars,
relating to Groupe Parima finished goods and samples were $5,454,378. During 2005, we
paid an additional $188,722, due to the average Canadian dollar per United States dollar
decreasing below $1.29 for the applicable quarter. If the average Canadian dollar per
United States dollar, based upon 2005 expenses, were $0.01 less than $1.29, we would have
incurred an additional $54,549 in additional expenses.

While
the effect of foreign currency translations has not been material to our results of
operations to date, currency translations on import purchases could be affected adversely
in the future by the relationship of the United States dollar to foreign currencies. In
addition, foreign currency fluctuations can have an adverse effect upon exports, even
though we recognize sales to international wholesalers in United States dollars. Foreign
currency fluctuations can directly affect the marketability of our products in
international markets.

We
are exposed to fluctuations in interest rates on borrowings under our $110 million New
Facility. As of May 15, 2006, $76 million was outstanding under the New Facility. The
interest rates payable on these borrowings are based on LIBOR. If LIBOR rates were to
increase by 1%, our annual interest expense on variable rate debt would increase by
approximately $760,000.

As
of December 31, 2005, we had the following outstanding debt with fixed rate interest:

|Period      | Debt (a) | Average Fixed Rate Interest
|----------- | -------- | ---------------------------
|Fiscal 2006 | $10,067  |                            
|Fiscal 2007 |         |                            
|Fiscal 2008 |         |                            
|Fiscal 2009 |         |                            

| | 57 | 
| | -- | 

---

|Fiscal 2010 |  |  | N/A | 
|----------- | - |  | --- | 
|Fiscal 2011 |  |  | N/A | 
|Thereafter  |  |  | N/A | 

---

|(a) |  | Debt
amounts include all interest.
|--- |  | ----------------------------------

Our
interest income is also exposed to interest rate fluctuations on our short-term
investments that are comprised of United States government treasury notes, which we hold
on an available-for-sale basis.

ITEM 8: FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

Our
financial statements and related financial statement schedule at December 31, 2005 and
2004, and for each of the three years ended December 31, 2005, 2004 and 2003, and the
Independent Auditors Report thereon, are contained on pages F-1 through F-41 of this
report on Annual Report on Form 10-K.

ITEM 9: CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND
PROCEDURES

We
maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports filed or submitted under the Securities Exchange
Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures.

An
evaluation was carried out under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures, as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2005. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a
result of the material weaknesses set forth below, our disclosure controls and procedures
were ineffective as of December 31, 2005. A material weakness, as defined under standards
established by the Public Company Accounting Oversight Boards Auditing Standard No. 2,
is a control deficiency, or combination of control deficiencies, that results in more
than a remote likelihood that a material misstatement of our annual or interim financial
statement would not be prevented or detected.

a)       Managements
Annual Report on Internal Control Over Financial Reporting

| | Our
management is responsible for establishing and maintaining adequate          internal
control over financial reporting as defined in Rule 13a-15(f)          under the Exchange
Act. Under Section 404 of the Sarbanes-Oxley Act of          2002, our management is
required to assess the effectiveness of our          internal control over financial
reporting as of the end of each fiscal          year and report, based on that
assessment, whether our internal control          over financial reporting is effective.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
internal control over financial reporting is a process designed to          provide
reasonable assurance regarding the reliability of financial          reporting and the
preparation of our financial statements for external          reporting purposes in
accordance with U.S. generally accepted          accounting principles. Under the
supervision and with the participation          of our management, including our Chief
Executive Officer and Chief          Financial Officer, we conducted a review,
evaluation, and assessment of          the effectiveness of our internal control over
financial reporting as          of December 31, 2005, based upon the criteria set forth
in Internal          Control-Integrated Framework issued by the Committee of Sponsoring
         Organizations of the Treadway Commission.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 58 | 
| | -- | 

---

Based on these review activities,
our management concluded that our internal control over financial reporting was
ineffective because of the following material weaknesses:

| |  |  | Information
Technology Controls.Managements evaluation of the effectiveness of our internal
                  control over financial reporting as of December 31, 2004 revealed a
material weakness relating                   to our information technology controls.  As
such evaluation was completed in 2006, managements                   evaluation of the
effectiveness of our internal control over financial reporting as of December
                  31, 2005 also found a material weakness in this area.  The material
weakness as of December 31,                   2005 related to inadequate controls over
information technology used in our core business and                   financial
reporting.  These areas included logical access security controls to financial
                  applications and change management procedures.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Financial
Closing Process.During 2006, management also                   concluded that we did not
adequately implement certain                   controls relating to our review and
verification of internally                   prepared reports and analyses utilized in
the financial                   closing process. As such, management has identified a
material                   weakness in our internal control over financial reporting
                  relating to our financial closing process.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
Board of Directors, acting through its Audit Committee, is responsible for the oversight
of our accounting policies, financial reporting and internal control. The Audit Committee
of the Board of Directors is comprised entirely of outside directors who are independent
of management. The independent registered public accounting firm and the internal
auditors have full and unlimited access to the Audit Committee, with or without
management, to discuss the adequacy of internal control over financial reporting, and any
other matters which they believe should be brought to the attention of the Audit
Committee.

Our
management has issued a report of its assessment of internal control over financial
reporting as of December 31, 2005, which is included herein. This report has been audited
by Grant Thornton LLP, our independent registered public accounting firm, as stated in
its report which appears below in this Item 9A.

b)       Remediation
of Material Weaknesses

| | As
described in Item 7. Managements Discussion and Analysis          of Financial
Condition and Results of Operations, we have recently          restated our previously
issued financial statements for the quarter and          nine months ended September 30,
2004, primarily to reflect the          correction of a single transaction not meeting
the criteria for revenue          recognition. We carried out an evaluation under the
supervision and          with the participation of our Chief Executive Officer and our
Chief          Financial Officer, of the error that resulted in the restatement and
         concluded that the restatement resulted from a material weakness in our
         internal control over financial reporting as of December 31, 2004. We
         have concluded that such weakness was remediated as of December 31,
         2005, as described below in this report in Changes in internal control
         over financial reporting.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
respect to the remediation of the material weakness leading to the          restatement
of our September 30, 2004 financial statements, our          remedial steps included
implementing controls relating to the approval          and communications of all terms
and conditions of all sales          transactions, including subsequently executed
modified sales          agreements, so that the Chief Financial Officer and his
accounting          staff are able to appropriately consider the accounting impact of
those          terms and conditions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
continues to remediate our material weakness in information          technology controls,
including by implementing controls, policies and          procedures within our
information technology department over the          monitoring and management of computer
systems access rights, as well as          documentation and approvals of programming
change requests and approval          of the programming changes.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
has also begun to address the material weakness relating to          our financial
closing process by creating and filling a new Director of          Finance position. Our
Director of Finance is responsible for overseeing          the financial closing process.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

c)       Changes in
Internal Control Over Financial Reporting

| | Our
management has not identified any changes in our internal controls          over
financial reporting during our Fourth Quarter 2005 that have          materially
affected, or are reasonably likely to materially affect, our          internal controls
over financial reporting, except as discussed above.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Because
of the inherent limitations in all control systems, no          evaluation of controls
can provide absolute assurance that all control          issues within our company have
been or will be detected. Even effective          internal control over financial
reporting can only provide reasonable          assurance with respect to financial
statement preparation. Furthermore,          because of changes in conditions, the
effectiveness of internal control          over financial reporting may vary over time.
Our management, including          our President and Chief Executive Officer and Chief
Financial Officer,          does not expect that our controls and procedures will prevent
all          errors.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Notwithstanding
the above, nothing has come to the attention of          management which would cause
management to believe that the material          weaknesses noted above have resulted in
material misstatements or          errors in our financial statements as of December 31,
2005, or for any          prior period other than the completed restatement noted above.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 59 | 
| | -- | 

---

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and ShareholdersBradley
Pharmaceuticals, Inc.

We
have audited managements assessment, included in the accompanying Managements Annual Report On
Internal Control Over Financial Reporting, that Bradley Pharmaceuticals, Inc. and
Subsidiaries did not maintain effective internal control over financial reporting as of
December 31, 2005, because of the effect of the material weaknesses identified in
managements assessment, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Bradley Pharmaceuticals, Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, evaluating managements
assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.

| | 60 | 
| | -- | 

---

Because
of the inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

A
material weakness is a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. The following material
weaknesses have been identified and included in managements assessment:

| |  |  | The
Company did not adequately implement certain controls over                  information
technology used in its core business and financial                  reporting. These
areas included logical access security                  controls to financial
applications and change management                  procedures. This material weakness
affects the Companys                  ability to prevent improper access and changes to
its                  accounting records.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
Company did not adequately implement certain controls                  relating to its
review and verification of internally prepared                   reports and analyses
utilized in the financial closing                   process. This material weakness
affected  the Companys ability                   to detect misstatements in its internally
prepared reports and                    analyses and its   accounting records.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These
material weaknesses were considered in determining the nature, timing, and extent of
audit tests applied in our audit of the 2005 financial statements, and this report does
not affect our report dated May 19, 2006 on those financial statements.

In
our opinion, managements assessment that Bradley Pharmaceuticals, Inc. and Subsidiaries
did not maintain effective internal control over financial reporting as of December 31,
2005, is fairly stated, in all material respects, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, because of the
effect of the material weaknesses described above on the achievement of the objectives of
the control criteria, Bradley Pharmaceuticals, Inc. and Subsidiaries has not maintained
effective internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We
have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Bradley Pharmaceuticals Inc., and Subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders equity and cash flows for each of the three years in the period
ended December 31, 2005 and our report
dated May 19, 2006 expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP

New York, New York  May 19, 2006

ITEM 9B. OTHER
INFORMATION

As
a result of our failure to file our Annual Report on Form 10-K for the year ended
December 31, 2005 by April 30, 2006, we triggered a default under the New Facility. On
May 15, 2006, we received a waiver of this default from our lenders under our New
Facility. In connection with this waiver, which also allowed us to continue outstanding
LIBOR Rate Loans under the New Facility, we agreed with our lenders to file our Annual
Report on Form 10-K for the year ended December 31, 2005 by May 31, 2006 and our

| | 61 | 
| | -- | 

---

Quarterly Report on Form 10-Q for
the fiscal quarter ended March 31, 2006 by June 30, 2006. Concurrently, our lenders
agreed to certain technical amendments to the New Facility clarifying Permitted
Investments which can be utilized in determining our minimum cash balance (which, until
we file our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006 and demonstrate compliance with the financial covenants in the New Facility,
must be at least $45 million), allowing us to deliver to the lenders our 2006 annual
budget by June 30, 2006 and allowing us to calculate, for financial covenant purposes,
consolidated EBITDA without giving effect to that portion of our initial $5 million
payment to MediGene that we classify as an expense in accordance with GAAP. Our lenders
acknowledged that provided we file our Annual Report on Form 10-K for the year ended
December 31, 2005 with the SEC by May 31, 2006, we would not be required to pay default
interest under the New Facility; otherwise, default interest would be payable on a
retroactive basis beginning on May 1, 2006.

PART III

ITEM 10. DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and
Executive Officers

|Name                                 |  | Age |  | Position(s)                                                 
|------------------------------------ |  | --- |  | ------------------------------------------------------------
|Daniel Glassman                      |  | 63  |  | Chairman of the Board, President and Chief Executive Officer
|C. Ralph Daniel, III, M.D            |  | 54  |  | Director                                                    
|Director Andre Fedida, M.D.(1)(2)(3) |  | 51  |  | Director                                                    
|Michael Fedida, R.Ph. (1)(3)         |  | 59  |  | Director and Chairman of the Compensation Committee         
|Iris Glassman                        |  | 63  |  | Treasurer and Director                                      
|Leonard S. Jacob, M.D.,              |  | 57  |  | Director and Chairman of the Nominating and Corporate       
|Ph.D.(3)                             |  |     |  | Governance Committee                                        
|Steven Kriegsman (2)                 |  | 64  |  | Director and Chairman of the Audit Committee                
|William J. Murphy (2)                |  | 62  |  | Director                                                    
|Alan Wolin, Ph.D. (1)(2)(3)          |  | 73  |  | Secretary and Director                                      
|Bradley Glassman                     |  | 32  |  | Sr. Vice President, Sales and Marketing                     
|Alan Goldstein                       |  | 46  |  | Vice President, Corporate Development                       
|Ralph Landau, Ph.D                   |  | 45  |  | Vice President, Chief Scientific Officer                    
|R. Brent Lenczycki                   |  | 34  |  | Vice President, Chief Financial Officer                     
|William Renzo                        |  | 41  |  | Vice President, Trade/Managed Care Relations                

---

|(1) |  | Member
of Compensation Committee
|--- |  | --------------------------------

|(2) |  | Member
of Audit Committee
|--- |  | -------------------------

|(3) |  | Member
of Nominating and Corporate                      Governance Committee
|--- |  | ----------------------------------------------------------------------------

Our
executive officers and members of our Board of Directors are as follows:

Daniel
Glassman is our founder and has served as our Chairman of the Board and Chief Executive
Officer since the Companys inception in January 1985. Mr. Glassman, a registered
pharmacist, has also served as our President since February 1991. Mr. Glassman has had an
over 35-year career in the pharmaceutical industry, including executive managerial
positions with companies and major specialty advertising agencies serving the largest
pharmaceutical companies. In 1995, Mr. Glassman was awarded

| | 62 | 
| | -- | 

---

the Ernst & Young LLP
Entrepreneur of the Year in New Jersey, and in 2005, Mr. Glassman was awarded the degree
of Doctor of Humane Letters by the New York College of Podiatric Medicine in recognition
of his contributions to medical education.

C.
Ralph Daniel, III, M.D.has served as one of our directors since June 2003. Since 1981,
Dr. Daniel has been in private practice and a member of the clinical staff at the
University of Mississippi Medical Center, Jackson, MS, where he has also held the
position of Clinical Professor of Medicine (Dermatology) at that institution from 1991.
As of 2005, Dr. Daniel has also served as Clinical Associate Professor of Dermatology at
the University of Alabama, Birmingham. Dr. Daniel has served in numerous leadership
positions in the American Academy of Dermatology, including as a member of the editorial
board of the Journal of the AAD and the Bioterrorism Task Force. Dr. Daniel is author or
co-author of over 100 publications, among which are dermatology texts, book chapters and
articles. Dr. Daniel holds an M.D. from the University of Mississippi.

Andre
Fedida, M.D.has served as one of our directors since May 2002. Dr. Fedida is a doctor
of gastroenterology currently practicing in Newark, New Jersey. He is also currently on
faculty as Assistant Professor of Medicine at Seton Hall University and Saint Michaels
Medical Center. Dr. Fedida performed his internship, residency and fellowship at Saint
Michaels Medical Center in Newark, New Jersey. Dr. Fedida is a member of the American
Medical Association, American College of Physicians, American College of Gastroenterology
and the American Society of Gastrointestinal Endoscopy. Dr. Fedida received his B.S.
from City University of New York at Queens College and received his M.D. from Saint
George University. Dr. Fedida is Mr. Michael Fedidas brother.

Michael
Fedida, R.Ph.has served as one of our directors since April 2004. Mr. Fedida is a
registered pharmacist and has served for the past fifteen years as an officer and
director of several retail pharmacies wholly or partially owned by him, including J&J
Pharmacy, J&J St. Michaels Pharmacy Inc., Classic Pharmacy, Perfect Pharmacy and
Phoster Pharmacy. Mr. Fedida has served on the Board of Directors of Watson
Pharmaceuticals, Inc., a California based specialty pharmaceutical company, since 1995.
From 1988 to 1995, Mr. Fedida served on the Board of Directors of Circa Pharmaceuticals,
Inc. Watson acquired Circa in 1995. Mr. Fedida is Dr. Andre Fedidas brother.

Iris
Glassmanhas served as our Treasurer since the Companys inception in 1985. Mrs.
Glassman, the spouse of Mr. Daniel Glassman, has also served as one of our directors
since January 1985. Mrs. Glassman has over 25 years of diversified administrative and
financial management experience. For more than the past 25 years, Mrs. Glassman has
served as a senior executive in several privately held companies engaged in the medical
publication and market research industries. Mrs. Glassman received her B.S. from the
City College of New York.

Leonard
S. Jacob M.D., Ph.D.has served as one of our directors, and as Chairman of the
Nominating and Corporate Governance Committee, since February 2006. Dr. Jacob founded
InKine Pharmaceutical Company, Inc. in 1997 and served as Chairman and CEO from its
founding until the company was acquired by Salix Pharmaceuticals in September 2005. In
1989, Dr. Jacob co-founded Magainin Pharmaceuticals and served as the companys Chief
Operating Officer until 1996. From 1980 to 1989, Dr. Jacob served in a variety of
executive roles, including Worldwide Vice President of SmithKline & French Labs (now
Glaxo- SmithKline), and as a member of their Corporate Management Committee. Dr. Jacob
currently serves as Chairman of Life Science Advisors, a consulting group to the
healthcare industry, and on the Board of Directors for the Colon Cancer Alliance and the
Board of Overseers for Temple University School of Medicine. Dr. Jacob also serves on
the Boards of MacroMed, Inc. and Glyconix Corp., both private drug delivery companies.
In addition, Dr. Jacob is a founding Director of the Jacob Internet Fund, a publicly
traded Mutual Fund.

Steven
Kriegsmanhas served as one of our directors since June 2003, and as Chairman of the
Audit Committee since November 2004. Mr. Kriegsman has been a director, President and
Chief Executive Officer of CytRx Corporation (Nasdaq: CYTR) since July 2002. Mr.
Kriegsman previously served as a director and the Chairman of Global Genomics since June
2000. Mr. Kriegsman is Chairman and founder of Kriegsman Capital Group LLC, a financial
advisory firm specializing in the development of alternative sources of equity capital
for emerging growth companies. Mr. Kriegsman has advised such companies as Closure
Medical Corporation, Novoste Corporation, Miravant Medical Technologies, Maxim
Pharmaceuticals and Supergen Inc. Mr. Kriegsman has a B.S. degree from New York
University in

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Accounting and completed the
Executive Program in Mergers and Acquisitions at New York University, The Management
Institute.

William
J. Murphyhas served as one of our directors since February 2006. From 1997 to 2005, Mr.
Murphy was with Computer Horizons Corp., serving first as Executive Vice President and
Chief Financial Officer. Beginning in March 2003 until October 2005, Mr. Murphy served as
President and CEO. From 1980 to 1997, Mr. Murphy was with the accounting firm of Grant
Thornton LLP, which he joined as Senior Audit Manager and advanced to the role of partner
in charge of its New Jersey practice in 1990. Previously, Mr. Murphy served as Senior
Audit Manager for the accounting firm of Price Waterhouse. Mr. Murphy is a member of the
New Jersey State Society of CPAs, the American Institute of Certified Public Accountants
and the Financial Executives Institutes. Mr. Murphy also serves as a Director of the
Commerce and Industry Association of New Jersey, a not-for-profit pro-business
organization. Mr. Murphy received his B.S. degree from Seton Hall University, majoring in
Accounting.

Alan
Wolin, Ph.D.has served as one of our directors since May 1997 and Secretary since
February 2004. Since 1988, Dr. Wolin has served as an independent consultant to numerous
companies in the food, drug and cosmetic industries. Prior to 1987, Dr. Wolin served in
various capacities for Mars, Inc., the worlds largest candy company, including as
Director of Consumer Quality Assurance and Quality Coordination. In this position, Dr.
Wolin was responsible for overseeing product quality and addressing public health issues
relating to Mars, Inc.s products. Dr. Wolin received his B.S., M.S. and Ph.D. from
Cornell University.

Bradley
Glassmanhas served as our Senior Vice President, Sales and Marketing since January 2004.
From July 2001 to December 2003, Mr. Glassman served as our Vice President, Sales and
Marketing. From April 2000 through June 2001, Mr. Glassman served as our Vice President,
Marketing. In addition, from January 1998 to March 2000, Mr. Glassman served as our
Director of Corporate Development, and from May 1996 to December 1997, he served as a
Corporate Development Analyst. Mr. Glassman received his B.A. and M.B.A. from Tulane
University. Mr. Glassman is the son of Daniel and Iris Glassman.

Alan
Goldsteinhas served as our Vice President, Corporate Development since March 2004. Mr.
Goldstein joined us in June 2002 as Director, Corporate Development. From November 2000
to May 2002, Mr. Goldstein served as Counsel in the corporate department of the
international law firm of Kaye Scholer LLP. From March 1998 to October 2000, Mr.
Goldstein was a partner in the New York law firm of Winick & Rich, P.C. specializing
in corporate finance matters. From January 1994 to February 1998, Mr. Goldstein was a
partner in the New York law firm of Reid & Priest LLP, having worked previously as an
associate at that firm and one of its predecessors, Spengler Carlson Gubar Brodsky & Frischling,
since 1987. Mr. Goldstein received his B.A. from the University of Michigan and his J.D.
from the University of Pittsburgh.

Ralph
Landau, Ph.D.has served as our Vice President and Chief Scientific Officer since January
2003. Dr. Landau joined us in October 2002 as Vice President, Manufacturing. From 2001 to
2002, Dr. Landau served as Director, Program Management/Business Development for Elan
Pharmaceutical Technologies. From 1997 to 2001, Dr. Landau held the positions of
Associate Director, with responsibilities in Drug Supply Management, Project Management
and Process Technologies for Novartis Pharmaceuticals. Additionally, Dr. Landau has
published articles in 28 peer-reviewed publications. Dr. Landau received his B.S. from
the New Jersey Institute of Technology and his Ph.D. from the University of Delaware, and
serves on the advisory committees for Rutgers University and the New Jersey Institute of
Technology.

R.
Brent Lenczycki, CPAhas served as our Vice President and Chief Financial Officer since
January 2001. Since joining Bradley Pharmaceuticals in 1998, Mr. Lenczycki has held the
positions of Manager of Finance and Purchasing, Director of Finance and Vice President,
Finance. From 1995 to 1998, Mr. Lenczycki held positions in public accounting at Arthur
Andersen LLP, and prior to 1995, as an internal auditor for Harrahs Hotel and Casino.
Mr. Lenczycki received his B.S. from St. Josephs University and his M.B.A. from Tulane
University.

William
Renzohas served as our Vice President of Trade/Managed Care Relations since November
2005. From 2003 to 2005, Mr. Renzo served as the General Manager of JOM Pharmaceutical
Services,

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Puerto Rico, a subsidiary of Johnson
& Johnson, where he designed and executed the reorganization of the company and
managed Sales, Marketing, Human Resources, Financial and Administrative operations of the
company. Mr. Renzo joined the sales department of Pfizer, Inc. in 1987 and advanced to
the role of Area Manager, Mid-Atlantic Region in 1999. He was then appointed Pfizers
General Manager, Puerto Rico and the Carribean in 2000, where he managed the companys
operations in Puerto Rico and 24 countries. Mr. Renzo holds a B.S from Seton Hall
University and an MBA Magna Cum Laude from Fairleigh Dickinson University.

Effective
March 16, 2005, Michael Bernstein resigned as a member of our Board of Directors.

Committees of the Board

Audit
Committee.The Audit Committee is comprised of directors that are independent of us and
independent of any relationship that, in the opinion of the Board of Directors, would
interfere with the exercise of their independent judgment as members of the Audit
Committee. Each member of this committee is independent within the meaning of SEC
regulations, the listing standards of the New York Stock Exchange and our Corporate
Governance Guidelines. The Audit Committees responsibilities include overseeing the
adequacy and effectiveness of systems and controls in place to reasonably assure the fair
presentation of our financial statements; appointing, dismissing, overseeing the
qualifications and performance of and determining the compensation paid to the external
auditors; reviewing and approving the scope of audits and related fees; interfacing
directly with the external auditors and otherwise; monitoring compliance with legal and
regulatory requirements; and reviewing and setting internal policies and procedures
regarding audits, accounting and other financial controls. The current charter of the
Audit Committee, provides a detailed description of its responsibilities. During 2005,
the Audit Committee held 18 meetings. The current members of the Audit Committee are Mr.
Kreigsman (Chair), Dr. Fedida, Dr. Wolin and Mr. Murphy. Mr. Kreigsman and Mr. Murphy are
each qualified as an audit committee financial expert within the meaning of SEC
regulations. The Audit Committee Charter may be found on our web site at
www.bradpharm.com, and we will provide without charge to each holder of our common stock
and Class B common stock, on the written request of any such person, a copy of the Audit
Committee Charter. Any such request should be in writing to Bradley Pharmaceuticals,
Inc., 383 Route 46 West, Fairfield, New Jersey 07004-2402, Attention: Secretary.

