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, 2006

[__] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)                             OF THE SECURITIES EXCHANGE
                                   ACT OF 1934                   For the transition period
from ______ to ______

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
|------------------------------------------------------------------------------------------------------- |  |  |  | ----------------------------------------------------------------------------------

Securities Registered
Pursuant to Section 12(g) of the Act:                                       None

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 X No _

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  __

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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, 2006 was
approximately $125,159,702 (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 February 28, 2007, there were
outstanding 16,094,420 shares of common stock, $.01 par value, and 429,752 shares of
Class B common stock, $.01 par value.

DOCUMENTS
INCORPORATED BY REFERENCE

Portions of the Proxy Statement for
the 2007 Annual Meeting of Stockholders                              Part III

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TABLE OF CONTENTS


|PART I   |  |                                                                                                                                                                             | Page Number
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------
|         |  |                                                                                                                                                                             |            
|ITEM 1:  |  | Business                                                                                                                                                                    | 3          
|ITEM 1A: |  | Risk Factors                                                                                                                                                                | 19         
|ITEM 1B: |  | Unresolved Staff Comments                                                                                                                                                   | 37         
|ITEM 2:  |  | Properties                                                                                                                                                                  | 37         
|ITEM 3:  |  | Legal Proceedings                                                                                                                                                           | 37         
|ITEM 4:  |  | Submission of Matters to a Vote of Security Holders                                                                                                                         | 39         
|         | 
|PART II  | 
|         |  |                                                                                                                                                                             |            
|ITEM 5:  |  | Market For Registrants Common Equity and Related Stockholder Matters and  Issuer Purchases of Equity Securities                                                            | 40         
|         |  |                                                                                                                                                                             |            
|ITEM 6:  |  | Selected Financial Data                                                                                                                                                     | 41         
|ITEM 7:  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                       | 42         
|         |  |                                                                                                                                                                             |            
|ITEM 7A: |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                  | 65         
|ITEM 8:  |  | Financial Statements and Supplementary Data                                                                                                                                 | 66         
|ITEM 9:  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                                                                        | 66         
|         |  |                                                                                                                                                                             |            
|ITEM 9A: |  | Controls and Procedures                                                                                                                                                     | 66         
|ITEM 9B: |  | Other Information                                                                                                                                                           | 70         
|         |  |                                                                                                                                                                             |            
|PART III |  |                                                                                                                                                                             |            
|         |  |                                                                                                                                                                             |            
|         |  | Incorporated by Reference to the Registrants Definitive Proxy Statement for its 2007 Annual Meeting of Stockholders to be Filed with the SEC Not Later Than April 30, 2007 | 71         
|         |  |                                                                                                                                                                             |            
|PART IV  |  |                                                                                                                                                                             |            
|         |  |                                                                                                                                                                             |            
|ITEM 15: |  | Exhibits and Financial Statement Schedules                                                                                                                                  | 71         

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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 expand from an Acquire, Enhance and Grow business strategy to an In-License,
Develop and              Bring to Market business strategy;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | our
plans to in-license, develop and launch new and enhanced              products with
long-term intellectual property protection or other              significant barriers to
market entry, such as VEREGEN and              ELESTRIN;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | our
ability to maintain or increase sales and launch VEREGEN and ELESTRIN during 2007;
| | - |  | ----------------------------------------------------------------------------------------

| |  |  | our
ability to compete in the marketplace against generic or therapeutically equivalent
products;
| | - |  | -------------------------------------------------------------------------------------------------

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

| |  |  | our
ability to continue to develop products organically with longer lifecycles and to extend
indications              for our current product portfolio;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  |  | our
ability to expand existing partnerships and joint venture              relationships with
biotechnology companies and foster new              strategic alliances designed to
deliver a stronger product              portfolio;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | our
reliance on third party manufacturers and suppliers;
| | - |  | --------------------------------------------------------

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

| |  |  | our
plans to expand the size of our sales force in anticipation of new product launches;
| | - |  | ----------------------------------------------------------------------------------------

| |  |  | our
estimates of 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 maintain adequate inventory levels;
| | - |  | --------------------------------------------------

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

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

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

| |  |  | our
ability to achieve our initiatives to enhance corporate governance and long-term
stockholder value;
| | - |  | -------------------------------------------------------------------------------------------------------

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| |  |  | our
ability to refinance indebtedness, if required; and
| | - |  | -------------------------------------------------------

| |  |  | 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 risks identified under
Risk Factors.