Compensation
Committee.The Compensation Committees responsibilities include approving and evaluating
the compensation of directors and officers; establishing policies to retain senior
executives, with the objective of aligning the compensation of senior management with our
business and the interests of our stockholders; and ensuring that our compensation
policies meet or exceed all legal and regulatory requirements and any other requirements
imposed on us by the Board. During 2005, the Compensation Committee held four meetings.
The current charter of the Compensation Committee provides a detailed description of its
responsibilities. The current members of the Compensation Committee are Mr. Fedida
(Chair), Dr. Fedida and Dr. Wolin. All of the current members of the Compensation
Committee are independent within the meaning of the listing standards of the New York
Stock Exchange, SEC regulations and our Corporate Governance Guidelines. The Compensation
Committee Charter may be found on our web site at www.bradpharm.com, and we will provide
without charge to each holder of our common stock and Class B common stock, on the
written request of any such person, a copy of the Compensation Committee Charter. Any
such request should be in writing to Bradley Pharmaceuticals, Inc., 383 Route 46 West,
Fairfield, New Jersey 07004-2402, Attention: Secretary.

Nominating
and Corporate Governance Committee.The Nominating and Corporate Governance Committee,
formed in April 2004, is responsible for establishing criteria for membership on the
Board of Directors, identifying individuals qualified to become Board members, reviewing
and considering candidates to the Board of Directors selected by stockholders, conducting
appropriate and necessary inquiries into the backgrounds and qualifications of possible
candidates to the Board of Directors, ensuring that the Audit, Compensation and
Nominating and Corporate Governance Committees have the benefit of qualified and
experienced independent directors, and developing and recommending to the Board of
Directors a set of effective corporate governance policies and procedures applicable to
the us. The Nominating and Corporate Governance Committee will consider director
candidates recommended by stockholders. All director candidates, including those
recommended by stockholders, are evaluated on the same basis. The Nominating and
Corporate Governance Committee held four meetings during 2005. The

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current charter of the Nominating
and Governance Committee provides a detailed description of its responsibilities. The
current members of the Nominating and Corporate Governance Committee are Dr. Jacob
(Chairman), Dr. Fedida and Dr. Wolin. All of the members of the Nominating and Corporate
Governance Committee are independent within the meaning of the listing standards of the
New York Stock Exchange, SEC regulations and our Corporate Governance Guidelines. The
Nominating and Corporate Governance Committee Charter may be found on our web site at
www.bradpharm.com, and we will provide without charge to each holder of our common stock
and Class B common stock, on the written request of any such person, a copy of the
Nominating and Corporate Governance Committee Charter. Any such request should be in
writing to Bradley Pharmaceuticals, Inc., 383 Route 46 West, Fairfield, New Jersey
07004-2402, Attention: Secretary.

SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based
solely upon a review of Forms 3, 4, and 5 and amendments thereto furnished to us for 2005
pursuant to Rule 16a-3(e) of the Securities Exchange Act of 1934, as amended, and written
representations from current reporting persons that all required reports had been filed,
we believe that all current reporting persons filed the required reports on a timely
basis, except for (1) Daniel Glassmans grant from us of 200,000 options on November 22,
2005 was reported on November 28, 2005; (2) Bradley Glassmans grant from us of 100,000
options on November 22, 2005 was reported on November 28, 2005; (3) Iris Glassmans
exercise of 18,000 options on September 10, 2005 was reported on September 14, 2005; (4)
Alan Goldsteins grant from us of 30,000 options on November 22, 2005 was reported on
November 28, 2005; (5) Ralph Landaus grant from us of 30,000 options on November 22,
2005 was reported on November 28, 2005; and (6) R. Brent Lenczyckis grant from us of
80,000 options on November 22, 2005 was reported on November 28, 2005.

CORPORATE GOVERNANCE
INFORMATION

Executive Sessions

Our
non-management directors meet periodically in executive sessions to discuss such topics
as they determine. The non-management directors will designate from time to time one
non-management director to serve as the Presiding Director to chair these executive
sessions of the Board of Directors. In addition, the Presiding Director will advise the
Chairman of the Board of Directors and, as appropriate, committee chairs, with respect to
agendas and information needs relating to Board and committee meetings; provide advice
with respect to the selection of committee chairs; and perform such other duties as the
Board of Directors may from time to time delegate to assist the Board of Directors in the
fulfillment of its responsibilities.

Communications with
Directors

Our
Nominating and Corporate Governance Committee has created a process by which stockholders
may communicate directly with non-management directors. Any stockholder wishing to
contact non-management directors may do so in writing by sending a letter addressed to
the name(s) of the director(s), c/o Secretary, Bradley Pharmaceuticals, Inc., 383 Route
46 West, Fairfield, New Jersey 07004. Communications will be distributed, as appropriate,
to the named director(s) and possibly other directors or the entire Board of Directors,
depending on the facts and circumstances outlined in the communication.

Independent Directors

Our Board of Directors has adopted
the following director independence standards: a director who is an employee, or whose
immediate family member is an executive officer, of the Company may not be deemed
independent until three years after the termination of such employment relationship.
Employment as an interim Chairman of the Board or Chief Executive Officer will not
disqualify a director from being considered independent following that employment; (ii) a
director who receives, or whose immediate family member receives, more than $100,000 per
year in direct compensation from the Company, other than director and committee fees and
pension or other forms of deferred compensation for prior service (provided such
compensation is not contingent in any way on continued service), may not be deemed
independent until three years after he or she ceases to receive more than $100,000 in
compensation; compensation received by a director for former service as an interim
Chairman of the Board or Chief Executive Officer and compensation received by an
immediate family member for service as a non-

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executive employee of the Company
will not be considered in determining independence under this test; (iii) a director who
is affiliated with or employed by, or whose immediate family member is affiliated with or
employed in a professional capacity by, a present or former internal or external auditor
of the Company may not be deemed independent until three years after the end of the
affiliation or the employment or auditing relationship; (iv) a director who is employed,
or whose immediate family member is employed, as an executive officer of another company
where any of the Companys current executive officers serve on that companys
compensation committee may not be deemed independent until three years after the end of
such service or the employment relationship; and (v) a director who is an executive
officer, general partner or employee, or whose immediate family member is an executive
officer or general partner, of an entity that makes payments to, or receives payments
from, the Company for property or services in an amount which, in any single fiscal year,
is the greater of $1 million or 2% of such other entitys consolidated gross revenues,
may not be deemed independent until three years after falling below that threshold. For
purposes of these independence standards, the following terms have the following
meanings: (y) Affiliate means any consolidated subsidiary of the Company and any other
company or entity that controls, is controlled by or is under common control with the
Company, as evidenced by the power to elect a majority of the board of directors or
comparable governing body of such entity; and (z) Immediate Family means spouse,
parents, children, siblings, mother- and fathers-in-law, sons- and daughters-in-law,
brothers- and sisters-in-law and anyone (other than domestic help) sharing a persons
home, but excluding any person who is no longer an immediate family member as a result of
legal separation or divorce, or death or incapacitation.

These
independence standards meet the listing standards currently adopted by the New York Stock
Exchange with respect to the determination of director independence. In accordance with
these standards, a director must be determined to have no material relationship with us
other than as a director. The standards specify the criteria by which the independence of
our directors will be determined, including strict guidelines for directors and their
immediate families with respect to past employment or affiliation with us or our
independent auditor. The Board of Directors has determined that every director, with the
exception of Mr. Glassman and Mrs. Glassman, is currently independent within the meaning
of SEC regulations, the listing standards of the New York Stock Exchange and our
independence standards.

Mr.
Glassman is considered a non-independent director because of his position as a senior
executive of Bradley. Mrs. Glassman is considered a non-independent director because her
spouse, Mr. Glassman, is an executive officer of Bradley. See Committees of the
Board-Audit Committee for additional information regarding director independence.

Codes of Ethics and
Corporate Governance Guidelines

Our
Board of Directors has adopted a Code of Business Conduct and Ethics that applies to all
of our directors, officers and employees in addition to a Supplemental Code of Ethics for
the Chief Executive Officer and Senior Financial Officers. Our Board of Directors has
also adopted Corporate Governance Guidelines which address numerous director issues. The
Code of Business Conduct and Ethics, Supplemental Code and Corporate Governance
Guidelines may be found on our web site at www.bradpharm.com, and we will provide without
charge to each holder of our common stock and Class B common stock, on the written
request of any such person, a copy of the Code of Business Conduct and Ethics,
Supplemental Code and Corporate Governance Guidelines. Any such request should be made in
writing to Bradley Pharmaceuticals, Inc., 383 Route 46 West, Fairfield, New Jersey
07004-2402, Attention: Secretary.

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ITEM 11. EXECUTIVE
COMPENSATION

The
following table shows all of our cash compensation paid, as well as certain other
compensation paid or accrued, during the years ended December 31, 2005, 2004 and 2003 to
Daniel Glassman, President and Chief Executive Officer and our five other paid executive
officers. There were no long-term incentive plan payouts or other compensation paid
during 2005, 2004 or 2003 to the executive officers named in the following table, except
as set forth below:

|Summary Compensation Table
|--------------------------
|
|
|Daniel Glassman           
|President and             
|Chief Executive Officer   
|                          
|                          
|Bradley Glassman          
|Sr. Vice President        
|Sales and Marketing       
|                          
|                          
|Alan Goldstein            
|Vice President            
|Corporate Development     
|                          
|                          
|Ralph Landau              
|Vice President            
|Chief Scientific Officer  
|                          
|                          
|R. Brent Lenczycki        
|Vice President            
|Chief Financial Officer   
|                          
|                          
|William Renzo             
|Vice President            
|Managed Care/ Trade       
|                          
|Relations                 

Mr.
Renzo first began earning a salary from us during November 2005.

We
have no defined benefit or defined contribution retirement plans other than the 401(k)
Plan established under Section 401(k) of the Internal Revenue Code of 1986, as amended.
Contributions to the 401(k) plan are voluntary and all employees are eligible to
participate. The 401(k) Plan permits us to match the employee contributions, and we make
matching contributions as follows: (1) $0.25 on each $1.00 for up to 6% of contributions
under 2 years of service, at time of match; (2) $0.50 on each $1.00 for up to 6% of
contributions over 2 years but less than 4 years of service, at time of match; and (3)
$0.75 on each $1.00 for up to 6% of contributions over 4 years of service, at time of
match.

Stock Options

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Our
stock option plans provide for the grant of stock options to key employees and key
consultants. Options may be either incentive stock options or non-qualified stock
options. The plans are administered by the Compensation Committee appointed by the Board
of Directors or the entire Board of Directors.

The
following table sets forth information concerning outstanding options to purchase shares
of our common stock granted by us, during 2005, to our executive officers listed in the
Summary Compensation Table above. Neither options to purchase shares of Class B common
stock nor stock appreciation rights were granted by us during 2005. The exercise prices
for all options reported below are not less than 100% of the per share market prices for
common stock on their dates of grant.

|Option Grants in 2005
|---------------------
|
|
|Daniel Glassman      
|Bradley Glassman     
|Alan Goldstein       
|Ralph Landau         
|R. Brent Lenczycki   
|William Renzo        

|(1) |  | The
potential realizable value portion of the table illustrates amounts          that might
be realized upon exercise of the options immediately prior          to the expiration of
their term, assuming the specified compounded          annual rates of stock price
appreciation over the scheduled life of the          options. This table does not take
into account provisions of certain          options providing for termination of the
option following termination          of employment, nontransferability or vesting
schedules. The dollar          amounts under these columns are the result of calculations
at the 5%          and 10% rates set by the SEC and are not intended to forecast possible
         future appreciation, if any, of our stock price. The column indicating
         0% appreciation is included to reflect the fact that a zero percent
         gain in stock price appreciation from the market price of the common
         stock on the date of grant will result in zero dollars for the
         optionee. No gain to the optionees is possible without an increase in
         stock price, which will benefit all stockholders commensurately. Dollar
         amounts shown are not discounted to present value.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Options
issued typically vest over 3 years and have expiration dates ten years after issuance for
employees and five years for board members and employees that have over 10% ownership.

The
following table presents the value, on an aggregate basis, as of December 31, 2005, of
outstanding stock options held and the stock options exercised during 2005 by our
executive officers listed in the Summary Compensation Table above.

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Aggregated Option
Exercises in 2005                             and Year-End Option Values

|                   |         |  | Number of Securities 
Underlying 
Unexercised Options at 
Year-End | Value of Unexercised 
In-the-Money Options at 
Year-End(2)
|------------------ | ------- |  | ------------------------------------------------------------------ | ----------------------------------------------------------
|
|Daniel Glassman    | 359,589 |  | $3,897,208                                                         |                                                           
|                   |         |  |                                                                    |                                                           
|                  
|Bradley Glassman   |        |  |                                                                   |                                                           
|                   |         |  |                                                                    |                                                           
|                  
|Alan Goldstein     |        |  |                                                                   |                                                           
|                   |         |  |                                                                    |                                                           
|                  
|Ralph Landau       |        |  |                                                                   |                                                           
|                  
|R. Brent Lenczycki |        |  |                                                                   |                                                           
|                   |         |  |                                                                    |                                                           
|                   |         |  |                                                                    |                                                           
|William Renzo      |        |  |                                                                   |                                                           

---

|(1) |  | Value
realized is calculated based on the closing price of the common          stock of the
underlying shares on the date of exercise, minus the          exercise price and assumes
the sale of all the underlying shares.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Value
of unexercised in-the-money options is calculated based on the          market value of
the underlying shares, minus the exercise price and          assumes the sale of all the
underlying shares on December 31, 2005, at          a price of $9.50, which was the
closing price of the common stock on          that date.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment Contracts
and Termination of Employment and Change-in-Control Arrangements

On
December 6, 2005, upon the approval of our Board of Directors and the Compensation
Committee of our Board of Directors, we entered into employment agreements with each of
Daniel Glassman, our Chairman of the Board, President and Chief Executive Officer, R.
Brent Lenczycki, our Vice President and Chief Financial Officer, Bradley Glassman, our
Senior Vice President, Sales and Marketing, and Alan Goldstein, our Vice President,
Corporate Development. We also entered into a Change of Control Agreement with Ralph
Landau, Ph.D., our Vice President, Chief Scientific Officer, on December 6, 2005.

Under
the employment agreements, which are each effective as of December 6, 2005, Mr. D.
Glassman, Mr. Lenczycki, Mr. B. Glassman, and Mr. Goldstein will serve in their positions
until the third anniversary of the effective date, unless sooner terminated by him or us.
 Each agreement renews automatically for an additional one year on the expiration date
and on each anniversary of the expiration date unless we or the employee gives written
notice to the other to the contrary at least 90 days prior to the end of the term or
renewal term, as the case may be.  Mr. D. Glassman will receive an annual base salary of
$675,000 plus an annual non-accountable expense allowance of $25,000.  Mr. Lenczycki will
receive an annual base salary of $262,500. Mr. B. Glassman will receive an annual base
salary of $260,000.  Mr. Goldstein will receive an annual base salary of $235,000. From
time to time during the term of their agreements, each of Mr. D. Glassman, Mr. Lenczycki,
Mr. B. Glassman, and Mr. Goldstein will be entitled to receive options to purchase shares
of our common stock or other similar securities on terms and conditions established by
our Board of Directors and Compensation Committee. Additionally, Mr. D.

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Glassman, Mr. Lenczycki, Mr. B.
Glassman, and Mr. Goldstein are eligible to participate in our bonus and benefit plans in
which our senior executives are generally entitled to participate.

Upon
termination of employment without cause or for good reason (as such terms are defined
in the employment agreements), each of Mr. D. Glassman, Mr. Lenczycki, Mr. B. Glassman,
and Mr. Goldstein will be entitled to: (i) a lump sum cash payment equal to the sum of
(a) any accrued but unpaid salary as of the date of such termination, (b) any accrued by
unpaid annual cash bonus payable under our EVA Bonus Plan for any annual period ended
prior to the date of such termination, and (c) all expenses incurred for which
documentation has been or will be provided in accordance with our policies but not yet
reimbursed; (ii) a lump sum cash payment equal to the amount payable under our EVA Bonus
Plan for the annual period in which such termination occurs prorated through the date of
such termination; (iii) continuation of all perquisites and other Bradley-related
benefits to which he was entitled as of the date of his termination through the end of
the second calendar year following the year in which his employment terminates; (iv)
immediate vesting of all of his stock options or any other equity awards based on our
securities; (v) continued participation in, and continuation by us of the payment of the
relevant premiums applicable to, the life insurance and health, welfare and medical
insurance plans through the end of the second calendar year following the year in  which
his employment terminates; and (vi) continued participation by him and his dependents in
all other Bradley-sponsored health, welfare and benefit plans through the end of the
second calendar year following the year in which his employment terminates.  In addition
to the foregoing payments and benefits continuation, upon termination without cause or
for good reason, each of Mr. D. Glassman, Mr. Lenczycki, Mr. B. Glassman, and Mr.
Goldstein will be entitled to a lump sum cash payment equal to two times the sum of his
then current annual salary and the average amount paid to him under our EVA Bonus Plan
with respect to the most recent three calendar years.

If
a change of control (as defined in the agreement) of Bradley occurs during the term of
his employment agreement, and if, during such term and within twelve months after the
date on which the change of control occurs, his employment is terminated by us without
cause or by him for any reason, then each of Mr. D. Glassman, Mr. Lenczycki, Mr. B.
Glassman, and Mr. Goldstein, as applicable, will be entitled to the payments and benefits
described in the preceding paragraph for a termination without cause or for good
reason .

In
the event that any payment under his employment agreement is subject to the excise tax
for golden parachute payments, we will provide Mr. D. Glassman, Mr. Lenczycki, Mr. B.
Glassman, and Mr. Goldstein, as applicable, with a gross-up payment as may be necessary
to put him in the same after-tax position as if the payments had not been subject to the
excise tax.

Each
of Mr. D. Glassman, Mr. Lenczycki, Mr. B. Glassman, and Mr. Goldstein has agreed that he
will not compete with us for a period of twelve months immediately following the term of
his employment agreement; provided, however, that such restriction will not apply if his
employment is terminated without cause  or he terminates his employment for good
reason, regardless of whether a change of control has occurred.

Pursuant
to his Change of Control Agreement, if a change of control (as defined in the
agreement) occurs, and if within twelve months after the date on which the change of
control occurs, Mr. Landaus employment is terminated by either Mr. Landau or us for any
reason, except if termination is by us for cause (as defined in the agreement), then
Mr. Landau will be entitled to the same payments and benefits described in the paragraph
above regarding the termination of Mr. D. Glassman, Mr. Lenczycki, Mr. B. Glassman, or
Mr. Goldstein for a termination without cause or for good reason.  Mr. Landau will be
entitled to a gross-up payment, if necessary, as described in the preceding paragraph.
 Mr. Landau has also agreed not to compete with us for a period of twelve months
immediately following his termination of employment; provided, however, that such
restriction will not apply if Mr. Landaus employment is (x) terminated without cause
or (y) Mr. Landau terminates his employment for good reason, for both (x) and (y)
within twelve months following the date on which a change of control occurs.

Other Compensation
Plans

| | 71 | 
| | -- | 

---

In
1998, we initiated the Stern Stewart EVA® Financial Management System. EVA®, Economic
Value Added, is defined as essentially net income less a charge for the capital that is
employed in the business. Based upon the change in EVA® from the current year to the
previous year, a portion of the change in profitability is distributed to all our
employees. Included in the 2003 bonuses distributed to executive officers listed in the
Summary Compensation Table above were the bonuses accrued for the related fiscal year
based upon the EVA® Financial Management System. For 2004 and 2005, the bonuses
distributed to the executive officers listed in the Summary Compensation Table above were
based upon qualitative worked performed in 2004 and 2005.

Compensation of
Directors

Non-employee
Directors receive an initial grant upon joining the Board of Directors of 15,000 options
to purchase shares of our common stock that vest over a period of three years from the
date of grant. Prior to December 1, 2005, these Directors also received an annual
retainer of $6,500 per year, an annual grant of 5,000 options to purchase shares of our
common stock that vest over a period of three years from the date of grant and a fee of
$1,000 for each meeting of the Board of Directors or any Board committee meeting attended
by that Director, plus out-of-pocket costs. In addition, our non-employee Directors who
served as a Chairperson of a committee of our Board received a payment of $1,000 to
$2,000 per month in that capacity. Directors who are also employees receive no additional
compensation for their services as Directors.

In
addition to the Director compensation listed above, our non-employee Directors began
receiving additional monthly fees for their additional work in connection with the SEC
inquiry and related matters, starting as of mid-December 2004. The Audit Committee
Chairman received $25,000 per month, other Audit Committee Members received $10,000 per
month, and other non-employee Directors received $5,000 per month, which fees were
terminated effective December 1, 2005.

Effective
December 1, 2005, the Board of Directors approved fees to be paid to its non-employee
Directors in lieu of existing Director fees. Each such Director will receive an annual
$20,000 cash retainer. The Chairman of the Audit Committee will receive an additional
annual retainer of $7,500 and the Chairman of each of the Compensation Committee and the
Nominating and Corporate Governance Committee will receive an additional annual retainer
of $3,000. Non-employee Directors will receive $1,000 for each Board of Directors or
committee meeting thereof attended in person or by telephone. Additionally, each
continuing non-employee Director will receive an annual grant of 5,000 options to
purchase shares of our common stock in accordance with our stock option plan.

Compensation Committee
Interlocks and Insider Participation

None.

ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The
following table sets forth certain information as of March 31, 2006, regarding the
ownership of our common stock and Class B common stock by (i) each Director, (ii) the
executive officers named in the Summary Compensation Table set forth elsewhere in this
Form 10-K, (iii) each beneficial owner of more than five percent of common stock and
Class B common stock known by us and (iv) all Directors and executive officers, as a
group, and the percentage of outstanding shares of common stock and Class B common stock
beneficially held by them on that date.

Since
each share of Class B common stock may be converted at any time by the holder into one
share of common stock, the beneficial ownership rules promulgated under the Securities
Exchange Act of 1934, as amended, require that all shares of common stock issuable upon
the conversion of Class B common stock by any stockholder be included in determining the
number of shares and percentage of common stock held by such stockholder.

| | 72 | 
| | -- | 

---

|                             | Amount and Nature of Beneficial 
Ownership(1)(2) | Percent of 
Class(2)
|---------------------------- | ------------------------------------------------ | --------------------
|
|Daniel Glassman              | 1,615,681                                        | (3)                 
|383 Route 46 West           
|Fairfield, New Jersey 07004 
|C. Ralph Daniel, III, M.D    | 11,666                                           | (5)                 
|Andre Fedida, M.D            | 19,999                                           | (6)                 
|Michael Fedida, R.Ph         | 10,000                                           | (7)                 
|Iris Glassman                | 263,072                                          | (8)                 
|Leonard S. Jacob, M.D., Ph.D |                                                 |                     
|Steven Kriegsman             | 11,666                                           | (10)                
|William J. Murphy            |                                                 |                     
|Alan Wolin, Ph.D             | 80,440                                           | (11)                
|Bradley Glassman             | 160,702                                          | (12)                
|Alan Goldstein               | 2,123                                            |                     
|Ralph Landau, Ph.D           | 16,118                                           | (13)                
|R. Brent Lenczycki           | 100,397                                          | (14)                
|William Renzo                |                                                 |                     
|Pequot Capital              
|Management, Inc.            
|500 Nyala Farm Road         
|Westport, CT 06880           | 940,000                                          | (15)                
|Seth W. Hamot               
|35 Hancock Street           
|Boston, MA 02108             | 1,476,300                                        | (15)                
|All executive officers and  
|Directors as a group (14    
|Persons)                     | 2,291,864                                        | (16)                

---

|* |  | Represents
less than one percent
|- |  | --------------------------------

|(1) |  | Unless
otherwise indicated, the stockholders identified in this table          have sole voting
and investment power with respect to the shares          beneficially owned by them.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Each
named person and all executive officers and directors, as a group,          are deemed to
be the beneficial owners of securities that may be          acquired within 60 days of
March 31, 2006 through the exercise of          options, warrants or exchange or
conversion rights. Accordingly, the          number of shares and percentage set forth
opposite each stockholders          name under the columns common stock includes shares
of common stock          issuable upon exercise of presently exercisable warrants and
stock          options and shares of common stock issuable upon conversion of shares
         of Class B common stock. The shares of common stock so issuable upon
         such exercise, exchange or conversion by any such stockholder are not
         included in calculating the number of shares or percentage of common
         stock beneficially owned by any other stockholder.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes
392,469 shares issuable upon conversion of a like number of          shares of Class B
common stock. 43,693 shares owned indirectly by Mr.          Glassman through affiliates
and 327,554 shares underlie presently          exercisable options owned by Mr. Glassman.
Mr. Glassmans affiliates          have disclaimed beneficial ownership over all of these
shares. Mr.          Glassman disclaims beneficial ownership over shares and options
owned          by his spouse, Iris Glassman.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes
9,733 shares owned indirectly by Mr. Glassman through          affiliates. Mr. Glassmans
affiliates have disclaimed beneficial          ownership over these shares. Does not
include 16,403 shares          beneficially owned by Iris Glassman, Mr. Glassmans spouse.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Includes
11,666 shares of common stock underlying presently exercisable options.
|--- |  | --------------------------------------------------------------------------------

| | 73 | 
| | -- | 

---

|(6) |  | Includes
19,999 shares of common stock underlying presently exercisable options.
|--- |  | --------------------------------------------------------------------------------

|(7) |  | Includes
10,000 shares of common stock underlying presently exercisable options.
|--- |  | --------------------------------------------------------------------------------

|(8) |  | Includes
16,403 shares issuable upon conversion of a like number of shares of Class B common
         stock, 4,000 shares owned indirectly by Mrs. Glassman through
         affiliates, 27,100 shares owned indirectly by Mrs. Glassman as trustee
         for her childrens and grandchildrens trusts and 34,999 shares
         underlying presently exercisable options. Mrs. Glassman disclaims
         beneficial ownership over all shares beneficially owned by her spouse,
         Daniel Glassman.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Mrs.
Glassman disclaims beneficial ownership over all shares of Class B          common stock
beneficially owned by her spouse, Daniel Glassman.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Includes
11,666 shares of common stock underlying presently exercisable options.
|---- |  | --------------------------------------------------------------------------------

|(11) |  | Includes
9,999 shares underlying presently exercisable options and 17,500 shares owned  indirectly by
Dr. Wolin through affiliates.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Includes 20,880 shares issuable upon conversion of
a like number of          shares of Class B common stock. Of these shares 60,000 shares
underlie          presently exercisable options.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | Includes
15,000 shares of common stock underlying presently exercisable          options.
|---- |  | -----------------------------------------------------------------------------------------

|(14) |  | Includes
82,265 shares of common stock underlying          presently exercisable options.
|---- |  | -----------------------------------------------------------------------------------------

|(15) |  | Based
upon the Schedule 13G filed          with the SEC with an effective date of December 31,
2005.
|---- |  | ----------------------------------------------------------------------------------------------------

|(16) |  | See
         footnotes 3, 5, 6, 7, 8, 10, 11, 12, 13 and 14.
|---- |  | ------------------------------------------------------------

Equity Compensation
Plans

The
following table summarizes information, as of December 31, 2005, relating to the
Companys equity compensation plans.

|Plan Category                                                     | (a) 
Number of 
Securities 
to be Issued 
Upon 
Exercise of 
Outstanding 
Options | (b) 
Weighted- 
      Average 
Exercise 
Price of 
Outstanding 
Options | (c) 
Number of 
      Securities Remaining 
      Available for 
      Future
Issuance 
      Under
Equity 
      Compensation Plans 
(Excluding Securities 
Reflected in Column (a))
|----------------------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by 
      security holders     | 1,875,089                                                                         |                                                                         | $13.76                                                                                                                                                                               
|Equity compensation plans not approved 
      by security holders |                                                                                  |                                                                         |                                                                                                                                                                                     
|                                                                  |                                                                                   |                                                                         |                                                                                                                                                                                      
|Total                                                             | 1,875,089                                                                         |                                                                         | $13.76                                                                                                                                                                               
|                                                                  |                                                                                   |                                                                         |                                                                                                                                                                                      

ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

We
have a number of related party transactions, all of which we believe are on terms no less
favorable to us than we could have obtained from unaffiliated third parties.

During
2004, we received administrative support services (consisting principally of mailing,
copying, financial services, data processing and other office services) which were
charged to operations from Medimetrik, Inc. (f/k/a Banyan Communications Group, Inc.)
(Medimetrik), an affiliate, in the amount of approximately $29,000. Daniel Glassman,
our Chairman of the Board of Directors, Chief Executive Officer and President, and Iris
Glassman, an officer, a member of our Board of Directors and spouse of Daniel Glassman,
are majority owners of Medimetrik. Medimetrik is a privately held entity that currently
has no operations but was principally engaged in the business of market research
services, which ceased providing services to us in June 2004 after it was sold to an
unrelated third party.

| | 74 | 
| | -- | 

---

We
lease approximately 33,000 square feet of office and warehouse space at 383 Route 46
West, Fairfield, New Jersey, under a lease expiring on January 31, 2008. The owner and
manager of this property is a limited liability company that is owned and controlled by
Daniel Glassman and his spouse, Iris Glassman. At our option, we can extend the term of
the lease for an additional 5 years beyond expiration. The lease agreement obligates us
to pay 3% increases in annual lease payments per year. Rent expense, including our
proportionate share of real estate taxes, was approximately $614,000 in 2005.

We
historically paid to Dr. C. Ralph Daniel, III, a member of our Board of Directors, since
Dr. Daniel joined our Board during June 2003, a monthly consulting fee of $2,500. This
fee was paid to Dr. Daniel in consideration for product performance, patient review,
general marketing and corporate development services performed on our behalf by Dr.
Daniel. This monthly consulting fee was credited, on a dollar-for-dollar basis, against
the annual cash retainer payable by us to Dr. Daniel in consideration for Dr. Daniels
serving as one of our directors. We had also agreed to pay to Dr. Daniel a success fee
calculated on a Lehman Formula basis, but not to exceed $300,000, if Dr. Daniel first
introduced to us a product licensing or acquisition opportunity or merger or acquisition
candidate which we had not yet internally identified (collectively, a New Business
Opportunity) and such New Business Opportunity was consummated by us. Dr. Daniel and we
agreed to terminate Dr. Daniels consulting and Lehman Formula transaction success fee
arrangement effective March 31, 2006.

We
paid to Steven Kriegsman, a member of our Board of Directors, for the period commencing
during June 2003, when Mr. Kriegsman joined our Board, and continuing through November 1,
2004, when Mr. Kriegsman became Chairman of our Audit Committee (the Applicable
Period), a monthly consulting fee of $2,500. This fee was paid to Mr. Kriegsman in
consideration for his assisting us in identifying New Business Opportunities. We had also
agreed to pay to Mr. Kriegsman during the Applicable Period a success fee in the amount
of 3% of the total transaction value of any New Business Opportunity consummated by us if
such New Business Opportunity was first introduced to us by Mr. Kriegsman. Mr. Kriegsman
and we agreed to terminate Mr. Kriegsmans consulting and transaction success fee
arrangement during November 2004, concurrently with Mr. Kriegsmans appointment as
Chairman of our Audit Committee.

ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES

Grant
Thornton LLP served as our independent registered public accounting firm for the fiscal
year ended December 31, 2005. A representative of Grant Thornton LLP is expected to be
present at the Joint 2005/ 2006 Annual Meeting, will have an opportunity to make a
statement if he desires to do so and is expected to respond to appropriate questions. For
the fiscal years ended December 31, 2005 and 2004, professional services were
performed by Grant Thornton LLP. The following table shows the fees billed or expected to
be billed to us for the audit and other services provided by Grant Thornton LLP for 2005
and 2004:

|                   | 2005       |  | 2004       | 
|------------------ | ---------- |  | ---------- | 
|Audit Fees         | $1,843,000 |  | $2,349,000 | 
|Audit Related Fees | 54,000     |  | 77,000     | 
|                   |            |  |            | 
|Total Audit and    | 1,897,000  |  | 2,426,000  | 
|Audit Related Fees
|                   |            | 
|Tax Fees           | 115,000    |  | 155,000    | 
|All Other Fees     |           |  | 394,000    | 
|                   |            |  |            | 
|Total Fees         | $2,012,000 |  | $2,975,000 | 
|                   |            |  |            | 

Audit
Fees.This category includes the audit of our consolidated financial statements, and
reviews of the financial statements included in our Quarterly Reports on Form 10-Q. This
category also includes advice on accounting matters that arose during, or as a result of,
the audit or the review of interim financial statements, SEC registration statements and
comfort letters and the SEC informal inquiry that commenced during December 2004.

| | 75 | 
| | -- | 

---

Audit
Related Fees.The services for fees under this category include other accounting advice
and employee benefit plan audits.

Tax
Fees.These fees relate to the preparation and review of tax returns, tax planning and
tax advisory services.

All
Other Fees.These fees primarily relate to due diligence for the Bioglan acquisition.

Our
Audit Committee is required to pre-approve the audit and non-audit services performed by
the independent auditor. Unless a type of service to be provided by the independent
auditor has received general pre-approval, subject to certain dollar limitations, it will
require specific pre-approval by the Audit Committee. The Audit Committee may delegate
pre-approval authority to one or more of its members. The member or members to whom such
authority is delegated shall report any pre-approval decisions to the Audit Committee at
its next scheduled meeting. Unless otherwise determined by the Audit Committee or
otherwise required by applicable law, the Chairperson of the Audit Committee has the
right to exercise the pre-approval authority of the Audit Committee. The Audit Committee
has determined that the professional services rendered by Grant Thornton are compatible
with maintaining the principal accountants independence. The Audit Committee gave prior
approval to all audit and non-audit services rendered in 2005.

PART IV

ITEM 15: EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES

| | (a) |  | Financial
Statements See F-Pages hereof.
| | --- |  | ----------------------------------------

| | (b) |  | Financial
Statement Schedules See Schedule II at page S-1.
| | --- |  | ----------------------------------------------------------

| | (c) |  | Exhibits
| | --- |  | --------

|Exhibit 
      Number |  | Description of Documents                                                                                                                                                                                                                                                                                                                                                                          
|--------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1                   |  | Asset
Purchase Agreement, dated as of June 8, 2004, by and among Quintiles Bermuda Ltd.,
              Quintiles Ireland Limited, Bioglan Pharmaceuticals Company, and the Company
(incorporated               herein by reference to Exhibit 2.1 to the Companys Quarterly
Report on Form 10-Q for the               period ended June 30, 2004)                                                
|                      |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|2.2                   |  | First
Amendment to the Asset Purchase Agreement dated as of June               8, 2004, by and
among Quintiles Bermuda Ltd., Quintiles Ireland               Limited, Bioglan
Pharmaceuticals Company, and the Company, dated               as of August 10, 2004
(incorporated herein by reference to Exhibit               2.2 to               the
Companys Form 8-K filed on August 12, 2004)
|                      |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|3.1                   |  | Certificate
of Incorporation of the Company, as amended (incorporated herein by reference
              from the Companys Proxy Statement for the 1998 Annual Meeting)                                                                                                                                                                                                                           
|                      |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|3.2                   |  | By-laws
of the Company, as amended (incorporated herein by reference from the Companys
              Proxy Statement for the 1998 Annual Meeting)                                                                                                                                                                                                                                                
|                      |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|4.1                   |  | Bradley
Pharmaceuticals, Inc. 401(k) Savings Plan (incorporated herein by reference to
              Exhibit 4.1 to the Companys Form S-8 filed on February 3, 2004)                                                                                                                                                                                                                             
|                      |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|10.1                  |  | 1990
Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the
              Companys Annual Report on Form 10-KSB for the year ended December 31,
1996)*                                                                                                                                                                                                           

| | 76 | 
| | -- | 

---

|10.2 |  | 1999
Incentive and Non-Qualified Stock Option Plan, as amended (incorporated herein by
              reference from the Companys Proxy Statement for the 1998 Annual Meeting)*
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | Distribution
Agreement, dated as of December 27, 2000, by and among Par Pharmaceutical,
              Inc. and Bioglan Pharma, Inc. (incorporated herein by reference to Exhibit
10.4 to the               Companys Quarterly Report on Form 10-Q for the period ended
September 30, 2004)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3.1 |  | Assignment
of Distribution Agreement, dated as of March 22, 2002, by and among Par
              Pharmaceutical, Inc. and Bioglan Pharma, Inc. and Quintiles Ireland Limited
(incorporated               herein by reference to Exhibit 10.4.1 to the Companys
Quarterly Report on Form 10-Q for               the period ended September 30, 2004)
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3.2 |  | Second
Amendment to Distribution Agreement and First Amendment to               Assignment of
Distribution Agreement, dated as of September 11,               2003, by and among Par
Pharmaceutical, Inc. and Quintiles Ireland               Limited (incorporated herein by
reference to Exhibit 10.4.2 to the               Companys Quarterly Report on Form 10-Q
for the period ended               September 30, 2004)
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3.3 |  | Third
Amendment to Distribution agreement, dated as of April 13,               2004, by and
among Par Pharmaceutical, Inc. and Quintiles Ireland               Limited (incorporated
herein by reference to Exhibit 10.4.3 to the               Companys Quarterly Report on
Form 10-Q for the period ended               September 30, 2004)
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3.4 |  | Consent
and Agreement, dated July 9, 2004, by and between Par Pharmaceutical, Inc. and
              Quintiles Ireland Limited (incorporated herein by reference to Exhibit
10.4.4 to the               Companys Quarterly Report on Form 10-Q for the period ended
September 30, 2004)
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 |  | License
and Manufacturing Agreement, dated March 13, 2000, by and among Bioglan Pharma PLC
              and Jagotec AG (incorporated herein by reference to Exhibit 10.5 to the
Companys Quarterly               Report on Form 10-Q for the period ended September 30,
2004)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4.1 |  | Addendum
Agreement, dated December 28, 2000, by and among Bioglan               Pharma PLC and
Jagotec AG (incorporated herein by reference to               Exhibit 10.5.1 to the
Companys Quarterly Report on Form 10-Q for               the period ended September 30,
2004)
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4.2 |  | Second
Addendum, dated December 2001, by and among Bioglan Pharma               PLC and Jagotec
AG (incorporated herein by reference to Exhibit               10.5.2 to the Companys
Quarterly Report on Form 10-Q for the               period ended September 30, 2004)
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4.3 |  | Deed
of Variation and Novation, dated 2001, by and among Bioglan Pharma PLC, Bioglan Pharma
              Inc., Quintiles Ireland Limited, Quintiles Transnational Corp. and Jagotec
AG (incorporated               herein by reference to Exhibit 10.5.3 to the Companys
Quarterly Report on Form 10-Q for               the period ended September 30, 2004)
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4.4 |  | Deed
of Consent and Novation, dated August 4, 2004, by and among Jagotec AG, Quintiles
              Transnational Corp., Quintiles Ireland Limited, Bradley Pharmaceuticals,
Inc. and BDY               Acquisition Corp. (incorporated herein by reference to Exhibit
10.5.4 to the Companys               Quarterly Report on Form 10-Q for the period ended
September 30, 2004)
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | Distribution
Services Agreement, dated as of March 9, 2005, by and between the Company and
              Cardinal Health, Inc. (incorporated herein by reference to Exhibit 10.6 to
the Companys               Form 8-K filed on March 14, 2005)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 |  | Forbearance
Agreement, dated as of March 22, 2005, by and among the Company, certain
              subsidiaries of the Company and Wachovia Bank, National Association
(incorporated herein by               reference to Exhibit 10.1 to the Companys Form 8-K
filed on March 22, 2005)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 77 | 
| | -- | 

---

|10.7 |  | McKesson
Corporation Core Distribution Agreement, dated as of               September 7, 2005,
between McKesson Corporation and the Company               (incorporated herein by
reference to Exhibit 10.1 to the Companys               Form 8-K filed on September 12,
2005)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 |  | Amended
and Restated Credit Agreement, dated as of November 14, 2005, among Bradley
              Pharmaceuticals, Inc., certain of its subsidiaries, Wachovia Bank, National
Association, as               administrative agent, JPMorgan Chase Bank, as syndication
agent, and General Electric               Capital Corporation, as documentation agent
(incorporated herein by reference to Exhibit               10.1 to the Companys Form 8-K
filed on November 17, 2005)
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8.1 |  | First
Amendment and Waiver, dated as of January 26, 2006, to               Amended and Restated
Credit Agreement dated as of November 14,               2005, among Bradley
Pharmaceuticals, Inc., certain of its               subsidiaries, and Wachovia Bank,
National Association, as               administrative agent for the Lenders (incorporated
herein by               reference to Exhibit 10.8.1 to the Companys Annual Report on
Form               10-K for the year ended December 31, 2004)
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8.2 |  | Second
Amendment and Waiver, dated as of May 15, 2006, to Amended               and Restated
Credit Agreement dated as of November 14, 2005, among               Bradley
Pharmaceuticals, Inc., certain of its subsidiaries, and               Wachovia Bank,
National Association, as administrative agent for               the Lenders
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9 |  | Employment
Agreement, dated December 6, 2005, between Bradley Pharmaceuticals, Inc. and
              Daniel Glassman (incorporated herein by reference to Exhibit 10.1 to the
Companys Form 8-K               filed on December 8, 2005)*
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | Employment
Agreement, dated December 6, 2005, between Bradley Pharmaceuticals, Inc. and R.
              Brent Lenczycki (incorporated herein by reference to Exhibit 10.2 to the
Companys Form 8-K               filed on December 8, 2005)*
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | Employment
Agreement, dated December 6, 2005, between Bradley Pharmaceuticals, Inc. and
              Bradley Glassman (incorporated herein by reference to Exhibit 10.3 to the
Companys Form               8-K filed on December 8, 2005)*
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | Employment
Agreement, dated December 6, 2005, between Bradley Pharmaceuticals, Inc. and
              Alan Goldstein (incorporated herein by reference to Exhibit 10.4 to the
Companys Form 8-K               filed on December 8, 2005)*
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | Change
of Control Agreement, dated December 6, 2005, between Bradley Pharmaceuticals, Inc.
              and Ralph Landau, Ph.D. (incorporated herein by reference to Exhibit 10.5
to the Companys               Form 8-K filed on December 8, 2005)*
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | Licensing
and Distribution Agreement, dated December 13, 2005, between Bradley
              Pharmaceuticals, Inc. and Par Pharmaceutical, Inc. (incorporated herein by
reference to               Exhibit 10.1 to the Companys Form 8-K filed on December 19,
2005)
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Collaboration
and License Agreement, dated January 30, 2006, between Bradley
              Pharmaceuticals, Inc. and MediGene AG (incorporated herein by reference to
Exhibit 10.1 to               the Companys Form 8-K filed on February 3, 2006)
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|21 |  | Subsidiaries
of the Company
|-- |  | ---------------------------

|23.1 |  | Consent
of Grant Thornton, LLP
|---- |  | ------------------------------

|24.1 |  | Power
of Attorney (included on the signature page to this report)
|---- |  | -----------------------------------------------------------------

| | 78 | 
| | -- | 

---

|31.1 |  | Rule
13a-14(a) Certification of Chief Executive Officer Pursuant to Section 302 of the
              Sarbanes-Oxley Act of 2002
|---- |  | -------------------------------------------------------------------------------------------------------------------------------

|31.2 |  | Rule
13a-14(a) Certification of Chief Financial Officer Pursuant to Section 302 of the
              Sarbanes-Oxley Act of 2002
|---- |  | -------------------------------------------------------------------------------------------------------------------------------

|32.1 |  | Certification
pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer, as adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 |  | Certification
pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer, as adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|* |  | Management
contracts or compensatory plans or arrangements.
|- |  | -----------------------------------------------------------

| | 79 | 
| | -- | 

---

SIGNATURES

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

|May
19, 2006 |  |  | BRADLEY
PHARMACEUTICALS, INC.
|------------ |  |  | -----------------------------
|             |  |  | By:                          
|             |  |  |                              

| | 80 | 
| | -- | 

---

POWER OF ATTORNEY

KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Daniel Glassman and R. Brent Lenczycki, or either of them, as his true and
lawful attorneys-in-fact and agents, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K and any documents related to this report
and filed pursuant to the Securities and Exchange Act of 1934, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite and necessary to be
done in connection therewith as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes may lawfully do or cause to be done by virtue hereof.

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

|DATE         | SIGNATURE                                     |  | TITLE                                                                                                            
|------------ | --------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------
|             |                                               |  |                                                                                                                  
|May 19, 2006 | /s/Daniel Glassman(Daniel Glassman)           |  | Chairman of the Board
          President and Chief
  Executive Officer
          (Principal Executive
  Officer)
|             |                                               |  |                                                                                                                  
|May 19, 2006 | /s/R. Brent Lenczycki(R. Brent Lenczycki)     |  | Vice President andChief Financial Officer(Principal Financial and
  Accounting Officer)                          
|
|
|
|             |                                               |  |                                                                                                                  
|May 19, 2006 | /s/C. Ralph Daniel, III(C. Ralph Daniel, III) |  | Director                                                                                                         
|
|
|             |                                               |  |                                                                                                                  
|May 19, 2006 | /s/Andre Fedida(Andre Fedida)                 |  | Director                                                                                                         
|
|             |                                               |  |                                                                                                                  
|May 19, 2006 | /s/Michael Fedida(Michael Fedida)             |  | Director                                                                                                         
|
|             |                                               |  |                                                                                                                  
|May 19, 2006 | /s/Iris Glassman(Iris Glassman)               |  | Director                                                                                                         
|
|             |                                               |  |                                                                                                                  
|May 19, 2006 | /s/Leonard S. Jacob(Leonard S. Jacob)         |  | Director                                                                                                         
|
|
|             |                                               |  |                                                                                                                  
|May 19, 2006 | /s/Steven Kriegsman(Steven Kriegsman)         |  | Director                                                                                                         
|
|             |                                               |  |                                                                                                                  
|May 19, 2006 | /s/William J. Murphy(William J. Murphy)       |  | Director                                                                                                         
|
|             |                                               |  |                                                                                                                  
|May 19, 2006 | /s/Alan Wolin(Alan Wolin)                     |  | Secretary and Director                                                                                           
|

``

| | 81 | 
| | -- | 

---

INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS

PageBradley Pharmaceuticals,
  Inc. and SubsidiariesReport of Independent
  Registered Public Accounting Firm

      F-2Consolidated Balance Sheets
  at December 31, 2005 and 2004

      F-3Consolidated Statements
  of Income for theYears Ended December 31, 2005,
  2004 and 2003

      F-5Consolidated Statement of
  Shareholders Equity for theYears Ended December 31, 2005,
  2004 and 2003

      F-6Consolidated Statements of
  Cash Flows for theYears Ended December 31, 2005,
  2004 and 2003

      F-7Notes to Consolidated
  Financial Statements

      F-8 - F-41


| | F-1 | 
| | --- | 

---

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders Bradley
Pharmaceuticals, Inc.

We
have audited the accompanying consolidated balance sheets of Bradley Pharmaceuticals,
Inc. and Subsidiaries as of December 31, 2005 and 2004, and the related consolidated
statements of income, shareholdersequity and cash flows for each of the three years
in the period ended December 31, 2005.  These financial statements are the responsibility
of the Companys management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Bradley Pharmaceuticals, Inc. and
Subsidiaries as of December 31, 2005 and 2004 and the consolidated results of their
operations and their consolidated cash flows for each of the three years in the period
ended December 31, 2005, in conformity with accounting principles generally accepted in
the United States of America.

As
discussed in Note A, the Company restated its classification of Auction Rate Municipal
Bonds.

Our
audit was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole.  The Schedule II - Valuation and Qualifying Accounts is
presented for purposes of additional analysis and is not a required part of the basic
financial statements.  This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements taken as a
whole.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Bradley Pharmaceuticals, Inc. and Subsidiaries
internal control over financial reporting as of December 31, 2005, based on criteria
established inInternal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission, and our report dated May 19, 2006
expressed an unqualified opinion on management assessment on the effectiveness of
internal controls over financial reporting and an adverse opinion on the effectiveness of
internal controls over financial reporting because of the existence of material
weaknesses.