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

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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 niche therapeutic markets, including dermatology,
podiatry, gastroenterology and womens health. Our business strategy contemplates our

| |  |  | in-licensing
phase II and phase III drugs and developing and               bringing to market products
with long-term intellectual property               protection or other significant
barriers to market entry;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | commercializing
brands that fill unmet patient and physician needs;
| | - |  | -------------------------------------------------------------------

| |  |  | expanding
existing partnerships and joint venture relationships               with biotechnology
and specialty pharmaceutical companies and               fostering new strategic
alliances designed to deliver a stronger               product portfolio; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | increasing
our focus on research and development activities to               continue to develop
products organically with longer lifecycles               and to extend indications for
our current product portfolio.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
have two primary business segments, our Doak Dermatologics subsidiary (which includes the
products we acquired from Bioglan Pharmaceuticals in 2004), specializing in therapies for
dermatology and podiatry, and our Kenwood Therapeutics division, providing
gastroenterology, womens health, respiratory and other internal medicine brands. To a
lesser extent, Kenwood Therapeutics also markets nutritional supplements and respiratory
products. At February 28, 2007, Doak Dermatologics had a dedicated sales force of 129
professional sales representatives, while Kenwood Therapeutics had a dedicated sales
force of 46 professional sales representatives. During 2006, we launched our A. Aarons
subsidiary, which markets authorized generic versions of Doaks and Kenwoods products.

During
2006, we generated net sales of $144,806,640, representing an increase of $105,137,667,
or 265%, from our net sales during 2002. Doak Dermatologics, led by its core branded
products of ADOXA®, KERALAC®/ KEROL, SOLARAZE®, ZODERM®, LIDAMANTLE®, and
ROSULA®, accounted for 79% of our net sales for 2006, while Kenwood Therapeutics, and
its core branded products of PAMINE®, ANAMANTLE®HC and FLORA-Q®, accounted for the
remaining 21% of our net sales for 2006. We did not recognize revenue for A. Aarons
during 2006 because we did not have sufficient historical data (A. Aarons first began
selling products during the Third Quarter of 2006) to make the assumptions necessary to
record revenue.

In
August 2004, we purchased certain assets of Bioglan Pharmaceuticals. As part of this
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. We paid approximately $191 million, including acquisition costs, for the
Bioglan assets.

During
2006, we entered into agreements with MediGene AG and BioSante Pharmaceuticals,
respectively, to commercialize VEREGEN and ELESTRIN, products with significant
intellectual property protection. Pursuant to our agreement for VEREGEN, we have been
granted 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, a novel active ingredient, for the treatment of
dermatological diseases in humans, including, but not limited to, external genital warts,
perianal warts and actinic keratosis. During the Fourth Quarter of 2006, the U.S. Food
and Drug Administration (FDA) approved the marketing of VEREGEN as a new drug
indicated for the treatment of external genital and perianal warts. During 2006, we paid
MediGene $5.0 million in consideration for development and regulatory activities
undertaken prior to the date of our agreement and a $14 million milestone payment that was

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triggered by the FDAs approval of
VEREGEN. VEREGEN is patented through 2017 (additional pending patent applications
may extend its patent life),

Pursuant
to our agreement for ELESTRIN, we have been granted the exclusive right to market
ELESTRIN in the United States. ELESTRIN, which was approved by the FDA in the
Fourth Quarter of 2006, is an estradiol transdermal gel to be prescribed for the
treatment of moderate-to-severe hot flashes in menopausal women and is available at
several dosage levels. ELESTRIN is the lowest dose of estradiol approved by the FDA
for the treatment of these moderate-to-severe vasomotor symptoms. In consideration for
the grant of our right to market ELESTRIN, we paid BioSante and its licensor for
ELESTRIN an aggregate of $3.5 million during October 2006. Under our agreement with
BioSante, the FDA approval of ELESTRIN triggered regulatory milestone payments of
$10.5 million, $7.0 million of which is payable in March 2007, with the remaining $3.5
million payable in December 2007. ELESTRIN is patented through 2021 (additional
pending patent applications may extend its patent life),

We
expect to launch VEREGEN and ELESTRIN during 2007. VEREGEN will be promoted
to physicians by both our Doak Dermatologics and Kenwood Therapeutics sales forces.
ELESTRIN will be promoted to physicians by our Kenwood Therapeutics sales force. In
connection with the launch of these products, we anticipate hiring approximately 20
additional Kenwood Therapeutics sales representatives during 2007 and incurring a
corresponding amount of additional sales, marketing and related expenses. Our net sales
and profitability would be adversely affected if, for any reason, we were unable to
launch VEREGEN and ELESTRIN on a timely basis.

With
the exception of SOLARAZE®, which is patented through at least 2014, VEREGEN, which
is patented through at least 2017, and ELESTRIN, which is patented through at least
2021, there is no meaningful intellectual property or proprietary protection for our
other material branded pharmaceutical products, including ADOXA®, and competing generic
or therapeutically equivalent versions for most of these other products are sold by other
pharmaceutical companies. Currently, only SOLARAZE®, KEROL and FLORA-Q® do not
face competition from generic or therapeutically equivalent products, which has, and is
expected to continue to, adversely affect our sales. In addition, governmental and other
pressure to reduce pharmaceutical costs may result in physicians prescribing products for
which there are generic or therapeutically equivalent products.

We
were originally incorporated in New Jersey in January 1985. In May 1998, we
reincorporated in Delaware. For a discussion of our international operations and segment
information, see Note M to our consolidated financial statements included elsewhere in
this Annual Report on Form 10-K.

Our Industry

We
principally target segments of the dermatologic, podiatric, womens health and
gastrointestinal markets where we believe that our sales force can effectively reach the
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.

Since
2004, our net sales have been negatively impacted by the onset and increase in generic or
therapeutically equivalent products competing on price with our brands. Increased
competition from the sale of generic or therapeutically equivalent products may cause a
further decrease in sales, which would have an adverse effect on our business, financial
condition and results of operations. In addition, as a result of increased generic
competition, the execution of Distribution Service Agreements (DSAs) with three of our
wholesale customers, two of whom are our two largest customers, and a change in these
customers market dynamics, we have experienced an increase in product returns. Our
branded products for which there are no generic or therapeutically equivalent forms

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may also face competition from
different therapeutic treatments used for the same indications for which our branded
products are used.

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 $7.7 billion in
retail prescription sales for 2006. Within the dermatologic market we estimate, based in
part on data from Wolters Kluwer, that approximately 12,000 dermatologists specialize in
treating a variety of skin disorders, including acne, eczema, psoriasis and actinic
keratosis. Our core dermatologic products, ADOXA®, KERALAC®/ KEROL, SOLARAZE®,
ZODERM®, LIDAMANTLE® and ROSULA®, compete in areas such as acne, rosacea, actinic
keratosis, topical anesthetics and xerosis, a segment of the market we estimate accounted
for approximately $3.8 billion in retail prescription sales in 2006. Within the podiatric
market we estimate, based in part on data from Wolters Kluwer, that approximately 13,000
podiatrists treat patients suffering from a range of foot disorders, including athletes
foot and nail disorders that can be treated with prescription products.

Within
the dermatologic market we estimate, based in part on data from Wolters Kluwer, that
approximately 4,000 dermatologists are experienced and skilled in the treatment of
external genital and perianal warts caused by human papilloma virus (HPV). External
genital and perianal warts caused by HPV are conditions that our new product,
VEREGEN, is indicated to treat. External genital warts are one of the most common and
fastest spreading venereal diseases worldwide. It is estimated that approximately 14
million people in the United States are infected with strains of HPV that cause external
genital warts, making the United States the largest market for this indication. According
to Wolters Kluwer, the U.S. market for this condition is approximately $200 million per
year. We believe that dermatologists will predominantly treat male patients infected with
external genital or perianal warts caused by HPV.

Gastrointestinal Market

Based
on data from Wolters Kluwer, we estimate that the United States market for prescription
gastrointestinal drugs accounted for approximately $20.6 billion in retail prescription
sales for 2006. Within the gastrointestinal market we estimate, based in part on data
from Wolters Kluwer, that approximately 11,000 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 $2.4 billion in retail prescription sales for
2006. Many of the drugs in this segment treat conditions such as constipation,
hemorrhoids and colitis. Our core gastrointestinal drugs, PAMINE®, ANAMANTLE®HC and
FLORA-Q® address principally hemorrhoids and symptoms associated with irritable bowel
syndrome, specifically gastrointestinal pain and cramping.