/s/ GRANT THORNTON LLP

New York, New York 
   May 19, 2006



| | F-2 | 
| | --- | 

---

Bradley Pharmaceuticals, Inc. and Subsidiaries
 CONSOLIDATED BALANCE SHEETS December 31,ASSETS
          2005
          
          2004(a)CURRENT ASSETSCash
  and cash equivalents
          $  19,798,728
          
          $  39,911,543Short-term
  investments
          -
          
          36,419,711Accounts
  receivable - net of allowances
          15,871,269
          
          14,168,480Inventories,
  net
          6,895,208
          
          9,032,256Deferred
  tax assets
          14,334,362
          
          12,663,542Prepaid
  expenses and other
          1,493,867
          
          3,489,025Prepaid
  income taxes
          6,653,425
          
          2,012,706Total
  current assets
          65,046,859
          
          117,697,263PROPERTY AND EQUIPMENT, NET
          1,499,398
          
          1,681,112INTANGIBLE ASSETS, NET
          151,354,333
          
          160,711,414GOODWILL
          27,478,307
          
          26,930,953DEFERRED TAX ASSET
          -
          
          1,272,010DEFERRED FINANCING COSTS
          5,834,318
          
          5,399,670RESTRICTED CASH AND
  INVESTMENTS
          45,000,000
          
          -OTHER ASSETS
          16,229
          
          6,229TOTAL ASSETS
          $296,229,444
          
          $313,698,651


|(a) |  | As restated, See Note A. 4.
|--- |  | ---------------------------

*The accompanying notes
  are an integral part of these statements.*

| | F-3 | 
| | --- | 

---

Bradley Pharmaceuticals, Inc. and Subsidiaries **CONSOLIDATED BALANCE SHEETS**



LIABILITIES AND SHAREHOLDERS EQUITY
        December 31,2005
        
        
        2004CURRENT LIABILITIESCurrent
  maturities of long-term debt
        $    9,075,781
        
        
        $   38,355,9494%
  convertible senior subordinated notes
        -
        
        
        37,000,000Accounts
  payable
        7,667,667
        
        
        5,949,234Accrued
  expenses
        37,109,475
        
        
        35,576,946Total current liabilities
        53,852,923
        
        
        116,882,129LONG-TERM LIABILITIESLong-term
  debt, less current maturities
        69,011,998
        
        
        33,052,630Deferred tax liabilities
        925,092
        
        
        -Total long-term liabilities
        69,937,090
        
        
        33,052,630COMMITMENTS AND
  CONTINGENCIES (Note I)SHAREHOLDERS EQUITYPreferred stock, $.01 par value; authorized,
  2,000,000 shares;issued
   none
        -
        
        
        -Common stock, $.01 par value, authorized, 26,400,000
  shares; issued  
                
            16,820,084 shares at December 31, 2005, 16,407,367 shares at 
                
             December 31, 2004
        168,201
        
        
        164,073Common stock,
  Class B, $.01 par value, authorized, 900,000 shares; 
                
             issued 429,752 shares at
  December 31, 2005 and 2004
        4,298
        
        
        4,298Additional paid-in capital
        134,254,460
        
        
        133,413,314Accumulated other
  comprehensive loss
        (5,950
        )
        
        (78,260
        )Retained earnings
        41,309,602
        
        
        33,348,092Treasury stock - common stock - at cost  (877,058
  shares at 
                
            December 31, 2005 and 865,812 shares at December 31, 2004)
        (3,291,180
        )
        
        (3,087,625
        )172,439,431
        
        
        163,763,892TOTAL LIABILITIES
  AND SHAREHOLDERS EQUITY
        $296,229,444
        
        
        $313,698,651


The accompanying notes
  are an integral part of these statements.

| | F-4 | 
| | --- | 

---

Bradley Pharmaceuticals, Inc. and Subsidiaries**CONSOLIDATED STATEMENTS OF INCOME**



Years ended December 31,2005
        
        
        2004
        
        
        2003Net sales
        $133,382,194
        
        
        $96,693,987
        
        
        $74,679,251Cost of sales
        19,817,676
        
        
        13,340,499
        
        
        6,533,119113,564,518
        
        
        83,353,488
        
        
        68,146,132Selling, general and administrative expenses
        79,638,298
        
        
        62,557,871
        
        
        38,946,576Research and development
        1,515,633
        
        
        804,832
        
        
        612,162Depreciation and
  amortization
        10,174,989
        
        
        4,815,095
        
        
        1,207,116Interest expense
        7,489,857
        
        
        4,328,327
        
        
        1,048,192Interest income
        (2,149,567
        )
        
        (2,178,623
        )
        
        (936,345
        )Write-off of deferred
  financing costs
        3,988,964
        
        
        -
        
        
        -Gains on short-term
  investments
        (103,166
        )
        
        (35,328
        )
        
        (312,285
        )100,555,008
        
        
        70,292,174
        
        
        40,565,416Income
  before income tax expense
        13,009,510
        
        
        13,061,314
        
        
        27,580,716Income tax expense
        5,048,000
        
        
        5,107,000
        
        
        10,756,000NET
  INCOME
        $   7,961,510
        
        
        $   7,954,314
        
        
        $  16,824,716Net income per common shareBasic
        $           0.50
        
        
        $           0.51
        
        
        $            1.55Diluted
        $           0.49
        
        
        $           0.49
        
        
        $            1.35Weighted average number of
  common sharesBasic
        16,000,000
        
        
        15,670,000
        
        
        10,820,000Diluted
        17,950,000
        
        
        18,410,000
        
        
        12,840,000


*The
accompanying notes are an integral part of these statements.*

| | F-5 | 
| | --- | 

---

Bradley Pharmaceuticals, Inc. and Subsidiaries**CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY**

**Common stock, 
         $.01 par value**
      
      **Class B common stock, 
            $.01 par value****Shares**
      
      **Amount**
      
      **Shares**
      
      **Amount**
      
      **Additional paid 
         in capital**Balance at December 31, 2002
      10,836,018
      
      $ 108,360
      
      429,752
      
      $ 4,298
      
      $ 31,153,596Stock options/ warrants
  exercised
      316,269
      
      3,163
      
      
      
      
      
      2,210,621Shares issued for follow-on
  offering
      4,600,000
      
      46,000
      
      
      
      
      
      96,159,457Options issued for
  consulting services
      
      
      
      
      
      
      
      
      11,041Purchase of treasury stockDistribution of treasury
  stock
      
      
      
      
      
      
      
      
      92,198Other comprehensive income/
  (loss):Net incomeNet unrealized loss on
  available-for-sale securitiesTotal comprehensive incomeBalance at December 31, 2003
      15,752,287
      
      $ 157,523
      
      429,752
      
      $ 4,298
      
      $ 129,626,913Stock options/ warrants
  exercised
      649,844
      
      6,498
      
      
      
      
      
      3,571,678Shares issued to employees
      5,236
      
      52
      
      
      
      
      
      124,984Registration cost for the
  follow-on offering
      
      
      
      
      
      
      
      
      (76,963
      )Purchase of treasury stockDistribution of treasury
  stock
      
      
      
      
      
      
      
      
      166,702Other comprehensive income/
  (loss):Net incomeNet unrealized loss on
  available-for-sale securitiesTotal comprehensive incomeBalance at December 31, 2004
      16,407,367
      
      $ 164,073
      
      429,752
      
      $ 4,298
      
      $ 133,413,314Stock options/ warrants
  exercised
      412,717
      
      4,128
      
      
      
      
      
      813,508Purchase of treasury stockDistribution of treasury
  stock
      
      
      
      
      
      
      
      
      27,638Other comprehensive income:Net incomeNet unrealized gain on
  available-for-sale securitiesTotal comprehensive incomeBalance at December 31, 2005
      16,820,084
      
      $ 168,201
      
      429,752
      
      $ 4,298
      
      $ 134,254,460  **Accumulated****other**  **comprehensive** **gain (loss)**
      
      **Retained 
         earnings**
      
      **Treasury Stock**
      
      **Total****Shares**
      
      **Amount**Balance at December 31, 2002
      $ 98,323
      
      
      $ 8,569,062
      
      793,195
      
      
      $ (1,739,923
      )
      
      $ 38,193,716Stock options/ warrants
  exercised
      
      
      
      
      
      
      
      
      
      
      
      2,213,784Shares issued for follow-on
  offering
      
      
      
      
      
      
      
      
      
      
      
      96,205,457Options issued for
  consulting services
      
      
      
      
      
      
      
      
      
      
      
      11,041Purchase of treasury stock
      
      
      
      
      
      45,713
      
      
      (545,055
      )
      
      (545,055
      )Distribution of treasury
  stock
      
      
      
      
      
      (7,622
      )
      
      15,180
      
      
      107,378Other comprehensive income/
  (loss):Net income
      
      
      
      16,824,716
      
      
      
      
      
      
      
      16,824,716Net unrealized loss on
  available-for-sale securities
      (115,368
      )
      
      
      
      
      
      
      
      
      
      (115,368
      )Total comprehensive income
      
      
      
      
      
      
      
      
      
      
      
      16,709,348Balance at December 31, 2003
      $ (17,045
      )
      
      $ 25,393,778
      
      831,286
      
      
      $ (2,269,798
      )
      
      $ 152,895,669Stock options/ warrants
  exercised
      
      
      
      
      
      
      
      
      
      
      
      3,578,176Shares issued to employees
      
      
      
      
      
      
      
      
      
      
      
      125,036Registration cost for the
  follow-on offering
      
      
      
      
      
      
      
      
      
      
      
      (76,963
      )Purchase of treasury stock
      
      
      
      
      
      42,000
      
      
      (831,982
      )
      
      (831,982
      )Distribution of treasury
  stock
      
      
      
      
      
      (7,474
      )
      
      14,155
      
      
      180,857Other comprehensive income/
  (loss):Net income
      
      
      
      7,954,314
      
      
      
      
      
      
      
      7,954,314Net unrealized loss on
  available-for-sale securities
      (61,215
      )
      
      
      
      
      
      
      
      
      
      (61,215
      )Total comprehensive income
      
      
      
      
      
      
      
      
      
      
      
      7,893,099Balance at December 31, 2004
      $ (78,260
      )
      
      $ 33,348,092
      
      865,812
      
      
      $ (3,087,625
      )
      
      $ 163,763,892Stock options/ warrants
  exercised
      
      
      
      
      
      
      
      
      
      
      
      817,636Purchase of treasury stock
      
      
      
      
      
      14,000
      
      
      (208,805
      )
      
      (208,805
      )Distribution of treasury
  stock
      
      
      
      
      
      (2,754
      )
      
      5,250
      
      
      32,888Other comprehensive income:Net income
      
      
      
      7,961,510
      
      
      
      
      
      
      
      7,961,510Net unrealized gain on
  available-for-sale securities
      72,310
      
      
      
      
      
      
      
      
      
      
      72,310Total comprehensive income
      
      
      
      
      
      
      
      
      
      
      
      8,033,820Balance at December 31, 2005
      $ (5,950
      )
      
      $ 41,309,602
      
      877,058
      
      
      $ (3,291,180
      )
      
      $ 172,439,431


*The accompanying notes are an integral part of these
statements.*

| | F-6 | 
| | --- | 

---

Bradley Pharmaceuticals, Inc. and Subsidiaries **CONSOLIDATED STATEMENTS OF CASH FLOWS**



Years ended December 31,2005
      
      
      2004(a)
      
      
      2003(a)Cash flows from operating
  activities:Net income
      $   7,961,510
      
      
      $   7,954,314
      
      
      $  16,824,716Adjustments to reconcile net
  income to net cashprovided by operating
  activities:Depreciation and
  amortization
      10,174,989
      
      
      4,815,095
      
      
      1,207,116Amortization of
  deferred financing costs
      953,263
      
      
      567,889
      
      
      216,171Write-off of deferred
  financing costs
      3,988,964
      
      
      -
      
      
      -Deferred income taxes
      526,282
      
      
      (7,730,497
      )
      
      (1,023,964
      )Distribution of
  treasury stock to fund 401(k)
      32,888
      
      
      180,857
      
      
      107,378Increase in allowance
  for doubtful accounts
      666,585
      
      
      399,317
      
      
      94,231Increase (decrease) in
  return reserve
      859,571
      
      
      20,968,247
      
      
      561,449Increase (decrease) in
  inventory valuation reserve
      34,675
      
      
      932,102
      
      
      (137,304
      )Increase (decrease) in
  rebate reserve
      2,078,421
      
      
      (1,133,700
      )
      
      1,905,122Increase in
  fee-for-service reserve
      750,963
      
      
      -
      
      
      -Gains on short-term
  investments
      (103,166
      )
      
      (35,328
      )
      
      (312,285
      )Noncash compensation
  for services
      -
      
      
      125,036
      
      
      11,041Tax benefit due to
  exercise of non-qualified optionsand warrants
      237,995
      
      
      829,699
      
      
      1,242,177Changes in operating
  assets and liabilities:Accounts receivable
      (3,120,337
      )
      
      (9,476,345
      )
      
      626,468Inventories
      2,102,373
      
      
      (1,517,791
      )
      
      (90,659
      )Prepaid expenses and
  other
      1,985,158
      
      
      (1,451,327
      )
      
      (841,854
      )Accounts payable
      1,718,433
      
      
      941,820
      
      
      2,589,099Accrued expenses
      (1,405,463
      )
      
      4,132,955
      
      
      2,036,035Prepaid income taxes
      (4,640,719
      )
      
      (2,718,014
      )
      
      1,020,866Net cash provided by
  operating activities
      24,802,385
      
      
      17,784,329
      
      
      26,035,803Cash flows from investing
  activities:Purchase of Bioglan
  Pharmaceuticals
      (547,355
      )
      
      (190,266,532
      )
      
      -Restriction of cash from the
  $110 million credit facility
      (12,035,193
      )
      
      -
      
      
      -Purchase of international
  distribution rights
      -
      
      
      (2,600,000
      )
      
      -Sale (purchases) of short-term investments- net
      3,630,380
      
      
      21,305,507
      
      
      (37,066,097
      )Purchase of property and
  equipment
      (636,193
      )
      
      (774,908
      )
      
      (423,260
      )Net cash used in investing
  activities
      (9,588,361
      )
      
      (172,335,933
      )
      
      (37,489,357
      )Cash flows from financing
  activities:Payment of notes payable
      (70,800
      )
      
      (30,762
      )
      
      (238,364
      )Proceeds from sale of 4%
  convertible senior subordinated notes
      -
      
      
      -
      
      
      37,000,000Payment of 4% convertible
  senior subordinated notes
      (37,000,000
      )
      
      -
      
      
      -Proceeds from the $125
  million credit facilitys term loan
      -
      
      
      75,000,000
      
      
      -Payments of $125 million
  credit facilitys term loan
      (71,250,000
      )
      
      (3,750,000
      )
      
      -Proceeds from bridge loan
      -
      
      
      50,000,000
      
      
      -Payment of bridge loan
      -
      
      
      (50,000,000
      )
      
      -Proceeds from the $110
  million credit facilitys term loan
      80,000,000
      
      
      -
      
      
      -Payments of the $110 million
  credit facilitys term loan
      (2,000,000
      )
      
      -
      
      
      -Proceeds from sale of common
  stock
      -
      
      
      -
      
      
      103,132,000Proceeds from exercise of
  stock options and warrants
      579,641
      
      
      2,748,477
      
      
      971,607Payment of deferred
  financing costs
      (5,376,875
      )
      
      (3,347,398
      )
      
      (2,709,041
      )Payment of offering and
  registration costs
      -
      
      
      (76,963
      )
      
      (6,926,543
      )Purchase of treasury stock
      (208,805
      )
      
      (831,982
      )
      
      (545,055
      )Net cash provided by (used
  in) financing activities
      (35,326,839
      )
      
      69,711,372
      
      
      130,684,604NET (DECREASE) INCREASE IN
  CASH AND CASH EQUIVALENTS
      (20,112,815
      )
      
      (84,840,232
      )
      
      119,231,050Cash and cash equivalents at
  beginning of year
      39,911,543
      
      
      124,751,775
      
      
      5,520,725Cash and cash equivalents at
  end of year
      $19,798,728
      
      
      $39,911,543
      
      
      $124,751,775Supplemental disclosures of
  cash flow information:Cash paid during the year
  for:Interest
      $  6,215,000
      
      
      $  2,692,000
      
      
      $        786,000Income taxes
      $  9,020,000
      
      
      $14,673,000
      
      
      $    9,510,000


At December
 31, 2005, the restricted cash and
investments amount applied to short-term investments was $32,964,807, see Note
B.

|(a) |  | As restated, See Note A. 4.
|--- |  | ---------------------------

*The accompanying notes
are an integral part of these statements.*

| | F-7 | 
| | --- | 

---

NOTE A - ORGANIZATION,
NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES

Bradley Pharmaceuticals, Inc. (the
Company) is a Delaware corporation originally founded in 1985.  The Companys primary
business activity is the marketing of various pharmaceutical products (primarily
dermatology, podiatry and gastroenterology), which primarily have been acquired through
the purchase of trademark rights and patents.  The products are sold either
over-the-counter or by prescription only throughout the United States and to distributors
in selected international markets.

A summary of the significant
accounting policies of the Company applied in the preparation of the accompanying
consolidated financial statements follows:

1.  Restatement of Previously Issued
Financial Statements for the Quarter Ended September 30, 2004

All amounts referenced in this
Annual Report reflect the relevant amounts on a restated basis.  The originally issued
financial statements for the quarter ended September 30, 2004 should no longer be relied
upon.

2.  Principles of Consolidation

The consolidated financial
statements include the accounts of Bradley Pharmaceuticals, Inc. and its wholly-owned
subsidiaries, Doak Dermatologics Inc. (Doak), Bioglan Pharmaceuticals Corp.
(Bioglan), A. Aarons, Inc. (a subsidiary that began operations in 2006) and Bradley
Pharmaceuticals Overseas, Ltd. (a foreign sales corporation).  All intercompany
transactions have been eliminated in consolidation.

3.  Cash and Cash Equivalents
   Cash
and cash equivalents include investments in highly liquid securities having maturity of
three months or less at the time of purchase.

4.  Restatement in the
Classification of Auction Rate Municipal Bonds

During
the Fourth Quarter of fiscal 2005, the Company restated its auction rate municipal bonds
to short-term investments available for sale.  Previously, such investments had been
classified as cash and cash equivalents.  This restatement results from recent
interpretations regarding the application of FASB 95.  The changed interpretation is
based on the view that the legal maturity dates of these types of investments are
generally outside the three-month term limitation specified in FASB 95.  Previously, it
was the Companys view that auction rate securities satisfied the cash equivalents
criteria of FASB 95 because of the short-term nature (i.e., less than 90 days) of reset
periods available to investors.  There is no impact from this restatement on the Companys
debt classification, working capital, net income or cash flows from operations or from
financing activities.  All amounts for prior periods have been restated to conform to
this presentation.  Amounts involved in the restatement from cash and cash equivalents
were $13,000,000 and $19,736,433 as at December 31,  2004 and 2003, respectively.  The
Company has also made corresponding adjustments of $6,736,433 and $4,436,433 to its
Consolidated Statement of Cash Flows for the years ended December 31, 2004 and 2003,
respectively, to reflect the net purchases of these securities as investing activities
rather than as components of cash and cash equivalents.

5. Short-term Investments

The
Company accounts for investments under Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities.  The Companys
debt and equity securities are classified as available-for-sale and held to maturity.
 Available-for-sale securities are carried at fair value as determined through quoted
market prices with the unrealized gains and losses reported in accumulated other
comprehensive income.  The cost of securities sold is based upon the specific
identification method.  Held-to-maturity investments in the accompanying balance sheet
represents investments in AAA rated commercial paper and other debt securities with
maturities of greater than 3 months and less than one year when purchased.  The amortized
cost of debt securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity.  Such amortization is included in interest income.
 It is the Companys intention to hold these securities to maturity.

6. Accounts Receivable and Material
Customers

The Company extends credit on an
uncollateralized basis primarily to wholesale drug distributors.  Historically, the
Company has not experienced significant credit losses on its accounts.  The Companys
four largest customers accounted for an aggregate of approximately 90% and 91% of gross
trade accounts

| | F-8 | 
| | --- | 

---

receivable at December 31, 2005, and
2004, respectively.  On December 31, 2005, on a gross trade accounts receivable basis,
Cardinal Health, Inc. owed approximately $8,962,000 to the Company or 50% of accounts
receivable and McKesson Corporation owed approximately $5,825,000 to the Company or 33%
of accounts receivable.  On December 31, 2004, Cardinal Health, Inc. owed approximately
$7,302,000 to the Company, or 46% of accounts receivable, and McKesson Corporation owed
approximately $5,437,000 to the Company, or 35% of accounts receivable.  The following
table presents a summary of gross sales to significant customers as a percentage of the
Companys gross sales:

Customer*
      
      2005
      
      2004
      
      2003AmerisourceBergen
  Corporation
      
      13%
      
      15%
      
      17%Cardinal Health, Inc.
      
      40%
      
      36%
      
      27%McKesson Corporation
      
      29%
      
      25%
      
      24%Quality King Distributors
      
      1%
      
      11%
      
      14%


---

|* |  | No
other  customer  had a percentage  of the  Companys  total gross sales  greater
than 5% during the            year ended December 31, 2005, 2004 or 2003.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Supplemental information on the
accounts receivable balances at December 31, 2005 and 2004 are as follows:

2005
      
      2004Accounts receivableTrade
      
      $17,897,760
      
      $15,750,828Other
      
      612,034
      
      4,76218,509,794
      
      15,755,590Chargebacks
      
      134,886
      
      478,451Discounts
      
      322,278
      
      344,846Fee-for-service
      
      750,963
      
      -Doubtful accounts
      
      1,430,398
      
      763,8132,638,525
      
      1,587,110Accounts receivable, net of
  allowances
      
      $15,871,269
      
      $14,168,480


Trade receivables consist of sales
of product primarily to wholesale customers.  Other receivables primarily consist of a
royalty due to the Company from Par Pharmaceuticals for the authorized generic of ADOXA® 50mg
and 100mg tablets.

Chargebacks are based on the
difference between the prices at which the Company sells its products to wholesalers and
the sales price ultimately paid under fixed price contracts by third party payers, who
are often governmental agencies and managed care buying groups.  The Company records an
estimate of the amount either to be charged back to the Company at the time of sale to
the wholesaler.  The Company has recorded reserves for chargebacks based upon various
factors, including current contract prices, historical trends and the Companys
future expectations.  The amount of actual chargebacks claimed could be either higher or
lower than the amounts accrued by the Company.  Changes in the Companys estimates
would be recorded in the income statement in the period of the change.

The Company records an estimate of
the discount amount deducted from customers payments at the time of sale. Typically, the
Company offers a 2% discount based upon customer prompt payments.  Management estimates
its reserves for discounts, based upon historical discounts claimed.  The amount of
actual discounts claimed could differ (either higher or lower) in the near term from the
amounts accrued by the Company.

The Company entered into
Distribution and Service Agreements (DSAs) with two of its major customers,
McKesson and Cardinal.  DSAs are a result of the wholesalers shifting from the buy and
hold model (i.e.,

| | F-9 | 
| | --- | 

---

wholesalers purchasing in bulk in
anticipation of price increases or in exchange for discounts) to the fee-for-service
model (i.e., where pharmaceutical providers pay wholesalers a fee for the service of
distributing the pharmaceutical providers products) in an effort to align wholesaler
purchasing patterns with end-user demand. In particular, the Company entered into DSAs
with Cardinal and McKesson during 2005 which DSAs had effective dates during 2004.  The
terms of the DSAs require the Company to pay fees to Cardinal and McKesson, as the case
may be, which fees are offset by any price appreciation of the inventory that Cardinal
and McKesson have on-hand, as the case may be, and also by any discounts that the Company
gives to Cardinal and McKesson, as the case may be, for new product promotions. In return
for this fee,  Cardinal and McKesson, as the case may be, are obligated to maintain
their respective inventory levels of the Companys products to the agreed upon
months-on-hand and to provide the Company with monthly inventory and sales reports.
 Based upon these DSAs, the Company owes, as of December 31, 2005, $750,963.

The Company also maintains a
provision for doubtful accounts, with respect to which the Company believes the
probability of collecting the accounts receivable is remote.  Based upon specific
analysis of the Companys accounts, the Company maintains a reserve.  The amount of
actual customer defaults could differ (either higher or lower) in the near term from the
amounts accrued by the Company.

7. Accrued Expenses

Supplemental
information on the accrued expenses at December 31, 2005 and 2004 are as follows:

2005
      
      2004Employee compensation
      
      $  1,874,883
      
      $  3,220,605Rebate payable
      
      55,504
      
      44,775Rebate liability
      
      5,032,044
      
      2,953,623Deferred revenue
      
      904,439
      
      1,043,907Return reserve (see Note
  A.8)
      
      24,934,080
      
      24,074,511Legal settlement reserve
      
      500,000
      
      1,750,000Royalty payable
      
      1,427,895
      
      1,041,036Other
      
      2,380,630
      
      1,448,489Accrued expenses
      
      $37,109,475
      
      $35,576,946


The Company establishes and
maintains reserves for amounts payable to managed care organizations and state Medicaid
programs for the reimbursement of a portion of the retail price of prescriptions filled
that are covered by the respective plans.  The amounts estimated to be paid relating to
products sold are recognized as revenue reductions and as additions to accrued expenses
at the time of sale based on the Companys best estimate of the expected prescription
fill rate to these managed care patients using historical experience adjusted to reflect
known changes in the factors that impact such reserves.  The rebate liability represents
the estimated claims for rebates owed to Medicaid and managed care providers but not yet
received by the Company.  The rebate payable represents actual claims for rebate amounts
received from Medicaid and managed care providers and payable by the Company.  Legal
settlement reserve represents the Companys estimate for potential legal settlements
discussed in Note I.6.