Womens Health
Market

Based
in part on data from Wolters Kluwer, we estimate that there are approximately 14,000
womens health providers, particularly OB/GYNs, who account for the majority of
prescriptions in the entire $1.3 billion annual U.S. estrogen therapy market, which
consists of oral and topical products. We believe that ELESTRIN, our new topical,
transdermal gel that has been approved by the FDA as offering the lowest effective dose
of estradiol in the marketplace for the treatment of moderate-to-severe hot flashes in
menopausal women, will compete primarily in the transdermal segment of this market. The
transdermal segment consists primarily of patch products, and is expected to grow to more
than $300 million annually over the next several years. We believe that womens health
providers, particularly OB/GYNs, will treat female patients infected with external
genital or perianal warts caused by HPV.

Our Strategy

Our
primary objective is to be a leading specialty pharmaceutical company focused on selected
pharmaceutical needs within the dermatologic, podiatric, womens health and
gastrointestinal markets. Our business

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strategy
contemplates our in-licensing phase II and phase III drugs and developing and bringing to
market products with long-term intellectual property protection. Our recent licensing
transactions with MediGene for VEREGEN and BioSante for ELESTRIN are examples of
our implementing this strategy. Under the MediGene Agreement, we also have rights to
additional products containing green tea catechins that may be developed by MediGene for
other dermatological indications. VEREGEN is patented through 2017 and ELESTRIN
is patented through 2021 (pending patent applications may extend the patent life of each
product), and we anticipate commencing commercialization of each product during 2007.

Our
business strategy  also includes our commercializing brands that fill unmet patient and
physician needs. For example, our SOLARAZE® Gel product is the only topical treatment
for actinic keratosis that is approved by the FDA for use on other parts of the body
besides the face and scalp. Further, ELESTRIN, our new estradiol transdermal gel
indicated for the treatment of moderate-to-severe hot flashes in menopausal women, has
been approved by the FDA as the lowest dose of estradiol currently available on the
market, fully 50% lower than the nearest current competitor.

We
also seek to expand existing partnerships and joint venture relationships with
biotechnology and specialty pharmaceutical companies and fostering new strategic
alliances designed to deliver a stronger product portfolio. We are continually pursuing
new business opportunities and reassessing existing relationships. In addition to the
MediGene and BioSante Agreements, our agreement in 2006 with Polymer Science to develop
delivery systems not currently utilized by us for our future products is an example of
this. For a more detailed discussion of our agreement with Polymer Science, see
Business- Products In Development included elsewhere in this Annual Report.

We
also plan to increase our focus on research and development activities and to continue to
develop products organically with longer lifecycles and to extend indications for our
current product portfolio. Our introduction of core product line extensions, such as
ADOXA Pak®, KEROL and ANAMANTLE® HC GEL, following the launch of generic or
therapeutically equivalent versions of these products, demonstrates our commitment to
enhancing our product lifecycle management.

Our Products

The
following is a list of major branded products, by therapeutic category, that we currently
distribute. We intend to launch VEREGEN and ELESTRIN during 2007.

|Product                                 |  |    | Strength                | Primary Uses | 
|--------------------------------------- |  | -- | ----------------------- | ------------ | 
|Dermatologic and Podiatric              |  |    |                        
|Acne/Roseaca                            |  |    |                        
|ADOXA®                                  |  |    |                        
|ADOXA®Tablets 50mg,
  75mg and 100mg    |  | Rx | Acne                   
|ADOXAPak®
  75mg, 100mg and 150mg       |  | Rx | Acne                   
|ZODERM®                                 |  |    |                        
|ZODERM® CLEANSER 4.5%, 6.5% and 8.5%    |  | Rx | Acne                   
|ZODERM® CREAM 4.5%,
  6.5% and 8.5%     |  | Rx | Acne                   
|ZODERM® GEL 4.5%,
  6.5% and 8.5%       |  | Rx | Acne                   
|ZODERM® REDI-PADS
  4.5%, 6.5% and 8.5% |  | Rx | Acne                   
|ROSULA®                                 |  |    |                        
|ROSULA® AQUEOUS
  CLEANSER              |  | Rx | Rosacea and acne       
|ROSULA® AQUEOUS GEL                     |  | Rx | Rosacea and acne       
|ROSULA®  NS PADS                        |  | Rx | Antibacterial          
|                                        |  |    |                        
|Keratolytic                             |  |    |                        
|KEROL REDI-CLOTHS                      |  | Rx | Mild to severe dry skin
|KERALAC®                                |  |    |                        
|KERALAC®CREAM                           |  | Rx | Mild to severe dry skin