8.  Allowance for returns

The Company records an estimate for
returns at the time of sale.  The Companys return policy typically allows product
returns for products within an eighteen-month window from six months prior to the
expiration date and up to twelve months after the expiration date.  The Company believes
that it has sufficient data to estimate future returns at the time of sale.  The Company
is required to estimate the level of sales, which will ultimately be returned pursuant to
the Companys return policy, and record a related reserve at the time of sale.
 These amounts are deducted from the Companys gross sales to determine the Companys
net sales.  The Companys estimates take into consideration historical returns of a
given product, product specific information provided by the Companys customers and
information obtained regarding the levels of inventory being held by the Companys
customers, as well as overall purchasing patterns by its customers. The Company
periodically reviews the reserves established for returns and adjusts them based on
actual experience, including the execution of the DSAs in 2005 (but effective as of 2004)
(for more information, see Note A.6), obtaining customer inventory data for the Companys
four largest customers, a change in these customers market dynamics, having
subsequent return visibility, and

| | F-10 | 
| | ---- | 

---

having increased generic
competition.  If the Company over or under estimates the level of sales which will
ultimately be returned, there may be a material impact to the Companys financial
statements.

9.  Inventories

The Company purchases raw materials
and packaging components for some third party manufacturing vendors.  The Company
utilizes third parties to manufacture and package finished goods held for sale, takes
title to certain finished inventories after manufactured, and warehouses such goods until
final distribution and sale.  Finished goods consist of salable products held at the
Companys warehouses.  Inventories are valued at the lower of cost or market using the
first-in, first-out method.  The Company provides valuation reserves for estimated
obsolescence or unmarketable inventory in an amount equal to the difference between the
cost of inventory and the estimated market value based upon assumptions about future
demand and market conditions.

Supplemental information on
inventory balances at December 31, 2005 and 2004 are as follows:

2005
      
      
      2004Finished
  goods
      
      $  5,877,815
      
      
      $  8,420,499Raw
  materials
      
      2,348,846
      
      
      1,908,535Valuation
  reserve
      
      (1,331,453
      )
      
      (1,296,778
      )Inventories, net
      
      $  6,895,208
      
      
      $  9,032,256


10. Property and Equipment

Property and equipment is stated at
cost.  Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using the
straight-line method over a period ranging from 5 to 7 years for equipment, 3 to 5 years
for furniture and fixtures and the lesser of 10 years or the life of the lease for
leasehold improvements.

11. Intangible Assets and Goodwill

The Company has made acquisitions of
products and businesses that include goodwill, license agreements, product rights, and
other identifiable intangible assets.  The Company assesses the impairment of
identifiable intangibles, including goodwill, when events or changes in circumstances
indicate that the carrying value may not be recoverable. Some factors the Company
considers important which could trigger an impairment review include: (i) significant
underperformance compared to expected historical or projected future operating results;
(ii) significant changes in the Companys use of the acquired assets or the strategy
for its overall business; and (iii) significant negative industry or economic trends.

When the Company determines that the
carrying value of intangible assets with definite lives may not be recoverable based upon
the existence of one or more of these factors, the Company first  performs an assessment
of the assets recoverability based on expected undiscounted future net cash flow, and if
the amount is less than the assets value, the Company will measure any impairment based
on a projected discounted cash flow method using a discount rate determined by the
Company  to be commensurate with the risk inherent in its current business model.

Goodwill is not being amortized, but
is subject to periodic impairment tests.  The Company performed an annual impairment test
during 2005 of its goodwill and determined that no impairment of the recorded goodwill
existed. The fair value of the reporting unit was calculated on the basis of discounted
estimated future cash flows and compared to the related book value of such reporting
units.  Under SFAS No. 142, goodwill will be tested for impairment at least annually and
more frequently if an event occurs which indicates the goodwill may be impaired. The
Company performed the test at December 31, 2005 and December 31, 2004 and noted that no
impairment existed.

| | F-11 | 
| | ---- | 

---

12. Revenue Recognition

Revenue from product sales, net of
estimated provisions, is recognized when the merchandise is shipped to an unrelated third
party, as provided in Staff Accounting Bulletin No. 104, Revenue Recognition in
Financial Statements.  Accordingly, revenue is recognized when all four of the following
criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of
the products has occurred; (iii) the selling price is both fixed and determinable; and
(iv) collectibility is reasonably probable.

The Companys customers consist
primarily of large pharmaceutical wholesalers who sell directly into the retail channel.
 Provisions for sales discounts, and estimates for chargebacks, rebates, damaged and
expired product returns and exchanges, are established as a reduction of product sales
revenues at the time such revenues are recognized based on historical experience adjusted
to reflect known changes in the factors that impact these reserves.  These revenue
reductions are generally reflected either as a direct reduction to accounts receivable
through an allowance or as an addition to accrued expenses.

The Company does not provide any
forms of price protection to wholesale customers other than a contractual right to two
wholesale customers that the Companys price increases and product purchase discounts
offered during each twelve-month period will allow for inventory of the Companys
products then held by these wholesalers to appreciate in the aggregate.  The Company does
not, however, guarantee that its wholesale customers will sell the Companys
products at a profit.

13. Risks, Uncertainties and Certain
Concentrations

The Companys future results of
operations involve a number of risks and uncertainties. Factors that could affect the
Companys future operating results and cause actual results to vary materially from
expectations include, but are not limited to, market acceptance of the Companys
products, the Companys ability to maintain or increase sales, the outcome of the
Companys federal securities class action lawsuit and state and federal shareholder
derivative lawsuits, the SEC inquiry, the Companys ability to file its required
financial reports with the SEC on a timely basis, the adequacy of the Companys cash
and cash flow to meet its working capital requirements, the Companys ability to comply
with its debt covenants, ability to obtain acceptable financing in the future, ability to
successfully acquire new products or technologies and implement life cycle management
techniques, impact from DSAs, changes in buying patterns from the wholesalers and
retailers, changes in physician prescribing habits, pharmacy substitution, accurately
estimating for returns, discounts, chargebacks and rebates, rising insurance costs,
product recalls, FDA approval of the Companys R&D projects or newly licensed or
acquired products on-timely basis, if at all, the Companys ability to meet minimum
purchase requirements under some supply agreements and other commitments, the Companys
ability to realize the value of intangible assets and deferred tax assets, dependence on
key personnel and the Companys sales force, government regulation, the maintenance
of patent protection on certain of the Companys products, manufacturing
disruptions, competition, reliance on certain customers and vendors, absence of redundant
facilities and credit risk.

The Company is potentially subject
to concentrations of credit risk, which consist principally of cash and cash equivalents,
restricted cash, short-term investments, and trade accounts receivable. The cash and cash
equivalent balances at December 31, 2005 and 2004 were principally held by three
institutions, and are in excess of the Federal Deposit Insurance Corporation (FDIC)
insurance limit. As of December 31, 2005 and 2004, four wholesale customers accounted for
$16,133,216 and $14,308,110 or 90% and 91%, respectively, of the gross trade accounts
receivable balance.

The Company maintains $10,000,000 of
product liability insurance on its products. This insurance is in addition to required
product liability insurance maintained by the manufacturers of the Companys products.
The Company cannot assure that product liability claims against it will not exceed that
coverage. To date, no product liability claim has been made against the Company and the
Company is not aware of any pending or threatened claim.

All manufacturers, marketers, and
distributors of human pharmaceutical products are subject to regulation by the Federal
Drug Administration (FDA).  New drugs are typically subject of an FDA-approved new drug
application before they may be marketed in the United States.  Some prescription and
other drugs are not the subject of an approved marketing application but, rather, are
marketed subject to the FDAs regulatory discretion and/or enforcement policies.  Any
change in the FDAs enforcement discretion and/or policies could alter the way the
Company conducts business and any such change could severely impact the Companys future
profitability.

| | F-12 | 
| | ---- | 

---



For the year ended December 31,
2005, five vendors that manufacture and package products for the Company accounted for
approximately 21%, 15%, 7%, 6% and 5% each of the Companys cost of goods sold.  For the
year ended December 31, 2004, five vendors that manufacture and package products for the
Company accounted for approximately 35%, 12%, 8%, 5% and 4% each of the Companys cost of
goods sold.  For the year ended December 31, 2003, five vendors that manufacture and
package products for the Company accounted for approximately 33%, 16%, 8%, 7% and 4% each
of the Companys cost of goods sold.  No other vendor, packager or manufacturer accounted
for more than 5%, 4% and 4% of the Companys cost of goods sold for 2005, 2004 or 2003,
respectively.  The Company currently has no manufacturing facilities of its own and,
accordingly, is dependent upon maintaining its existing relationship with its vendors or
establishing new vendor relationships to avoid a disruption in the supply of products to
supply inventory. There can be no assurance that the Company would be able to replace its
current vendors without any disruption to operations.

The Company had export sales of
approximately 2%, 2% and 2% of its net sales for the years ended December 31, 2005, 2004
and 2003, respectively.

In December 2004, the Company was
advised by the staff of the SEC that it is conducting an informal inquiry relating to the
Company to determine whether there have been violations of the federal securities laws.
 In connection with the inquiry, the SEC staff has requested that the Company provide it
with certain information and documents, including with respect to revenue recognition and
capitalization of certain payments.  The Company is cooperating with this inquiry,
however, the Company is unable at this point to predict the final scope or outcome of the
inquiry, and it is possible the inquiry could result in civil injunctive or criminal
proceedings, the imposition of fines and penalties, and/or other remedies and sanctions.
 The conduct of these proceedings could negatively impact the Companys stock price.
 Since the Company cannot predict the outcome of this matter and its impact on the
Company, the Company has made no provision relating to this matter in its financial
statements.  In addition, the Company expects to continue to incur expenses associated
with the SEC inquiry and its repercussions, regardless of the outcome of the SEC inquiry,
and it may divert the efforts and attention of the Companys management from normal
business operations.

There is no proprietary protection
for most of the Companys branded pharmaceutical products, and competing generic or
comparable products for most of these products are sold by other pharmaceutical
companies.  For the products the Company has proprietary protection, the proprietary
protection does not always provide significant protection.  In addition, governmental and
other pressure to reduce pharmaceutical costs may result in physicians prescribing
products for which there are generic or comparable products.  Increased competition from
the sale of generic pharmaceutical or comparable products may cause a decrease in sales
from the Companys branded products, which could have an adverse effect on the Companys
business, financial condition and results of operations.  In addition, the Companys
branded products for which there are no generic or comparable forms available may face
competition from different therapeutic treatments used for the same indications for which
the Companys branded products are used.

14. Net Income Per Common Share

The Company computes income per
share in accordance with Statement of Financial Accounting Standards No. 128 Earnings per
Share (SFAS 128) which specifies the compilation, presentation and disclosure
requirements for income per share for entities with publicly held common stock or
instruments which are potentially common stock.

15. Income Taxes

The Company and its subsidiaries
file a consolidated Federal income tax return.

Deferred income taxes are provided
for the future tax consequences attributable to the differences between the financial
statement carrying amounts of assets and liabilities and their respective tax base.
 Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion of the deferred tax assets will
not be realized.

16. Reclassifications

Certain reclassifications have been
made to the 2005 and 2004 financial statements in order to conform to the current
presentation, including reclassification of the distribution of treasury stock to fund
401(k) from

| | F-13 | 
| | ---- | 

---

financing activities to operating
activities within the cash flow statement.  In addition, the Company reclassified its
auction rate municipal bonds to short-term investments (see Note A.4).

17. Using Estimates in Financial
Statements

In preparing financial statements in
conformity with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the reporting period.
 Actual results could differ from those estimates.  The Companys estimate for
chargebacks, rebates, discounts and returns, the determination of useful lives of
intangible assets and the realization of deferred tax assets represent particularly
sensitive estimates.

18. Advertising

The Company expenses advertising
costs as incurred.  Total advertising costs charged to expense amounted to approximately
$16,589,620, $14,714,987 and $9,338,849 for the years ended December 31, 2005, 2004 and
2003, respectively.

19. Shipping and Handling Costs

The Company expenses shipping and
handling costs as incurred.  Shipping and handling costs charged to selling, general and
administration expense amounted to $1,679,758, $1,631,526 and $1,965,487 for the years
ended December 31, 2005, 2004 and 2003, respectively.

20. Research and Development

Research and development costs
related to both present and future products are expensed as incurred.

21. Stock Based Compensation

The Company has the 1990 Stock Option
Plan and the 1999 Incentive and Non-Qualified Stock Option Plan, which are described more
fully in Note H.2.  As permitted under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, (SFAS 123), the Company accounts for
those plans under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.  No stock-based
employee compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal or above the market value of the underlying common
stock on the date of grant.  The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition provisions of
SFAS 123 using the assumptions described in Note H.2, to stock-based employee
compensation.

| | F-14 | 
| | ---- | 

---

Year ended December 31,2005
      
      2004
      
      
      
      2003Net income, as reported
      
      $
      7,961,510
      
      $
      7,954,314
      
      
      
      $
      16,824,716Deduct: Total stock-based
  employee 
              compensation
  expense determined 
               under fair value based method for all  
              awards, net of
  related tax effects
      
      
      (1,214,244
      )
      
      (1,875,419
      )
      
      
      
      (1,452,989
      )Pro forma net income for
  basic computation
      
      $
      6,747,266
      
      $
      6,078,895
      
      
      
      $
      15,371,727Net income, as reported
      
      $
      7,961,510
      
      $
      7,954,314
      
      
      
      $
      16,824,716Deduct: Total stock-based
  employee 
              compensation
  expense determined under  
              fair value based method for all awards, 
               net of
  related tax effects
      
      
      (1,214,244
      )
      
      (1,875,419
      )
      
      
      
      (1,452,989
      )Add: After-tax interest
  expense and 
              other
  from convertible notes
      
      
      897,461
      
      
      1,024,340
      
      
      
      
      447,160Pro forma net income for
  diluted
          Computation
      
      $
      7,644,727
      
      $
      7,103,235
      
      
      
      $
      15,818,887Earnings per share:Basic  as
  reported
      
      $
      0.50
      
      $
      0.51
      
      
      
      $
      1.55Basic
   pro forma
      
      $
      0.42
      
      $
      0.39
      
      
      
      $
      1.42Diluted
   as reported
      
      $
      0.49
      
      $
      0.49
      
      
      
      $
      1.35Diluted
   pro forma
      
      $
      0.42
      
      $
      0.39
      
      
      
      $
      1.23


22. Fair Market Value of Financial
Instruments

The estimated fair value of certain
of the Companys financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable, accounts payable and accrued expenses
approximate their carrying amounts due to their short term maturities. The carrying value
of the Companys auction rate municipal bonds approximates their fair value due to
their variable interest rates, which typically reset within 35 days. The carrying value
of the Companys $110 million new facility approximates its fair value because the
interest rates applicable to such debt are based on floating rates identified by
reference to market rates.

| | F-15 | 
| | ---- | 

---

23. New Accounting Standards

In March 2004, the EITF reached a
consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. This consensus clarifies the meaning of
other-than-temporary impairment and its application to investments classified as either
available-for-sale or held-to-maturity under Statement of Financial Accounting Standard
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, and
investments accounted for under the cost method or the equity method.  The application of
this guidance should be used to determine when an investment is considered impaired,
whether an impairment is other than temporary, and the measurement of an impairment loss.
 The guidance also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about unrealized losses
that have not been recognized as other-than-temporary impairments.  The guidance for
evaluating whether an investment is other-than-temporarily impaired is effective for
evaluations made in reporting periods beginning after June 15, 2004.  In September 2004,
the FASB issued FSP 03-1-1, Effective Date of Paragraphs 10-20 of EITF 03-1, The
Meaning of Other than Temporary Impairment, which delayed certain provisions of EITF
03-1 until the FASB issues further implementation guidance.  The application of this
consensus did not have a material impact on the Companys results of operations or
financial position.

In October 2004, the Emerging Issues
Task Force (the EITF) of the FASB reached a consensus on EITF 04-8,The Effect of
Contingently Convertible Instruments on Diluted Earnings Per Share (EITF 04-8), which
requires all shares that are contingently issuable under the Companys outstanding
convertible notes to be considered outstanding for its diluted earnings per share
computations, if dilutive, using the if converted method of accounting from the date of
issuance. These shares were only included in the diluted earnings per share computation
if the Companys common stock price has reached certain conversion trigger prices. EITF
04-8 also requires the Company to retroactively restate its prior periods diluted
earnings per share. EITF 04-8 is effective for periods ending after December 15, 2004.
Upon adoption, EITF 04-8 had no impact on the Companys diluted earnings per share.

In November 2004, the FASB issued
Statement 151, Inventory Costs. The standard clarifies that abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials should be recognized as
current-period charges and requires the allocation of fixed production overheads to
inventory based on the normal capacity of the production facilities.  The standard is
effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
 The adoption of SFAS No. 151 is not expected to have a material impact on the Companys
financial position or results of operations.

In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29.  The standard is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of the assets
exchanged and eliminates the exception under ABP Opinion No. 29 for an exchange of
similar productive assets and replaces it with an exception for exchanges of nonmonetary
assets that do not have commercial substance.  The standard is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005.  The adoption of
SFAS No. 153 is not expected to have a material impact on the Companys financial
position or results of operations.

In December 2004, the FASB issued
SFAS No. 123R (revised 2004),Share-Based Payment(SFAS 123R). SFAS 123R replaced SFAS
No. 123, Accounting for Stock-Based Compensation (SFAS 123), and superseded Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25).  In
March 2005, the U.S. Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 107 (SAB 107), which expresses views of the SEC staff regarding
the interaction between SFAS 123R and certain SEC rules and regulations, and provides the
staffs views regarding the valuation of share-based payment arrangements for public
companies.  SFAS 123R will require compensation cost related to share-based payment
transactions to be recognized in the financial statements.  SFAS 123R required public
companies to apply SFAS 123R in the first interim or annual reporting period beginning
after June 15, 2005.  In April 2005, the SEC approved a new rule that delays the
effective date, requiring public companies to apply SFAS 123R in their next fiscal year,
instead of the next interim reporting period, beginning after June 15, 2005.  As
permitted by SFAS 123, the Company elected to follow the guidance of APB 25, which
allowed companies to use the intrinsic value method of accounting to value their
share-based payment transactions with employees.  SFAS 123R requires measurement of the
cost of share-based payment transactions to employees at the fair value of the award on
the grant date and recognition of

| | F-16 | 
| | ---- | 

---

expense over the requisite service
or vesting period.  SFAS 123R allows for implementation using a modified version of
prospective application, under which compensation expense of the unvested portion of
previously granted awards and all new awards will be recognized on or after the date of
adoption.  SFAS 123R also allows companies to adopt SFAS 123R by restating previously
issued statements, basing the amounts on the expense previously calculated and reported
in their pro forma footnote disclosures required under SFAS 123.  The Company will adopt
SFAS 123R in the first interim period of fiscal 2006 and is currently evaluating the
impact that the adoption of SFAS 123R has on its results of operations and financial
position.

In May 2005, the FASB issued
Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error
Corrections (SFAS 154).  SFAS 154 requires retrospective application to prior-period
financial statements of changes in accounting principles, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the change.
 SFAS 154 also redefines restatement as the revising of previously issued
financial statements to reflect the correction of an error.  This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005.  The adoption of SFAS 154 is not expected to have a material impact on
the Companys financial position or results of operations.

NOTE B - SHORT-TERM
INVESTMENTS

The Companys short-term investments
are intended to establish a high-quality portfolio that preserves principal, meets
liquidity needs and delivers an appropriate yield in relationship to the Companys
investment guidelines and market conditions.

The Company invests primarily in
money market funds, short-term commercial paper, short-term municipals, treasury bills,
and treasury notes.  By policy, the Company invests primarily in high-grade investments.

The Company restated its
presentation of its auction rate municipal bonds to short-term investments.  Previously,
such investments had been classified as cash equivalents.  For more information, see Note
A.4.

The following is a summary of
available-for-sale securities for December 31, 2005:

Cost
      
      Gross 
             Unrealized 
             Loss
      
      
      Gross Fair 
             ValueMunicipal bonds
      
      $
      32,970,757
      
      $
      (5,950
      )
      
      $
      32,964,807Total available-for-sale
  securities
      
      $
      32,970,757
      
      $
      (5,950
      )
      
      $
      32,964,807




The following is a summary of
available-for-sale securities for December 31, 2004:

Cost
      
      Gross 
             Unrealized 
             Loss
      
      
      Gross Fair 
             ValueMunicipal bonds
      
      $
      32,412,971
      
      $
      (78,260
      )
      
      $
      32,334,711Total available-for-sale
  securities
      
      $
      32,412,971
      
      $
      (78,260
      )
      
      $
      32,334,711




During the year ended December 31,
2005, 2004 and 2003, the Company had gross realized losses on sales of available-for-sale
securities of $41,927, $120,017 and zero, respectively.  During the year ended December
31, 2005, 2004 and 2003, the Company had gross realized gains on sales of
available-for-sale securities of zero, $155,345 and $218,994, respectively.  The net
adjustment to unrealized gains during fiscal 2005 on available-for-sale securities
included in accumulated other comprehensive income totaled $72,310 and the net adjustment
to unrealized losses during fiscal 2004 and 2003 on available-for-sale securities
included in stockholders equity totaled $61,215 and $115,368, respectively.  The Company
views its available-for-sale securities as available for current operations.

| | F-17 | 
| | ---- | 

---

The Companys held-to-maturity
investments represent investments that have a remaining maturity of more than three
months and less than 1 year, when purchased.  Securities classified as held-to-maturity,
which consist of securities that management has the ability and intent to hold to
maturity, are carried at amortized cost.  The Company had no held-to-maturity investments
at December 31, 2005.

The composition of the Companys
held-to-maturity investments at December 31, 2004 was as follows:

Municipal bonds, 4% 
            
          maturity
  date January 1, 2005
      
      $1,885,000Municipal bonds, 5% 
            
          maturity
  date January 1, 2005
      
      2,200,000Total held-to-maturity
  investments
      
      $4,085,000


Due to the short maturity dates of
the held-to-maturity investments, the carrying value approximates the fair market value
at December 31, 2004.

The amortized cost and estimated
fair value of the available-for-sale securities at December 31, 2005, by maturity, are
shown below.  Expected maturities will differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without prepayment
penalties, and the Company views its available-for-sale securities as available for
current operations.