| | 6 | 
| | - | 

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|Product                           |  |                                                                           | Strength                                                | Primary Uses | 
|--------------------------------- |  | ------------------------------------------------------------------------- | ------------------------------------------------------- | ------------ | 
|KERALAC®LOTION                    |  | Rx                                                                        | Mild to severe dry skin                                
|KERALAC®GEL                       |  | Rx                                                                        | Mild to severe dry skin, nail disorders                
|KERALAC®NAILSTIK                  |  | Rx                                                                        | Mild to severe dry skin, nail disorders                
|KERALAC®OINTMENT                  |  | Rx                                                                        | Mild to severe dry skin                                
|CARMOL®                           |  |                                                                           |                                                        
|CARMOL®40                         |  | Rx                                                                        | Mild to severe dry skin, xerosis, nail disorders       
|CARMOL®HC                         |  | Rx                                                                        | Inflammatory skin conditions                           
|CARMOL®10, 20                     |  | OTC                                                                       | Dry skin                                               
|                                  |  |                                                                           |                                                        
|Genital Warts                     |  |                                                                           |                                                        
|VEREGEN                          |  | Rx                                                                        | External genital or perianal warts                     
|                                  |  |                                                                           |                                                        
|Actinic Keratoses                 |  |                                                                           |                                                        
|SOLARAZE®                         |  | Rx                                                                        | Actinic keratoses, pre-cancerous skin lesions          
|                                  |  |                                                                           |                                                        
|Anesthetics                       |  |                                                                           |                                                        
|LIDAMANTLE®                       |  |                                                                           |                                                        
|LIDAMANTLE®HC                     |  | Rx                                                                        | Topical anesthetic and anti-inflammatory               
|LIDAMANTLE®                       |  | Rx                                                                        | Topical anesthetic                                     
|ACIDMANTLE®                       |  | Cosmetic                                                                  | Skin pH balancer                                       
|ZONALON®                          |  | Rx                                                                        | Topical anesthetic                                     
|                                  |  |                                                                           |                                                        
|Scalp                             |  |                                                                           |                                                        
|SELSEB®                           |  | Rx                                                                        | Dandruff                                               
|CARMOL®SCALP LOTION               |  | Rx                                                                        | Dandruff                                               
|                                  |  |                                                                           |                                                        
|Cosmeceutical                     |  |                                                                           |                                                        
|TRANS-VER-SAL®                    |  | OTC                                                                       | Warts                                                  
|AFIRM®                            |  | Professional use
  only            In office procedure for chemical peels
|BETA-LIFT®                        |  | Professional use
  only            In office procedure for chemical peels
|                                  |  |                                                                           |                                                        
|Gastrointestinal                  |  |                                                                           |                                                        
|ANAMANTLE®HC                      |  |                                                                           |                                                        
|ANAMANTLE®HC 14                   |  | Rx                                                                        | Hemorrhoids and anal fissures                          
|ANAMANTLE® HC CREAM KIT 20S      |  | Rx                                                                        | Hemorrhoids and anal fissures                          
|ANAMANTLE®HC FORTE                |  | Rx                                                                        | Hemorrhoids and anal fissures                          
|ANAMANTLE®HC GEL                  |  | Rx                                                                        | Hemorrhoids and anal fissures                          
|PAMINE®, PAMINE®  FORTE           |  | Rx                                                                        | Relief of gastrointestinal symptoms                    
|                                  |  |                                                                           |                                                        
|FLORA-Q® (nutritional supplement) |  | OTC                                                                       | Bacteria strains for proper balance of intestinal flora
|                                  |  |                                                                           |                                                        
|Respiratory                       |  |                                                                           |                                                        
|DECONAMINE®                       |  | Rx                                                                        | Antihistamine and decongestant                         
|ENTSOL®                           |  | OTC                                                                       | Nasal wash                                             
|                                  |  |                                                                           |                                                        
|Womens Health                    |  |                                                                           |                                                        
|Genital Warts                     |  |                                                                           |                                                        
|VEREGEN                          |  | Rx                                                                        | External genital or perianal warts                     
|                                  |  |                                                                           |                                                        
|Estrogen Therapy                  |  |                                                                           |                                                        
|ELESTRIN                         |  | Rx                                                                        | Moderate-to-severe hot flashes in menopausal women     
|                                  |  |                                                                           |                                                        