Available-for-sale
      
      Cost
      
      Estimated 
           Fair ValueDue in one year or less
      
      $8,324
      
      $8,383Due after one year through
  two years
      
      $2,090,000
      
      $2,090,000Due after two years
      
      $30,872,433
      
      $30,866,424Total
      
      $32,970,757
      
      $32,964,807


As of December 31, 2005, the Company
had a restriction on the ability to use its short-term investment from the $110 million
credit facility (see Note F).  The total amount of restricted cash and investments from
the $110 million credit facility is $45,000,000. The following table exhibits the
application of the restriction on the short-term investments at December 31, 2005:

Unapplied short-term
  investments
      $32,964,807Amount of short-term
  investments applied to restricted cash
      (32,964,807)Short-term investments
      -Amount of cash and cash
  equivalents applied to restricted cash and investments
      $12,035,193




| | F-18 | 
| | ---- | 

---

NOTE C - INTANGIBLE
ASSETS

Details of intangible assets are
summarized as follows:

December 31, 2005
      
      December 31, 2004Cost
      
      Accumulated 
          Amortization
      
      Net
      
      Cost
      
      Accumulated 
          Amortization
      
      NetTrademarks
      
      $ 166,261,617
      
      $ 24,768,984
      
      $ 141,492,633
      
      $ 166,261,617
      
      $ 16,653,459
      
      $ 149,608,158Patents
      
      10,327,454
      
      2,578,260
      
      7,749,194
      
      10,327,454
      
      1,661,700
      
      8,665,754Licenses
      
      2,724,886
      
      612,380
      
      2,112,506
      
      2,724,886
      
      287,384
      
      2,437,502Covenants not to compete
      
      162,140
      
      162,140
      
      -0-
      
      162,140
      
      162,140
      
      -0-$ 179,476,097
      
      $ 28,121,764
      
      $ 151,354,333
      
      $ 179,476,097
      
      $ 18,764,683
      
      $ 160,711,414


Trademarks, patents and licenses are
all intangible assets with definite useful lives and therefore continue to be amortized
under SFAS 142.  Amortization periods for intangible assets as of December 31, 2005 are
summarized as follows:

Weighted 
           Average 
           Amortization  
          PeriodTrademarks
      
      19Patents
      
      10Licenses
      
      8


The following relates to the
Companys intangible assets with definitive useful lives:

Aggregate Amortization ExpenseFor the fiscal year ended
  2003
      
      $   821,480For the fiscal year ended
  2004
      
      4,126,249For the fiscal year ended
  2005
      
      9,357,081Estimated Amortization ExpenseYear ended December 31, 2006
      
      $9,295,690Year ended December 31, 2007
      
      9,263,565Year ended December 31, 2008
      
      9,261,765Year ended December 31, 2009
      
      9,059,381Year ended December 31, 2010
      
      9,059,381




Intangible assets arose principally
from the following transactions:

Bioglan Pharmaceuticals Company

On August 10, 2004, the Company
purchased certain assets of Bioglan Pharmaceuticals Company, a wholly-owned subsidiary of
Quintiles Transnational Corp.  As part of the transaction, the Company acquired certain
intellectual property, regulatory filings, and other assets relating to SOLARAZE®,
ADOXA®, ZONALON®, Tx Systems®, and certain other dermatologic products.
 The total consideration was approximately $191 million, including acquisition costs.
 For more information, see Note J.

| | F-19 | 
| | ---- | 

---

International Distribution Rights 
  On June 30, 2004, the Company
entered into a distribution agreement with Dermik Laboratories, a division of Aventis
Pharmaceuticals, Inc., a wholly owned subsidiary of Aventis Pharma AG, to acquire
exclusive distribution and marketing rights in selected international markets to the
prescription acne and rosacea products Benzamycin®, Klaron® and Noritate®, and three
additional products, Hytone®, Sulfacet R® and Zetar® Shampoo.  Pursuant to this
agreement, the Company acquired exclusive distribution and marketing rights to these
products for eight years in Australia, Japan, the countries comprising the former Soviet
Union, Saudi Arabia, the United Arab Emirates, Kuwait and Egypt in the Middle East, and
Vietnam, Thailand and Cambodia in Southeast Asia.  The Company is responsible for
securing the necessary approvals to market these products in these countries.  The
Company has agreed to pay Dermik not less than $3.2 million in aggregate acquisition fees
and royalties against the Companys net sales of these products, of which the Company has
paid, as of December 31, 2005, approximately $2.6 million in distribution rights included
in intangible assets and $240,000 in advanced royalties.

NOTE D - PROPERTY AND
EQUIPMENT

Property and equipment are
summarized as follows:

December 
           31, 2005
      
      
      December  
          31, 2004Furniture and Fixtures
      
      $  2,586,931
      
      
      $  2,041,379Equipment
      
      1,758,774
      
      
      1,642,767Leasehold Improvements
      
      452,841
      
      
      488,0684,798,546
      
      
      4,172,214Accumulated Depreciation
      
      (3,299,148
      )
      
      (2,491,102
      )$  1,499,398
      
      
      $  1,681,112




Assets under capital lease were
$142,304 as of December 31, 2005 and December 31, 2004.  Related accumulated depreciation
was $142,304 and $141,229 as of December 31, 2005 and 2004.

NOTE E - INCOME TAXES

The provision for income tax expense
is as follows:

Year ended 
          December 
           31, 2005
      
      
      Year ended 
          December 
          31, 2004
      
      
      Year ended 
          December 
           31, 2003CurrentFederal
      
      $ 4,053,000
      
      
      $  10,690,000
      
      
      $ 10,130,000State
      
      766,000
      
      
      2,435,000
      
      
      1,947,0004,819,000
      
      
      13,125,000
      
      
      12,077,000DeferredFederal
      
      194,000
      
      
      (6,785,000
      )
      
      (1,097,000
      )State
      
      35,000
      
      
      (1,233,000
      )
      
      (224,000
      )229,000
      
      
      (8,018,000
      )
      
      (1,321,000
      )$ 5,048,000
      
      
      $   5,107,000
      
      
      $ 10,756,000




The following is a summary of the
items giving rise to deferred tax assets (liabilities) at December 31, 2005 and 2004.

| | F-20 | 
| | ---- | 

---



2005
      
      
      2004CurrentAllowance
  for doubtful accounts
      
      $
      557,855
      
      
      $
      315,184Allowance
  on sales
      
      
      12,108,862
      
      
      
      10,678,973Inventory
  reserves and capitalization
      
      
      1,184,574
      
      
      
      864,333Other
      
      
      483,071
      
      
      
      805,052$
      14,334,362
      
      
      $
      12,663,542Long-termIntangibles
  and fixed assets
      
      $
      (925,092
      )
      
      $
      1,272,010


As of December 31, 2005 and 2004,
the Company determined that no deferred tax asset valuation allowance was necessary.  The
Company believes that its projections of future taxable income make it more likely than
not that such deferred assets will be realized.

During 2001, deferred tax assets and
additional paid-in capital increased by $2,042,045 for the tax benefit relating to the
exercise of warrants.  During 2005 and 2004, deferred tax assets and current taxes
payable were reduced by $296,886 relating to these warrants.  Additionally during the
years ended December 31, 2005, 2004 and 2003, the Company recorded approximately
$238,000, $830,000 and $1,242,000 of tax benefits directly to paid in capital resulting
from the exercise of stock options.

The Company has taken certain tax
positions, which it believes are appropriate, but may be subject to challenge by tax
authorities.  Should those challenges be successful, the Companys best estimate of
additional possible taxes due amounts to approximately $1.1 million.

The difference between the actual
Federal income tax expense and the amount computed by applying the prevailing statutory
rate to income before income taxes is reconciled as follows:

Year ended 
          December 31, 
           2005
      
      Year ended 
          December 31,  
          2004
      
      Year ended 
          December 31,  
          2003Tax at statutory rate
      35.0
      %
      
      35.0
      %
      
      35.0
      %State income tax expense, net of Federal tax effect
      3.9
      
      
      6.2
      
      
      4.5Other
      (0.1
      )
      
      (2.1
      )
      
      (0.5
      )Effective tax rate
      38.8
      %
      
      39.1
      %
      
      39.0
      %


NOTE F - REVOLVING
CREDIT FACILITY, CONVERTIBLE SENIOR SUBORDINATED NOTES AND LONG-TERM DEBT

On June 11, 2003, the Company issued
$25 million in aggregate principal amount of its 4% convertible senior subordinated notes
due June 15, 2013 (the Notes ) (plus a potential allotment to the initial purchasers
of the Notes to acquire up to an additional $8 million in principal amount of the Notes)
in a private placement transaction.  The Notes accrued interest at the rate of 4% per
annum, payable semi-annually in arrears on June 15 and December 15 of each year, and were
convertible into shares of the Companys common stock at any time prior to maturity at a
conversion rate of 50 shares of the Companys common stock per $1,000 in principal amount
of Notes, which represented a conversion price of $20.00 per share.  The Notes were
junior to all of the Companys existing and future senior indebtedness and effectively
subordinated to all existing and future liabilities of the Companys subsidiaries,
including trade payables.

On July 24, 2003, the Company issued
an additional $12 million in aggregate principal amount of Notes.

During September 2004, the Company
entered into a $125 million credit facility (the Old Facility) with a
syndicate of banks led by Wachovia Bank, National Association (Wachovia Bank).
 The Old Facility was comprised of a $75 million term loan and a $50 million revolving
line of credit.  The Old Facility would have expired and become due upon the earlier to
occur of (i) September 28, 2009; and (ii) May 15, 2008 if,

| | F-21 | 
| | ---- | 

---

after giving effect to a redemption
of the Companys outstanding $37 million of convertible senior 4% subordinated notes
due 2013 (the Notes) that could have been compelled by the Noteholders on
June 15, 2008, the Company would have failed to meet certain financial ratios described
in the Old Facility.  The Old Facility was secured by a lien upon substantially all of
the Companys assets, including those of its subsidiaries, and was guaranteed by the
Companys operating subsidiaries.  The Company intended to use the Old Facility for
general corporate purposes, including potential acquisitions and the repayment by the
Company of its obligations under its former $50 million bridge loan.

Amounts outstanding under the Old
Facility accrued interest at the Companys choice from time to time of either (i)
the base rate (which was equal to the greater of the applicable prime rate or the federal
funds rate plus 1/2 of 1%) plus 1.00% to 1.75%, depending upon the Companys
leverage ratio; or (ii) a rate equal to the sum of the applicable LIBOR rate plus 2.00%
to 2.75%, depending upon the Companys leverage ratio.  In addition, the lenders
under the Old Facility were entitled to customary facility fees based on unused
commitments under the facility and outstanding letters of credit.

In its Current Report on Form 8-K
filed on April 28, 2005, the Company reported that (i) it had received a notice from a
beneficial holder of the Notes claiming a default under the related indenture (the Indenture)
as a result of the Companys failure to file its Annual Report on Form 10-K for the
year ended December 31, 2004; and (ii) such a default, if not cured within 30 days after
receipt of that notice, would constitute an event of default entitling the trustee or
Noteholders to accelerate maturity of the Notes, which had an aggregate principal amount
of $37 million.

On June 1, 2005, the Company
received a subsequent notice from that beneficial Noteholder advising that the Companys
failure to cure such default now constituted an event of default under the Indenture and
declaring the principal of the Notes and interest thereon to be due and payable.
 However, in light of the notice described below relating to the Old Facility, no payment
could be made to the Noteholders under the Indenture with respect to the Notes until the
end of the Payment Blockage Period described below.

The administrative agent for the
lenders that were party to the Old Facility sent a notice on May 20, 2005 (the Payment
Blockage Notice) to the trustee advising the trustee that certain non-payment
defaults existed under the Old Facility and electing to effect a Payment Blockage Period
under the Indenture.  The Old Facility represented indebtedness that was senior to the
Notes.

Under the Indenture, a Payment
Blockage Period meant the period commencing upon receipt by the trustee of the
Payment Blockage Notice and ending on the earliest of:

| |  |  | 179
days thereafter (provided that the senior indebtedness to which the non-payment
                  default relates has not been accelerated);
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
date on which the non-payment default is cured, waived or ceases to exist;
| | - |  | ------------------------------------------------------------------------------

| |  |  | The
date on which the senior indebtedness is discharged or paid in full; or
| | - |  | ---------------------------------------------------------------------------

| |  |  | The
date on which the Payment Blockage Period is terminated by written notice to the
                 trustee from the representative of the senior indebtedness initiating
the Payment                   Blockage Period.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Concurrently with the closing of a
new $110 million credit facility on November 14, 2005 described in more detail below (the
New Facility), which New Facility replaced the Old Facility, the Company
repaid all amounts due under the Notes and the related Indenture, including all default
interest and other payments.

On November 14, 2005, the Company
entered into the $110 million New Facility with a syndicate of lenders again led by
Wachovia Bank that replaced the Old Facility.  The New Facility is comprised of an $80
million term loan and a $30 million revolving line of credit.  The New Facilitys
term loan and revolving line of credit both mature on November 14, 2010 and are secured
by a lien upon substantially all

| | F-22 | 
| | ---- | 

---

of the Companys assets,
including those of its subsidiaries, and is guaranteed by the Companys domestic
subsidiaries. The New Facility was subsequently amended on January 26, 2006 and May 15, 2006, as described below.

As discussed above, concurrently
with the closing of the New Facility, the Company repaid all amounts due under its Notes
and the related Indenture, including all default interest and other payments (an
aggregate of $38,429,898), and paid all fees and expenses in connection with the New
Facility.  In connection with the closing of the New Facility, the payment of related
fees, the satisfaction of all amounts outstanding under the Old Facility, and the
repayment of all amounts due under the Notes and the related Indenture, including all
default interest and other payments, the Company used all of the proceeds of the New
Facilitys term loan and approximately $22 million of its cash-on-hand.  Immediately
prior to the repayment of the Notes, the administrative agent for the lenders party to
the Old Facility terminated the Payment Blockage Period under the Indenture that had
arisen from a notice to the trustee, dated May 20, 2005, advising the trustee that
certain non-payment defaults existed under the Old Facility.  As a result of the
prepayment of the Notes, the Company expensed $2,055,861 of deferred financing costs
during the Fourth Quarter of 2005.  Also, as a result of the prepayment of the Old
Facility, the Company expensed $1,933,103 of deferred financing costs in the Fourth
Quarter of 2005.

Amounts outstanding under the New
Facility accrue interest at the Companys choice from time to time of either (i) the
alternate base rate (which is equal to the greater of the applicable prime rate or the
federal funds effective rate plus 1/2 of 1%) plus 3%; or (ii) a rate equal to the sum of
the applicable LIBOR rate plus 4%.  In addition, the lenders under the New Facility are
entitled to customary facility fees based on unused commitments under the New Facility
and outstanding letters of credit.  At December 31, 2005, the effective interest rate
accrued by the Company was 8.35%.  As a result of entering into the New Facility, the
Company incurred deferred financing costs of $5,376,875 which are being amortized over
the five year term of the New Facility.

The financial covenants under the
New Facility require that the Company maintain (i) a leverage ratio (which is a ratio of
funded debt of the Company and its subsidiaries to consolidated EBITDA) less than or
equal to 2.50 to 1.00 beginning with the fiscal quarter ended September 30, 2005; (ii) a
fixed charge coverage ratio (which is a ratio of (A) consolidated EBITDA minus
consolidated capital expenditures made in cash to (B) the sum of consolidated interest
expense made in cash, scheduled funded debt payments, total federal, state, local and
foreign income, value added and similar taxes paid or payable in cash, and certain
restricted payments) greater than or equal to 1.50 to 1.00; (iii) not less than $25
million of unrestricted cash and cash equivalents on its balance sheet at all times; and
(iv) upon receipt of the audited financial statements for the fiscal year ended 2004, pro
forma for the Bioglan acquisition, consolidated EBITDA of at least $42.2 million.
Further, the New Facility limits the Companys ability to declare and pay cash
dividends.

On January 3, 2006, the Company
received a notice from the administrative agent under the New Facility stating that the
Company was in default under the New Facility with the minimum pro forma consolidated
EBITDA covenant for the fiscal year ended December 31, 2004 and the covenant to file with
the SEC the Companys Annual Report on Form 10-K for the fiscal year ended December
31, 2004 by December 31, 2005.  On January 26, 2006, the Company received a waiver of
these defaults from its lenders under the New Facility.  In connection with this waiver,
which also granted the Company permission to enter into the Collaboration and License
Agreement with MediGene, the Company agreed with its lenders to file its Annual Report on
Form 10-K for the year ended December 31, 2004 by January 31, 2006, have a minimum
audited consolidated EBITDA for the fiscal year ended December 31, 2004, pro forma for
the Bioglan acquisition, of at least $33.22 million, file its Annual Report on Form 10-K
for the year ended December 31, 2005 by April 30, 2006, have a minimum audited
consolidated EBITDA for the fiscal year ended December 31, 2005 of at least $40.0 million
(before permitted reductions for non-recurring costs incurred by the Company during 2005
in connection with the restatement of the Companys  Third Quarter 2004 financial
statements, the SEC inquiry and related lawsuits, including legal, accounting and other
professional fees, and the costs associated with the Companys elimination of debt
during 2005 under the Old Facility and the Notes), satisfy the leverage ratio and fixed
charge coverage ratio tests beginning with the fiscal quarter ended December 31, 2005 and
pay to them waiver, amendment and arrangement fees of $520,000 in the aggregate.  In
addition, the Company agreed with its lenders that until the Company files its Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2005, June 30, 2005 and September

| | F-23 | 
| | ---- | 

---

30, 2005, and Annual Report on Form
10-K for the year ended December 31, 2005, the Company will increase, from $25 million to
$45 million, the amount of unrestricted cash and cash equivalents it will maintain at all
times on its balance sheet, not incur any borrowings under the revolving credit line
portion of the New Facility and provide them with monthly cash reports.  The Companys
lenders ceased their accrual of default interest under the New Facility concurrently with
their delivery to the Company of the waiver.

As a result of the Companys
failure to file its Annual Report on Form 10-K for the year ended December 31, 2005 by
April 30, 2006, the Company triggered a default under the New Facility.  On May 15, 2006,
the Company received a waiver of this default from its lenders under the New Facility.
 In connection with this waiver, which also allowed the Company to continue outstanding
LIBOR Rate Loans under the New Facility, the Company agreed with its lenders to file its
Annual Report on Form 10-K for the year ended December 31, 2005 by May 31, 2006 and its
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006 by June 30,
2006.  Concurrently, the Companys lenders agreed to certain technical amendments to
the New Facility clarifying Permitted Investments which can be utilized in determining
the Companys minimum cash balance (which, until the Company files its Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2006 and demonstrates
compliance with the financial covenants in the New Facility, must be at least $45
million), allowing the Company to deliver to the lenders under the New Facility the
Companys 2006 annual budget by June 30, 2006 and allowing the Company to calculate,
for financial covenant purposes, consolidated EBITDA without giving effect to that
portion of the Companys initial $5 million payment to MediGene that the Company
classifies as an expense in accordance with GAAP.  The Companys lenders
acknowledged that provided the Company file its Annual Report on Form 10-K for the year
ended December 31, 2005 with the SEC by May 31, 2006, the Company would not be required
to pay default interest under the New Facility; otherwise, default interest would be
payable on a retroactive basis beginning on May 1, 2006.

As of May 15, 2006, the Company has
$76 million in borrowings under the New Facilitys term loan outstanding and no
amounts under the New Facilitys revolving line of credit were outstanding.

As result of the refinancing on
November 14, 2005 and the waiver of the defaults on January 26, 2006, the Company has
classified as a long-term liability $69 million that would have otherwise been shown as
current as a result of the default.

Long-term debt consists of the
following:

December 
             31, 2005
      
      December 
           31,
             2004Convertible Notes
      
      $
      -
      
      $
      37,000,000Old Facility
      
      
      -
      
      
      71,250,000New Facility
      
      
      78,000,000
      
      
      -Other
      
      
      87,779
      
      
      158,579Total debt
      
      
      78,087,779
      
      
      108,408,579Less current maturities:Convertible Notes
      
      
      -
      
      
      37,000,000Old Facility
      
      
      -
      
      
      38,250,000New Facility
      
      
      9,000,000
      
      
      -Other
      
      
      75,781
      
      
      105,949Total current maturities
      
      
      9,075,781
      
      
      75,355,949Total long-term debt
      
      $
      69,011,998
      
      $
      33,052,630


The annual scheduled maturities of
long-term debt as of December 31, 2005 were as follows:

| | F-24 | 
| | ---- | 

---

Year 2006
      
      $   9,075,781Year 2007
      
      13,006,643Year 2008
      
      17,005,355Year 2009
      
      21,000,000Year 2010
      
      18,000,000Thereafter
      
      -Total
      
      $ 78,087,779


Because of the nature of the
Companys debt, its maturities, and prevailing interest rates, the Company believes that
the carrying values of the long-term debt, excluding its Notes, approximates their fair
values at December 31, 2005 and 2004. The fair value of the Companys Notes as of
December 31, 2004 was approximately $44,000,000, as obtained from an investment bank.

NOTE G - RELATED PARTY
TRANSACTIONS

1.  Transactions With an Affiliated
Company

During the years ended December 31,
2004 and 2003, the Company received administrative support services (consisting
principally of mailing, copying, financial services, data processing and other office
services) which were charged to operations from Medimetrik, Inc. (f/k/a Banyan
Communications Group, Inc.) ( Medimetrik ), an affiliate, in the amount of $29,000 and
$55,532, respectively. Daniel Glassman, the Companys Chairman of the Board of Directors,
Chief Executive Officer and President, and Iris Glassman, an officer, a member of the
Companys Board of Directors and spouse of Daniel Glassman, are majority owners of
Medimetrik.  Medimetrik is a privately held entity that currently has no operations but
was principally engaged in the business of market research services, which ceased
providing services to the Company in June 2004 after it was sold to an unrelated third
party.

2.  Transactions With Shareholders
and Officers

The Company leases approximately
33,000 square feet of office and warehouse space at 383 Route 46 West, Fairfield, New
Jersey, under a lease expiring on January 31, 2008, with a limited liability company
(LLC) owned and controlled by Daniel Glassman and his spouse, Iris Glassman. The
purpose of the LLC is to own and manage the property at 383 Route 46 West. At the
Companys option, the Company can extend the term of the lease for an additional 5 years
beyond expiration. The lease agreement obligates the Company to pay 3% increases in
annual lease payments per year. Rent expense, including the Companys proportionate share
of real estate taxes, was approximately $614,000, $487,000 and $496,000 in 2005, 2004 and
2003, respectively.

As of December 31, 2005, the
estimated assets of the LLC were approximately $1.8 million and the estimated liabilities
were $1.5 million.  Daniel and Iris Glassman own 10% and their children own 90% of this
LLC.

During 2003, the Company consulted
with Bruce Simpson, a former member of the Board of Directors. Mr. Simpson provided
services in marketing, sales, and corporate development.  His related consultant expense
was approximately $25,000 for the year ended December 31, 2003.

The Company historically paid to Dr.
C. Ralph Daniel, III, a member of the Companys Board of Directors, since Dr. Daniel
joined the Companys Board during June 2003, a monthly consulting fee of $2,500.  This
fee was paid to Dr. Daniel in consideration for product performance, patient review,
general marketing and corporate development services performed on the Companys behalf by
Dr. Daniel.  This monthly consulting fee was credited, on a dollar-for-dollar basis,
against the annual cash retainer payable by the Company to Dr. Daniel in consideration
for Dr. Daniels serving as one of the Companys directors.  The Company had
also agreed to pay to Dr. Daniel a success fee calculated on a Lehman Formula  basis,
but not to exceed $300,000, if Dr. Daniel first introduced to the Company a product
licensing or acquisition opportunity or merger or acquisition candidate which the Company
had not yet internally identified (collectively, a New Business Opportunity) and such
New Business Opportunity was consummated by the Company.  Dr. Daniel and the Company
agreed to terminate Dr. Daniels consulting and Lehman Formula transaction
success fee arrangement effective March 31, 2006.

The Company paid to Steven
Kriegsman, a member of the Companys Board of Directors, for the period commencing during
June 2003, when Mr. Kriegsman joined the Companys Board, and continuing through November
1, 2004, when Mr. Kriegsman became Chairman of the Companys Audit Committee (the

| | F-25 | 
| | ---- | 

---

Applicable Period ), a monthly
consulting fee of $2,500.  This fee was paid to Mr. Kriegsman in consideration for his
assisting the Company in identifying New Business Opportunities.  The Company had also
agreed to pay to Mr. Kriegsman during the Applicable Period a success fee in the amount
of 3% of the total transaction value of any New Business Opportunity consummated by the
Company if such New Business Opportunity was first introduced to the Company by Mr.
Kriegsman.  Mr. Kriegsman and the Company agreed to terminate Mr. Kriegsmans
consulting and transaction success fee  arrangement during November 2004, concurrently with
Mr. Kriegsmans appointment as Chairman of the Companys Audit Committee.

During January 2004, the Company
issued 5,236 restricted, fully vested and non-forfeitable shares of common stock to
certain officers of the Company for being members of a management committee which is
responsible for identifying and implementing the Companys strategic plans.  The
committee was formed in the First Quarter 2004 and as a result of the issuance of the
restricted stock, the Company expensed $125,036 during the First Quarter 2004.

NOTE H - SHAREHOLDERS
EQUITY

The Companys authorized shares of
common stock are divided into two classes, of which 26,400,000 shares are common stock
and 900,000 shares are Class B common stock.  The rights, preferences and limitations of
the common stock and the Class B common stock are equal and identical in all respects,
except that each common stock share entitles the holder thereof to one vote upon any and
all matters submitted to the shareholders of the Company for a vote, and each Class B
share entitles the holder thereof to five votes upon certain matters submitted to the
shareholders of the Company for a vote.

Both common stock and Class B common
stock vote together as a single class upon any and all matters submitted to the
shareholders of the Company for a vote, provided, however, that the holders of common
stock and holders of Class B common stock vote as two separate classes to authorize any
proposed amendment to the Companys Certificate of Incorporation, which affects the
rights and preferences of such classes.  So long as there are at least 325,000 shares of
Class B common stock issued and outstanding, the holders of Class B common stock vote as
a separate class to elect a majority of the directors of the Company (who are known as
Class B Directors), and the holders of common stock and voting preferred stock, if any,
vote together as a single class to elect the remainder of the directors of the Company.

The Board of Directors may divide
the preferred stock into any number of series, fix the designation and number of shares
of each such series, and determine or change the designation, relative rights,
preferences and limitations of any series of preferred stock.  The Board of Directors may
increase or decrease the number of shares initially fixed for any series, but no such
decrease shall reduce the number below the number of shares then outstanding and shares
duly reserved for issuance.

1. Stock Repurchase Plan

During September 2004, the Companys
previously announced program to repurchase up to $4 million of outstanding common stock
expired.  During 2004, prior to the plans expiration, the Company repurchased 20,000
shares at a cost of $418,077. During 2003, the Company acquired 45,713 shares at a cost
of $545,055. The Company had repurchased, from the plans inception during September
2002, a total of 117,713 shares at a cost of $1,474,102.

On October 27, 2004, the Companys
Board of Directors approved a program to repurchase up to $8 million of the Companys
outstanding common stock, which program expires on October 26, 2006.  Repurchases are
currently subject, however, to a restriction under the Companys $110 million New
Facility, which limits the aggregate repurchases of stock by the Company to $3 million
during the term of the New Facility, unless waived or amended. Stock repurchases under
this program may be made from time to time, on the open market, in block transactions or
otherwise, at the discretion of management of the Company. During 2005 and 2004, the
Company repurchased under the October 2004 approved program 14,000 and 22,000 shares at a
cost of $208,805 and $413,904, respectively.

2. Incentive and Non-Qualified Stock
Option Plan

Under the 1990 Stock Option Plan,
2,600,000 shares of common stock are reserved for issuance.  This plan expired upon the
adoption of the 1999 Incentive and Non-Qualified Stock Option Plan; however, as of
December 31, 2005, some options under this Plan remain outstanding.



| | F-26 | 
| | ---- | 

---

Under the 1999 Incentive and
Non-Qualified Stock Option Plan, 3,250,000 shares of common stock are reserved for
issuance.  The plan will expire on January 31, 2010, but options may remain outstanding
past this date.  As of December 31, 2005 and 2004, there were 692,959 and 1,590,973
shares available for grant, respectively.  Grants cancelled or forfeited are available
for future grants.  Options issued typically vest over 3 years and have expiration dates
ten years after issuance for employees and five years for board members and employees
that have over 10% ownership.

The number of shares covered by each
outstanding option, and the exercise price, must be proportionately adjusted for any
increase or decrease in the number of issued shares resulting from a subdivision or
consolidation of shares, stock split, or the payment of a stock dividend.  The following
table summarizes the option activity from January 1, 2003 to December 31, 2005:

Number of 
            Options
      Weighted 
            Average 
            Exercise 
            PriceBalance, January 1, 2003
      1,786,123
      
      $  5.44Granted
      214,300
      
      $20.86Exercised
      (135,136
      )
      4.23Canceled
  or forfeited
      (69,634
      )
      13.58Balance, December 31, 2003
      1,795,653
      
      $7.04Granted
      187,900
      
      $23.71Exercised
      (544,476
      )
      2.58Canceled
  or forfeited
      (49,285
      )
      18.58Balance, December 31, 2004
      1,389,792
      
      $10.64Granted
      998,900
      
      $13.53Exercised
      (412,717
      )
      1.40Canceled
  or forfeited
      (100,886
      )
      19.02Balance, December 31, 2005
      1,875,089
      
      $13.76


As of December 31, 2005, options
outstanding for 767,833 shares were exercisable at a weighted average price of $12.38,
and the weighted remaining contractual life was 1.42 years.  As of December 31, 2004,
options outstanding for 978,746 shares were exercisable at a weighted average price of
$6.82, and the weighted remaining contractual life was 4.8 years.

During 2003, the Company granted a
consultant an option to purchase 1,800 shares of common stock at a price of $13.90, the
market value on the date of grant, which is exercisable immediately, non-forfeitable, and
will expire three years from the date of grant.  During 2003, the Company expensed
$11,041 for these services using a Black-Scholes method to value such options.

On December 31, 2005 and 2004, there
were 464,245 and 123,276 options outstanding and exercisable to non-employees and board
members, respectively.  Options issued typically vest over 3 years and have expiration
dates ten years after issuance for employees and five years for board members and
employees that have over 10% ownership.

The
following table summarizes option data as of December 31, 2005:

| | F-27 | 
| | ---- | 

---



Range of Exercise 
            Prices
      Number 
            Outstanding 
            as of 
            December 31, 
            2005
      Weighted 
            Average 
            Remaining 
            Contractual 
            Life (yrs)
      Weighted 
            Average 
            Exercise 
            Price
      Number 
            Exercisable 
            as of 
            December 31, 
            2005
      Weighted 
            Average 
            Exercise 
            Price$ 1.06 - $ 1.19
      7,596
      
      1.3
      
      $  1.18
      
      7,596
      
      $  1.181.31
  -    1.98
      4,200
      
      2.4
      
      1.84
      
      4,200
      
      1.842.00
  -    4.03
      47,500
      
      2.3
      
      2.12
      
      47,500
      
      2.127.05
  -     9.97
      201,600
      
      5.8
      
      7.63
      
      197,600
      
      7.6010.53
  -   11.76
      53,824
      
      2.9
      
      10.48
      
      23,824
      
      10.7212.40
  -   14.39
      1,098,535
      
      9.6
      
      13.29
      
      352,133
      
      13.1414.75
  -   20.18
      263,834
      
      6.3
      
      15.44
      
      45,834
      
      17.6220.31
  -   27.12
      198,000
      
      8.1
      
      24.78
      
      89,146
      
      24.821,875,089
      
      
      
      
      
      767,833


The fair value of each option
granted for purposes of the pro forma disclosures included in Note A.21 has been
estimated on the grant date using the Black-Scholes Option Valuation Model.  The weighted
average fair market value of the options granted during 2005, 2004 and 2003 were $7.92,
$14.00 and $12.10, respectively.  The following assumptions were made in estimated fair
value:

|                                     | 2005    |  | 2004    |  | 2003   
|------------------------------------ | ------- |  | ------- |  | -------
|Dividend yield                       | 0%      |  | 0%      |  | 0%     
|Risk-free interest rate              | 5.0%    |  | 5.0%    |  | 5.0%   
|Expected life after vesting
  period |         |  |         |  |        
|Directors
  and officers             | 4 years |  | 4 years |  | 4 years
|Others                               | 2 years |  | 2 years |  | 2 years
|Expected volatility                  | 60%     |  | 60%     |  | 60%    

The exercise price of all options
granted during the years ended December 31, 2005, 2004 and 2003 equaled or was greater
than the market price on the grant date.

3. Reserved Shares

The following table summarizes
shares of common stock reserved for issuance at December 31, 2005:

|Reserved for                                                                             | Exercise 
          Price | Number 
          of shares 
          Issuable
|---------------------------------------------------------------------------------------- | ------------------------- | -----------------------------------------------
|Warrants for consulting
  services (expiring July 9, 2008)                               | $       2.34              |                                                
|Warrants issued to private
  placement advisor (expiring 
             October 29, 2005) | 8.50                      |                                                
|1990 and 1999 Stock Option
  Plans                                                       | (see above)               |                                                
|                                                                                         |                           |                                                
|                                                                                         |                           |                                                
|                                                                                         |                           |                                                

All warrants listed above are
exercisable at December 31, 2005.

The number of shares covered by each
outstanding warrant and convertible Note, and the exercise price or conversion price,
must be proportionately adjusted for any increase or decrease in the number of issued
shares resulting from a subdivision or consolidation of shares, stock split, or the
payment of a stock dividend.  The following table summarizes the warrant activity from
January 1, 2003 to December 31, 2005:

| | F-28 | 
| | ---- | 

---



Number of 
            Warrants
      Weighted 
            Average 
            Exercise 
            PriceBalance, January 1, 2003
      335,266
      
      $  7.65Granted
      -0-
      
      $    -0-Exercised
      (209,208
      )
      5.01Canceled
  or forfeited
      -0-
      
      -0-Balance, December 31, 2003
      126,058
      
      $12.03Granted
      -0-
      
      $    -0-Exercised
      (110,571
      )
      13.26Canceled
  or forfeited
      (8,500
      )
      3.20Balance, December 31, 2004
      6,987
      
      $  3.21Granted
      -0-
      
      $    -0-Exercised
      -0-
      
      -0-Canceled
  or forfeited
      -0-
      
      -0-6,987
      
      $  3.21


For financial reporting purposes,
the tax benefit resulting from the exercise of non-qualified options and warrants
allowable for income tax purposes in excess of expense recorded for financial reporting
purposes is credited to additional paid-in capital.

4. Common Stock Offering

During December 2003, the Company
completed an offering of 4,600,000 shares of common stock at a price of $22.42 per share.
 The Company received net proceeds of $96.2 million from the offering after deducting
offering expenses.

| | F-29 | 
| | ---- | 

---

NOTE I - COMMITMENTS
AND CONTINGENCIES

1.  Leases

As of December 31, 2005, the Company
had the following lease commitments:

Year ending December 31,
      
      Operating 
            Leases
      Capital 
            Leases2006
      
      $1,871,452
      
      $15,9802007
      
      1,708,494
      
      6,6422008
      
      1,341,139
      
      5,3552009
      
      814,043
      
      -2010
      
      41,983
      
      -Thereafter
      
      -
      
      -$5,777,111
      
      27,977Amounts representing
  interest
      
      
      
      (284
      )Total principal payments
      
      
      
      $27,693


See Note G.2 for discussion of the
lease on the 383 Route 46 West premises.

Rent expense for the periods ended
December 31, 2005, 2004 and 2003 were $920,453, $541,297 and $538,036, respectively.

On August 10, 2004, the Company
acquired certain assets and assumed certain liabilities of Bioglan Pharmaceuticals
Company and certain subsidiaries, accounted for as a business combination in accordance
with SFAS No. 141, Business Combinations.  Included in the acquisition was a Bioglan
lease for facilities in Malvern, Pennsylvania, which had a term through December 31,
2006.  This lease was assigned to the Company with the consent of the landlord.  At the
time of acquisition, the Companys plan was to maintain the Malvern facilities until
November 1, 2004.

The Companys plan was to sub-lease
the Malvern facilities, and the Company expected that future sub-lease rentals would
substantially offset lease costs under the existing Bioglan agreement, and no liability
would be recognized.  On July 15, 2005, after unsuccessful attempts to secure a
sub-tenant, the Company entered into a lease termination agreement with the landlord.
 This agreement included payment of minimum annual rents and operating costs through the
July 15, 2005 termination date, plus the sum of $507,479 as a lease termination payment.
 The termination payment was recorded as an acquisition cost to goodwill during 2005.

2.  Distribution Arrangement

The Company has a distribution
arrangement with a third party public warehouse located in Tennessee to warehouse and
distribute substantially all of the Companys products.  This arrangement provides
that the Company will be billed based on invoiced sales of the products distributed by
such party, plus certain additional charges.

3.  Distribution Service Agreements
(DSAs)

In 2005, the Company entered into
DSAs with its two largest wholesale customers.  In exchange for a set fee, the
wholesalers agreed to provide the Company with certain information regarding product
stocking and out-movement, to maintain inventory quantities within specified maximum
levels, to provide inventory handling, stocking and management services and certain other
services.  For more information, see Note A.6.

| | F-30 | 
| | ---- | 

---

4.  Employment Agreements

On December 6, 2005, the Company
entered into employment agreements with four officers of the Company, which include
change of control provisions.  The Company also entered into a change of control
agreement with another officer of the Company on December 6, 2005.  The employment
agreements automatically renew for successive one year periods after the initial three
year term unless terminated, provide for minimum salary, as adjusted, incentive bonuses
paid upon attainment of specified management goals and severance provisions in the event
of termination under specified conditions, including change of control.  The change of
control agreement and employment agreements provide for severance payments in the event
that employment is involuntarily terminated in connection with a change in control of the
Company.

5.  Manufacturing and Supply
Agreements
  The Company has limited approved manufacturers for its products.  Any problems
with such manufacturing operations or capacity could reduce sales of the Companys
products as could any licensing or other contract disputes with these suppliers.  Under
some manufacturing and supply agreements, the Company has minimum inventory purchase
requirements.  For the periods ending December 31, 2009, 2008, 2007 and 2006, these
minimum purchase requirements are zero, $1,100,000, $1,000,000 and $1,275,000,
respectively.

6.   Legal Proceedings

DPT Litigation

On February 25, 2003, the Company
filed an action in the United States District Court for the District of New Jersey
against DPT Lakewood, Inc., an affiliate of DPT Laboratories Ltd.  In this lawsuit, the
Company alleged, among other things, that DPT Lakewood breached a confidentiality
agreement and misappropriated the Companys trade secrets relating to CARMOL®40
CREAM.  Among other things, the Company sought damages from DPT Lakewood for
misappropriation of the Companys trade secrets.  DPT Lakewood counterclaimed against the
Company seeking a declaration of invalidity and non-infringement of the patents in
question and making a claim for interference with contract and prospective economic
advantage.  On March 6, 2003, DPT Laboratories filed a lawsuit against the Company in the
Northern District of Texas alleging defamation arising from the Companys press release
announcing commencement of the litigation against DPT Lakewood. During January 2005, the
Company ended all pending litigation involving DPT Lakewood and DPT Laboratories.  During
February 2005, the District Court for the Northern District of Texas ordered the
dismissal of the case with prejudice based on the settlement previously reached by the
parties concerning the Texas action and related New Jersey action, which was dismissed
during June 2004.

Summers Laboratories Litigation

In December 2004, Summers
Laboratories filed a trademark infringement action against the Company in the U.S.
District Court for the Eastern District of Pennsylvania.  Summers principal claim was
that the Companys sale of pharmaceutical products utilizing the KERALAC trademark
was likely to cause confusion with Summers sale of pharmaceutical products utilizing
Summers KERALYT® trademark.  At the time of the commencement of the infringement
action, the Company and Summers each had pending with the U.S. Patent and Trademark
Office applications to register the marks KERALAC and KERALYT®, respectively.
 Summers sought a permanent injunction to prevent the Companys continued use of the
KERALAC mark and monetary damages in an unspecified amount.  The Company, at that
time, denied that the Company had infringed or otherwise caused any damage to Summers.

On October 6, 2005, the Company and
Summers agreed to settle this case.  In consideration for the Companys payment to
Summers of $1,250,000, Summers agreed to dismiss the lawsuit with prejudice, withdraw or
dismiss, with prejudice, its opposition to the Companys registration of its KERALAC trademark,
consent to the federal registration of the Companys KERALAC mark, acknowledge the
validity of the Companys federal registration of its KERALAC mark and consent to
the Companys continued use of the KERALAC mark and the sale by the Company of
pharmaceutical products utilizing the KERALAC mark.  The Company accrued for the
$1,250,000 lawsuit settlement in the Fourth Quarter 2004 and paid this amount in 2005.

| | F-31 | 
| | ---- | 

---

Contract Dispute

In 2004, the Company was named in a
Complaint as a defendant in a civil action filed in the Superior Court of New Jersey
alleging breach of contract by the Company and seeking unspecified monetary damages.
 During 2005, the Company filed an Answer and Counterclaim with respect to this matter,
seeking monetary relief of its own. Discovery with respect to this dispute has not yet
been scheduled by the Court.  While the Company believes that it has meritorious defenses
to the plaintiffs allegations and valid bases to assert its counterclaims and demand for
monetary damages, the Company accrued $500,000 as a probable settlement for this matter
in the Fourth Quarter 2004.

Shareholder Lawsuits

The Company, along with certain of
the Companys officers and directors, were named defendants in thirteen federal
securities lawsuits that were consolidated on May 5, 2005 in the United States District
Court for the District of  New Jersey.  In the amended consolidated complaint, filed on June 20, 2005, the
plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder, arising out of disclosures that plaintiffs
allege were materially false and misleading.  Plaintiffs also allege that the Company and
the individual defendants falsely recognized revenue.  Plaintiffs sought an unspecified
amount of compensatory damages in an amount to be proven at trial.  The Company and the
individual defendants filed their initial response on July 20, 2005 seeking to dismiss
the amended consolidated complaint in its entirety with prejudice.  On March 23, 2005,
the Court issued an order denying the Companys motion to dismiss the federal
securities class action lawsuit.  The Company continues to dispute the allegations set
forth in the class action lawsuit and intend to vigorously defend itself.  Discovery in
the federal securities class action lawsuit has not yet been scheduled.

Additionally, two related New Jersey
state court shareholder derivative actions were filed on April 29, 2005 and May 11, 2005
against certain of the Companys officers and directors alleging breach of fiduciary duty
and other claims arising out of substantially the same allegations made in the federal
securities class action lawsuit. Plaintiffs seek an unspecified amount of damages in
addition to attorneys fees.  On the parties agreement, these two related state
shareholder derivative actions were consolidated on July 19, 2005 in the Superior Court
of New Jersey and stayed in their entirety pending a decision on the motion to dismiss
the consolidated federal securities class action lawsuit.  Plaintiffs in the state
shareholder derivative actions have 30 days from the decision denying the motion to
dismiss the federal securities class action lawsuit to file a consolidated amended
derivative complaint.  The Company disputes the allegations in the state shareholder
derivative lawsuit and intends to move to dismiss the consolidated amended derivative
complaint, if timely filed, in its entirety.

Further, a federal shareholder
derivative action was recently filed in the United States District Court for the District
of New Jersey against the Company and certain of its officers and directors.  Service of
process in this matter was accepted by the Company and the other defendants on April 26,
2006.  This action alleges breach of fiduciary duties arising out of the SEC inquiry and
the restatement of the Companys financial results for the quarter ended September
30, 2004 and violations of Delaware law regarding annual meetings.  Plaintiffs seek an
unspecified amount of damages and attorneys fees and an order compelling the
Company to schedule an Annual Meeting of Stockholders.  The Company and the other
defendants intend to move to dismiss this action in its entirety and schedule a Joint
2005/2006 Annual Meeting of Stockholders following the Companys filing of its 2005
Annual Report on Form 10-K.

The Company expects to incur
additional substantial defense costs regardless of the outcome of these lawsuits.
Likewise, such events have caused, and will likely continue to cause, a diversion of the
Companys managements time and attention.

SEC Inquiry

In December 2004, the Company was
advised by the staff of the SEC that it is conducting an informal inquiry relating to the
Company to determine whether there have been violations of the federal securities laws.
 In connection with the inquiry, the SEC staff has requested that the Company provide it
with certain information and documents, including with respect to revenue recognition and
capitalization of certain payments.  The Company is cooperating with this inquiry,
however, the Company is unable at this point to predict the final scope or outcome of the
inquiry, and it is possible the inquiry could result in civil injunctive or criminal
proceedings, the imposition of fines and penalties, and/or other remedies and sanctions.
 The conduct of these proceedings could negatively impact the Companys stock price.
 Since the

| | F-32 | 
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Company cannot predict the outcome
of this matter and its impact on the Company, the Company has made no provision relating
to this matter in its financial statements.  In addition, the Company expects to continue
to incur expenses associated with the SEC inquiry and it repercussions, regardless of the
outcome of the SEC inquiry, and the inquiry may divert the efforts and attention of the
Companys managements team from normal business operations.

General Litigation

The Company and its operating
subsidiaries are parties to other routine actions and proceedings incidental to their
business.  There can be no assurance that an adverse determination on any such action or
proceeding would not have a material adverse effect on the Companys business, financial
condition or results of operations.  The Company discloses the amount or range of
reasonably possible losses in excess of recorded amounts.

The Company accounts for legal fees
as services are incurred.

7. Defined Contribution 401(k) Plan

The Company has a defined
contribution 401(k) plan whereby the Company matches employee contributions.  During
2005, the Company matched up to 25% of the employees first 6% of contributions for
employees with less than 2 years of service, up to 50% of the employees first 6% of
contributions for employees with more than 2 years of service but less than 4 years of
service and up to 75% of the employees first 6% of contributions for employees with more
than 4 years of service.  During 2004, the Company matched up to 25% of the employees
first 6% of contributions.  The Companys contributions for the 401(k) employee match was
approximately $414,000, $277,000 and $73,000 incurred for the years ended December 31,
2005, 2004 and 2003, respectively.

8. Co-Promotion Agreements

On July 9, 2003, the Company entered
into a Co-Promotion Agreement with Ventiv Health U.S. Sales LLC to co-promote ANAMANTLE® HC.
 Ventiv agreed to promote ANAMANTLE® HC to obstetricians and gynecologists. During
2005, 2004 and 2003, the Company expensed $280,513, $558,261 and $259,064, respectively,
for these services.  The Co-Promotion Agreement with Ventiv was terminated in February
2005.

During June 2005, the Company
entered into a Co-Promotion Agreement with Mission Pharmacal, a privately-held
 pharmaceutical company specializing in Womens Health, to co-promote ANAMANTLE® HC
to obstetricians and  gynecologists.  During February 2006, the Company and Mission
agreed to terminate this agreement.  During 2005,  the Company expensed $128,394 for
these services.

9. International Distribution
Agreement

On June 30, 2004, the Company
entered into a distribution agreement with Dermik Laboratories, a division of Aventis
Pharmaceuticals, Inc., a wholly owned subsidiary of Aventis Pharma AG, to acquire
exclusive distribution and marketing rights in selected international markets to the
prescription acne and rosacea products Benzamycin®, Klaron® and Noritate®,
and three additional products, Hytone®, Sulfacet R® and Zetar® Shampoo.
 Pursuant to this agreement, the Company has exclusive distribution and marketing rights
to these products for eight years in Australia, Japan, the countries comprising the
former Soviet Union, Saudi Arabia, the United Arab Emirates, Kuwait and Egypt in the
Middle East, and Vietnam, Thailand and Cambodia in Southeast Asia.  The Company is
responsible for securing the necessary approvals to market these products in these
countries.  The Company has agreed to pay Dermik not less than $3.2 million in aggregate
acquisition fees and royalties against the Companys net sales of these products, of
which the Company has paid, as of December 31, 2005, approximately $2.6 million in
distribution rights included in intangible assets and $240,000 in advanced royalties.
 After satisfying its $3.2 million obligation to Dermik, the Company is required to pay
Dermik a 7.5% royalty against the Companys net sales of these products in these
international territories.

10. Authorized Generic Agreement

On December 13, 2005, the Company
entered into a Licensing and Distribution Agreement with Par Pharmaceutical, Inc.
(Par).  Under the Agreement, the Company has granted to Par and its affiliates an
exclusive, royalty-bearing license to manufacture and distribute in the United States
doxycycline

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monohydrate tablets and capsules
(i.e., an authorized generic version of ADOXA®), in certain strengths and dosage
forms, excluding 50mg and 100mg capsules.

Under this Agreement, Par has agreed
to act as the Companys sole and exclusive distributor for the authorized generic product
in the United States.  Par may launch such combinations of the authorized generic product
in strengths and dosage forms as the Company approves in advance.  In addition, the
Company may withhold its approval for Par to market or sell the authorized generic
product in blister or unit-dose packaging.  To date, the Company has only approved the
launch of the authorized generic version of the 50mg and 100mg strengths of ADOXA® tablets
in bottles.  Under the terms of the Agreement, Par must pay to the Company 50% of Pars
net profits under the Agreement.  During 2005, the Company earned $607,302 in royalty
revenue under the Agreement.

The Agreement commenced on December
13, 2005 and continues, unless otherwise earlier terminated, for a period of ten (10)
years from the date of Pars first commercial sale of the authorized generic product and
will be automatically renewed for successive one-year periods unless a party otherwise
notifies the other in writing at least ninety (90) days prior to the expiration of the
initial, or any renewal, term.  Either party has the right to terminate the Agreement if
the other party commits a breach or default in the performance or observance of any of
its material obligations under the Agreement and the breach or default continues for
sixty (60) days after the breaching party is notified in writing of the breach or
default.  Either party may also terminate the Agreement in certain other instances
described in the Agreement.

11.      Collaboration and License
Agreement

On January 30, 2006, the Company
entered into a Collaboration and License Agreement with MediGene AG.  Under the
Agreement, MediGene has granted to the Company the exclusive license, or sublicense in
certain instances, to certain patents, trademarks and other intellectual property for the
Companys use in the commercialization, in the United States, as a prescription
product, of any ointment or other topical formulation containing green tea catechins,
developed pursuant to the Companys agreement with MediGene, for the treatment of
dermatological diseases in humans, including but not limited to external genital warts,
perianal warts and actinic keratosis. MediGene has also granted to the Company the
non-exclusive license, or sublicense in certain instances, to certain patents, trademarks
and other intellectual property to manufacture those products outside of the United
States.

Additionally, under the Agreement,
the Company agreed to purchase exclusively from MediGene the active product  ingredient,
a mixture of green tea catechins, required for the Companys commercialization of
the products in  the United States and have agreed to certain minimum purchase amounts.
 Under the Agreement, the Company and  MediGene will pursue the EGW Indication (as
defined below), for which MediGene is obligated to pay all further  development and
registration costs.  The Agreement further provides that the parties may engage in
development  and registration activities relating to products covered by the Agreement
for indications other than the EGW  Indication or new development which would extend the
scope of the EGW Indication.  If the parties mutually  decide to pursue these other
registration and development activities, the Company and MediGene will share the  costs
of such development and registration activities in varying percentages, depending on the
indication sought  and other circumstances.  MediGene retains the rights to data
generated under such activities for use outside  the United States.  Under the Agreement,
if certain criteria are not met at various points along the development  timeline for
particular products, or if certain products being developed cease to have economic
viability, each  party has the right to cease its participation in and funding of the
development and registration activities  relating to that particular product.

In the First Quarter 2006, the
Company paid to MediGene $5,000,000 in consideration for development and registration
activities undertaken prior to the date of the Agreement.  The Company will expense the
$5,000,000 research and development payment during the First Quarter 2006.  Additionally,
if a product having an external genital wart and perianal wart indication to be applied
three times per day (the EGW Indication) receives final regulatory approval,
the Company will pay MediGene a milestone payment which, when added to the $5,000,000
already paid, will bring the aggregate milestones payable with respect to the EGW
Indication to $19,000,000.  The Agreement also contemplates additional milestone payments
which, when added to the milestones payable with respect to the EGW Indication, could
aggregate to a maximum of approximately $69,000,000.  These milestones are dependent upon
specific achievements in the product development and regulatory approval process of
products under the Agreement for indications

| | F-34 | 
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---

other than the EGW Indication (which
could aggregate to a maximum of approximately $19,000,000 in milestones) and also based
upon the Companys net sales of all products under the Agreement, including sales
relating to the EGW Indication (which could aggregate to a maximum of approximately
$31,000,000 in milestones).  In addition to these payments, the Company will also pay
MediGene, with respect to each product, a product royalty based on a percentage (in the
mid-teens) of net sales during the product royalty term, which percentage is subject to
reduction under certain circumstances.  Thereafter, MediGene is entitled to a trademark
royalty based on a percentage (in the low single digits) of net sales.

The Agreement commenced on January
30, 2006 and, unless earlier terminated, expires on the last day of the Royalty Term (as
defined in the Agreement) of the product whose Royalty Term is the last-to-expire of all
products developed and marketed under the Agreement.  Either party may terminate the
Agreement in its entirety by notice in writing to the other party upon or after any
material breach of the Agreement by the other party, if the other party has not cured the
breach within 60 days after written notice to cure has been given by the non-breaching
party to the breaching party; however, if any breach relates solely to one or more
products, then the non-breaching party may terminate the Agreement only to the extent it
applies to such product or products, with certain exceptions.  Either party may also
terminate the Agreement in certain other instances described in the Agreement.

NOTE J - PURCHASE OF
BIOGLAN PHARMACEUTICALS COMPANY

On August 10, 2004, the Company,
through its wholly-owned subsidiary, Bioglan Pharmaceuticals Corp. (f/k/a BDY Acquisition
Corp.), acquired certain assets constituting the Bioglan business from Bioglan
Pharmaceuticals Company, Quintiles Bermuda Ltd. and Quintiles Ireland Limited, each a
subsidiary of Quintiles Transnational Corp. (Quintiles). The purchase price of
approximately $191 million, including acquisition costs, was paid in cash.

The assets acquired include certain
intellectual property, regulatory filings, and other assets relating to SOLARAZE®, a
topical treatment indicated for the treatment of actinic keratosis; ADOXA®, an oral
antibiotic indicated for the treatment of acne; ZONALON®, a topical treatment
indicated for pruritus; Tx Systems®, a line of advanced topical treatments used
during in-office procedures; and certain other dermatologic products.

In connection with the acquisition,
the Company hired certain sales representatives and other personnel of Bioglan and
entered into a $50 million bridge loan, which replaced the Companys then existing credit
facility. The Company funded the purchase price for the acquisition through the proceeds
of the bridge loan and working capital.  On September 28, 2004, the Company replaced the
bridge loan with the $125 million Old Facility, consisting of a $75 million term loan and
a $50 million revolving line of credit.  The Old Facility was replaced with the $110
million New Facility on November 14, 2005.  For more information, see Note F.

The U.S. Food and Drug
Administration (FDA) approved ADOXA® in 2001 as an Abbreviated New Drug
Application (ANDA).  ADOXA® is not patent protected and is subject to possible
generic competition.  During December 2005, a generic competitor launched a generic
version of ADOXA® 50mg and 100mg tablets in bottles.  Under a Distribution Agreement
with Par Pharmaceutical, the Company holds the distribution rights for ADOXA® in the
United States and related territories.  Under a royalty agreement with Par, the Company
may use the ANDA owned by Par and must pay Par royalties through 2010 of 5% of sales for
the 100mg and 50mg strengths and 7.5% for the 75mg strength.  After 2010, the Company has
the option to purchase the ANDA for $10.  In addition, the Company has a manufacturing
agreement with Par for ADOXA® through 2010.

The FDA approved SOLARAZE® Gel
in October 2000, and the related U.S. patent expires in 2014.  The Company has a license
agreement with Jagotec AG for SOLARAZE® in the United States, Canada and Mexico.
 The Company also holds the New Drug Application (NDA) for the United States and the
New Drug Submission for Canada.  Under the terms of the license agreement, the Company
currently pays royalties of 15% of sales to Jagotec AG.

ZONALON® is an FDA-approved
product that is off-patent.  The Company holds the NDA for ZONALON® in the United
States.  ZONALON® is currently manufactured for the Company on a purchase order
basis by DPT Laboratories.

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---

The Company holds the license in the
United States for TxSystems® and Cardinal Health supplies the product.  The
manufacturing agreement with Cardinal Health is renewed annually, with a required
ninety-day notice for termination.

The Bioglan acquisition was
accounted for as a purchase business combination in accordance with SFAS No. 141, and
accordingly, the results of Bioglans operations are included in the Companys
consolidated results from the date of purchase.

Accounts
  receivable, net
      
      
      $1,555,052Inventories
      
      
      6,052,877Deferred
  tax asset, net
      
      
      1,053,857Prepaid
  expenses and other current assets
      
      
      384,707Property
  and equipment
      
      
      642,614Intangibles
  assets subject to amortization:Patent
  (10 year useful life)
      9,000,000Core
  technology (20 year useful life)
      42,000,000Trademarks
  (20 year useful life)
      106,000,000Total
  intangible assets subject to amortization
      
      
      157,000,000Goodwill
      
      
      27,188,111Other
  assets
      
      
      5,477Total
  assets acquired
      
      
      193,882,695Current
  liabilities
      
      
      (3,037,642
      )Long-term
  debt, less current maturities
      
      
      (31,166
      )Total
  liabilities assumed
      
      
      (3,068,808
      )Net
  assets acquired
      
      
      $190,813,887


Assets, excluding intangible assets,
and liabilities have been recorded at their net book value, which approximates their fair
market value at the date of purchase.

The amount paid in excess of the
fair value of the net tangible assets has been allocated to separately identified
intangible assets based upon an independent valuation analysis.

In accordance with SFAS No. 142,
goodwill related to this purchase will not be amortized but will be subject to periodic
impairment tests.  To the extent the Company is required to pay additional amounts such
as acquisition costs, the amount of goodwill that will be subject to periodic impairment
assessments will increase.  For tax purposes, the goodwill is tax deductible over 15
years.  The intangible assets that do have definite lives are being amortized over
estimated useful lives ranging from 10 to 20 years.

Under the terms of the purchase
agreement entered by the Company in connection with the acquisition of Bioglan, the
Company is able to receive credit on Bioglan product returns for a period of 12 months
after the acquisition, sold by Bioglan prior to the Companys acquisition, in excess of
Bioglans product return reserve as of the closing date.  The Company may be able to
receive $1,235,988 if Quintiles, the selling company, agrees with the Companys
calculation, of which there can be no assurance.  The Company is

| | F-36 | 
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---

accounting for this potential
receivable as a gain contingency under SFAS 5, and, as a result, the potential gain has
not been recorded.

The following data sets forth the
actual consolidated results of operations for the year ended December 31, 2005 and the
unaudited pro forma combined consolidated results of operations for the year ended
December 31, 2004 as if the purchase had taken place on January 1, 2004.  The pro forma
data gives effect to actual operating results prior to the purchase, with adjustments for
interest income, interest expense, intangible amortization expense, foreign currency gain
or losses and income taxes.  No effect has been given to cost reductions or operating
synergies in this presentation.

**Twelve Months Ended 
            December 31,****2005**
      **(unaudited) 
            (pro forma) 
            2004**Net sales
      
      $133,382,194
      
      $134,911,830Net income
      
      7,961,510
      
      11,208,786Basic net income per share
      
      $               .50
      
      $             0.72Diluted net income per share
      
      $               .49
      
      $             0.66




The unaudited pro forma results are
provided for information purposes only and do not purport to represent what the results
of operations would actually have been had the transaction in fact occurred as of the
dates indicated, or to project the results of operations for any future period.

As stated in the Companys Form 8-K
filed with the SEC on August 12, 2004, statements of income and cash flows for the
Bioglan business for any period prior to March 22, 2002, the date on which the Bioglan
business was acquired by Quintiles, were not available or able to be produced by
Quintiles.  Accordingly, the Company filed by amendment to the Form 8-K on October 22,
2004, audited balance sheets of the Bioglan business as of December 31, 2003 and 2002 and
audited statements of operations, entity equity and cash flows for the periods from March
22, 2002 through December 31, 2002 and January 1, 2003 through December 31, 2003 in
addition to the required June 30, 2003 and 2004 unaudited financial statements.  Further,
the Company filed audited financial statements of the Bioglan business for the period
from January 1, 2004 through the closing, which provided more current information than,
but are not a substitute for, the omitted statements of income and cash flows for the
pre-March 22, 2002 periods.

Due to the significance of the
acquisition of Bioglan, among other factors, the Company was unable to obtain a waiver
from the SEC of the requirement to include Bioglans pre-March 22, 2002 statements of
income and cash flows in its Form 8-K filed with respect to the acquisition.  However,
the Company believes that those omitted financial statements would not be particularly
meaningful to an understanding of the current and future operations of the Company and
the Bioglan business because, among other reasons, it understands that the Bioglan
business was part of an insolvent organization prior to its acquisition by Quintiles and
not operated in the ordinary course of business during the period that would be covered
by those financial statements.  The Company intends to again seek a waiver from the SEC
concerning the Companys omission of those financial statements, which is a requirement
for the Company to have future registration statements for its securities declared
effective by the SEC.  However, the Company cannot assure whether or when that waiver may
be granted.  Until the Company is able to have registration statements for public
offerings of its securities declared effective by the SEC, the Company would need to
pursue additional borrowings or private placements of securities if it desires to conduct
a financing, which could result in increased costs or other less favorable terms compared
to public offerings.

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NOTE K - NET INCOME
PER SHARE

Basic net income per common share is
determined by dividing net income by the weighted average number of shares of common
stock outstanding.  Diluted net income per common share is determined by dividing net
income plus applicable after-tax interest expense and related offsets from convertible
Notes by the weighted number of shares outstanding and dilutive common equivalent shares
from stock options, warrants and convertible Notes.  A reconciliation of the weighted
average basic common shares outstanding to weighted average diluted common shares
outstanding for the year ended 2005, 2004 and 2003 are as follows:

2005
      2004
      2003Basic Shares
      16,000,000
      
      15,670,000
      
      10,820,000Dilution:Convertible
  Notes
      1,620,000
      
      1,850,000
      
      950,000Stock
  options and warrants
      330,000
      
      890,000
      
      1,070,000Diluted
  shares
      17,950,000
      
      18,410,000
      
      12,840,000Net
  income as reported
      $7,961,510
      
      $7,954,314
      
      $16,824,716After-tax
  interest expense and 
                other
  from convertible Notes
      897,461
      
      1,024,340
      
      447,160Adjusted
  net income
      $8,858,971
      
      $8,978,654
      
      $17,271,876Net
  income per share 
            Basic
      $         0.50
      
      $         0.51
      
      $           1.55Diluted
      $         0.49
      
      $         0.49
      
      $           1.35


Options and warrants to purchase
1,604,636 shares of common stock at prices ranging from $11.18 to $27.12 per share were
excluded from the above computation for the year ended 2005.  Options and warrants to
purchase 222,000 shares of common stock at prices ranging from $23.18 to $27.12 per share
were excluded from the above computation for the year ended 2004 and options and warrants
to purchase 120,000 shares of common stock at prices ranging from $20.18 to $26.90 per
share in 2003 were excluded from the above computation.  These were excluded from the
computation of diluted income per share because their exercise price was greater than the
average market price of the Companys common stock and, therefore, the effect would be
anti-dilutive.

In connection with the closing of
the $110 million New Facility on November 14, 2005, as discussed in more detail in Note
F, the convertible Notes have been extinguished and are no longer convertible into shares
of common stock, and there are now 1,850,000 fewer shares of our common stock reserved
for and outstanding on a fully diluted basis.  In addition, since the Notes have been
extinguished, we no longer have an adjustment for after-tax interest expense and other of
approximately $1,024,000 per year in determining earnings per share on a fully diluted
basis.  For 2005, the prorated portion of the convertible notes prior to extinguishment
is included in the net income per diluted share computation.

NOTE L - BUSINESS
SEGMENT INFORMATION

The Companys three reportable
segments are Doak Dermatologics, Inc. (dermatology and podiatry), Bioglan Pharmaceuticals
Corp. (dermatology) and Kenwood Therapeutics (gastrointestinal, respiratory, nutritional
and other).  Each segment has been identified by the Company to be a distinct operating
unit distributing different pharmaceutical products.  Doak Dermatologics products are
marketed, promoted and distributed primarily to physicians practicing in the fields of
dermatology and podiatry; Bioglan Pharmaceuticals products are marketed, promoted and
distributed primarily to physicians practicing in the field of dermatology; and Kenwood
Therapeutics products are marketed, promoted and distributed primarily to physicians
practicing in the field of internal medicine/ gastroenterology.  On August 10, 2004 the
Company, through its wholly-owned subsidiary Bioglan Pharmaceuticals Corp., acquired
certain assets constituting the Bioglan business from Bioglan Pharmaceuticals and
certain of its affiliated companies.  The Bioglan business is currently operated as a
separate subsidiary but may, upon completion of the integration of the Bioglan business
with the Companys other dermatology operations, be combined with Doak into one
reportable segment.

The accounting policies used to
develop segment information correspond to those described in the summary of significant
accounting policies.  The reportable segments are distinct business units operating

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in different market segments with no
intersegment sales.  The following information about the three segments are for years
ended December 31, 2005, 2004 and 2003:

Year Ended December 31, 2005
      Year EndedDecember 31, 2004
      Year EndedDecember 31, 2003Net sales:Doak Dermatologics, Inc.
      $  45,207,780
      
      $56,862,564
      
      $56,617,119Bioglan Pharmaceuticals
      65,137,091
      
      16,023,787
      
      -0-Kenwood Therapeutics
      23,037,323
      
      23,807,636
      
      18,062,132$133,382,194
      
      $96,693,987
      
      $74,679,251Depreciation and
  amortization:Doak Dermatologics, Inc.
      $       524,569
      
      $     374,133
      
      $     261,520Bioglan Pharmaceuticals
      8,394,363
      
      3,374,034
      
      -0-Kenwood Therapeutics
      1,256,057
      
      1,066,928
      
      945,596$  10,174,989
      
      $  4,815,095
      
      $  1,207,116Income (loss) before income
  tax (benefit):Doak Dermatologics, Inc.
      (1,413,657
      )
      $14,743,404
      
      $25,301,965Bioglan Pharmaceuticals
      14,058,589
      
      (1,346,212
      )
      -0-Kenwood Therapeutics
      364,578
      
      (335,878
      )
      2,278,751$  13,009,510
      
      $13,061,314
      
      $27,580,716Income tax expense
  (benefit):Doak Dermatologics, Inc.
      $    (548,000
      )
      $  5,764,000
      
      $  9,867,000Bioglan Pharmaceuticals
      5,455,000
      
      (526,000
      )
      -0-Kenwood Therapeutics
      141,000
      
      (131,000
      )
      889,000$    5,048,000
      
      $  5,107,000
      
      $10,756,000Net income (loss):Doak Dermatologics, Inc.
      $    (865,657
      )
      $  8,979,404
      
      $15,434,965Bioglan Pharmaceuticals
      8,603,589
      
      (820,212
      )
      -0-Kenwood Therapeutics
      223,578
      
      (204,878
      )
      1,389,751$    7,961,510
      
      $  7,954,314
      
      $16,824,716Geographic information
  (revenues):Doak Dermatologics, Inc.United States
      $  42,706,147
      
      $55,088,301
      
      $55,303,477Other countries
      2,501,633
      
      1,774,263
      
      1,313,642$  45,207,780
      
      $56,862,564
      
      $56,617,119Bioglan PharmaceuticalsUnited States
      $  64,790,763
      
      $15,783,686
      
      $             -0-Other countries
      346,328
      
      240,101
      
      -0-$  65,137,091
      
      $16,023,787
      
      $             -0-Kenwood TherapeuticsUnited States
      $  22,569,641
      
      $23,533,501
      
      $17,947,063Other countries
      467,682
      
      274,135
      
      115,069$  23,037,323
      
      $23,807,636
      
      $18,062,132Net sales by category:Dermatology andPodiatry
      $110,344,871
      
      $72,886,351
      
      $56,617,119Gastrointestinal
      17,036,064
      
      17,675,446
      
      8,764,560Respiratory
      4,088,897
      
      4,336,983
      
      6,397,820Nutritional
      1,668,165
      
      1,477,229
      
      2,553,659Other
      244,197
      
      317,978
      
      346,093$133,382,194
      
      $96,693,987
      
      $74,679,251




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The basis of accounting that is used
by the Company to record business segments sales and cost of sales have been recorded
and allocated by each business segments identifiable products.  The basis of accounting
that is used by the Company to allocate operating expenses that relate to the segments is
based upon the proportionate quarterly net sales of each segment.  Accordingly, the
allocation percentage used can differ between quarters and years depending on each
segments proportionate share of net sales.

NOTE M - QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)

The table below lists the quarterly
financial information for fiscal 2005 and 2004.  All figures in thousands, except per
share amounts, and certain amounts do not total to the annual amounts due to rounding.

|                                                           | Quarter Ended 2005 |   | Quarter Ended 2004 |  
|---------------------------------------------------------- | ------------------ | - | ------------------ | -
|                                                           | March              |   | June               |  
|Net sales                                                  | $33,202            |   | $28,189            |  
|Cost of sales                                              | 5,041              |   | 4,147              |  
|                                                           |                    |   |                    |  
|Gross profit                                               | 28,161             |   | 24,042             |  
|                                                           |                    |   |                    |  
|Selling, general and
  administrative                      | 20,621             |   | 19,975             |  
|Depreciation and
  amortization                            | 2,472              |   | 2,570              |  
|Research and development                                   | 257                |   | 125                |  
|Write-off of deferred
  financing costs                    | -                  |   | -                  |  
|Interest expense                                           | 1,649              |   | 1,717              |  
|Interest income                                            | (377               | ) | (533               | )
|Losses (gains) on
  short-term 
             investments   | 2                  |   | 1                  |  
|                                                           |                    |   |                    |  
|                                                           | 24,624             |   | 23,855             |  
|                                                           |                    |   |                    |  
|Income (loss) beforeincome tax expense
  (benefit)         | 3,537              |   | 187                |  
|Income tax expense
  (benefit)                             | 1,383              |   | 73                 |  
|                                                           |                    |   |                    |  
|Net income (loss)                                          | 2,154              |   | 114                |  
|                                                           |                    |   |                    |  
|Basic net income (loss) per
  
             common share   | $0.13              |   | $0.01              |  
|                                                           |                    |   |                    |  
|Diluted net income (loss)
  per 
             common share | $0.13              |   | $0.01              |  
|                                                           |                    |   |                    |  
|Number of shares- basic                                    | 15,960             |   | 15,960             |  
|                                                           |                    |   |                    |  
|Number of shares- diluted                                  | 18,180             |   | 16,280             |  
|                                                           |                    |   |                    |  



| | F-40 | 
| | ---- | 

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Fourth Quarter 2005 Adjustments
(unaudited)

The Company recorded in the Fourth
Quarter 2005 a write-off of deferred financing costs of $3,988,964 due to the repayment
of the 4% Notes and the $125 million Old Facility during November 2005.  The write-off of
deferred financing costs decreased net income by $2,441,246 and decreased basic and Diluted net income
per share by $0.15.

In addition, during the Fourth
Quarter of 2005, the Company increased its return reserve provision by approximately
$10,867,000 primarily due to an increase in its estimated inventory of the Companys
products at the wholesalers and retailers as a result of additional actual product return
experience in the first 4 months of 2006 and an increase in the rate of return for
certain products. This resulted in an increase to the return reserve accrual by
approximately $3,615,000. This additional provision decreased net income by approximately
$6,650,000 and decreased basic and diluted net income per share by $0.41.

Fourth Quarter 2004 Adjustments
(unaudited)

The Company recorded in the Fourth
Quarter 2004, an increase in the Companys return reserve as a result of a change in
estimate. In summary, the change in estimate was a result of the execution of DSAs with
two of the Companys major wholesale customers in 2005 (but effective as of 2004), the
Companys obtaining customer inventory data from its four largest customers during the
Fourth Quarter 2004 and First Quarter 2005, a change in these customers market dynamics
becoming evident during 2005, the Company having subsequent return visibility relating to
2004 and prior during 2005, and the Company having increased generic competition
occurring in the Fourth Quarter 2004 and 2005. The increase in the Companys reserves
against sales during the Fourth Quarter 2004 resulted in a Fourth Quarter adjustment of
$17,926,084, which decreased net sales by $17,926,084, net income by $10,916,985, basic
net income per share of $0.70 and diluted net income per share of $0.59.

In addition, the Company recorded in
the Fourth Quarter 2004, as discussed in Note I.6, an accrual of $1,750,000 for legal
settlements and a reduction in the rebate liability of $1,154,438 due to the receipt of a
written affirmation of a lower rebate owed from our customer.

The aggregate of the Fourth Quarter
adjustments, noted above, decreased net income by $11,279,682, basic net income per share
of $0.72 and diluted net income per share of $0.61.

| | F-41 | 
| | ---- | 

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SCHEDULE II

BRADLEY PHARMACEUTICALS, INC. AND
SUBSIDIARIES 
  VALUATION AND QUALIFYING ACCOUNTS 
  YEARS ENDED DECEMBER 31, 2003, 2004 AND
2005 
  (IN THOUSANDS)

**Classification**
      **Balance 
          Beginning 
          of Year**
      **Additions 
          (Deductions)**
      **Charged to 
          Costs and 
          Expenses**
      **Balance 
          End of 
          Year**2003
      
      Allowance for doubtful
  accounts(1)
      196
      
      (24)
      
      118
      
      290Allowance for chargebacks
  and discounts(1)
      1,488
      
      (5,204)
      
      5,057
      
      1,341Allowance for rebates(2)
      2,370
      
      (3,225)
      
      4,760
      
      3,905Allowance for returns(2)
      364
      
      (1,906)
      
      2,468
      
      9262004
      
      Allowance for doubtful
  accounts(1)(3)
      290
      
      (474)
      
      948
      
      764Allowance for chargebacks
  and discounts(1)(3)
      1,341
      
      (5,200)
      
      4,682
      
      823Allowance for rebates(2)(3)
      4,089
      
      (4,836)
      
      3,701
      
      2,954Allowance for returns(2)(3)
      926
      
      (5,645)
      
      28,794
      
      24,0752005
      
      Allowance for doubtful
  accounts(1)
      764
      
      (666)
      
      1,332
      
      1,430Allowance for chargebacks
  and discounts(1)
      823
      
      (5,778)
      
      5,412
      
      457Allowance for rebates(2)
      2,954
      
      (6,545)
      
      8,623
      
      5,032Allowance for returns(2)
      24,075
      
      (17,976)
      
      18,835
      
      24,934  (1)
      
      Shown
as a reduction of accounts receivable  (2)
      
      Included
in accrued expenses  (3)
      
      Included
in the     Additions/(Deductions) are the acquired Bioglan liabilities at August 10,
    2004          of the following:  (i)
      
      Allowance
for doubtful accounts of 74  (ii)
      
      Allowance
for          chargebacks and discounts of $183  (iii)
      
      Allowance   for
rebates of $33  (iv)
      
      Allowance
for returns of $2,181




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