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Our
core branded products that we actively promote in the dermatologic, podiatric,
gastrointestinal and womens health markets are described below. With the exception of
SOLARAZE®, KEROL, FLORA-Q®, VEREGEN and ELESTRIN, all of our other core
brands are currently subject to some form of competition from generic or therapeutically
equivalent products offered by other pharmaceutical companies.

ADOXA®,
doxycycline monohydrate, is a member of the tetracycline family of antibiotics and is
available in 150mg, 100mg, 75mg and 50mg tablets. ADOXA® is available in bottles of
tablets and as ADOXA Pak®, a convenient package that may enhance patient compliance and
encourage physician prescribing. We also introduced ADOXA® Pak in an effort to offset
the effects of generic competition. 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 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. We have granted Par
Pharmaceutical the right to market authorized generic versions of our ADOXA® 50mg, 75mg
and 100mg tablets in bottles. Based on data from Wolters Kluwer, we estimate that, as of
December 31, 2006, ADOXA® had approximately 16%, or $60 million, of the annual market
for the oral antibiotic treatment for acne.

KEROL
and KERALAC® are prescription urea-based topical moisturizing therapies with
keratolytic properties (helps to remove the surface layer of dead cells). KEROL is
currently available as a urea-medicated cloth in its own packaging. We launched KEROL
in the Fourth Quarter of 2006 as a line extension to KERALAC® in an effort to offset
KERALAC® generic competition. KERALAC® is currently available in five formulations -
a lotion, cream, nail gel, ointment and a Nailstik. KERALAC® LOTION is marketed for
mild to moderate dry skin, KERALAC® CREAM is marketed for moderate to severe dry skin
and KERALAC® GEL is marketed for site-specific dry skin, nail debridement and as a nail
softener. KERALAC® NAILSTIK is a patient-friendly application to treat diseased and
damaged nails. KERALAC® OINTMENT is a site-specific treatment for dry skin relief. We
developed KERALAC® as an enhancement to our CARMOL®40 products. Based on data from
Wolters Kluwer, we estimate that, as of December 31, 2006, KEROL, KERALAC® and
CARMOL®40 collectively had approximately 21%, or $30 million, of the annual urea-based
prescription severe dry skin and damaged nails market.

SOLARAZE®
Gel is an 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.
Based on data from Wolters Kluwer, we estimate that, as of December 31, 2006, SOLARAZE®
Gel had approximately 19%, or $34 million, of the annual market for the topical treatment
for actinic keratosis. SOLARAZE® is patented through at least 2014.

ZODERM®
CLEANSER, ZODERM® CREAM, ZODERM® GEL and ZODERM® REDI-PADS are internally
developed benzoyl peroxide topical prescription products that help treat acne. 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 that 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.

ROSULA®
AQUEOUS CLEANSER, ROSULA® AQUEOUS GEL and ROSULA® NS PADS are internally developed
topical prescription products that treat skin conditions, including acne and rosacea. 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

| | 8 | 
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---

associated with rosacea. The active
ingredient in ROSULA® NS PADS, sodium sulfacetamide, also acts as an antibacterial that
is effective for acne and rosacea.

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 methscopolamine bromide, 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.

ANAMANTLE
HC® 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, reduces swelling and soothes  irritation.  ANAMANTLE HC® cream is
packaged as a kit containing 20 single-use units, each containing a single-use tube and
applicator, as well as a soothing cleansing wipe. ANAMANTLE HC® FORTE delivers twice
the anti-inflammatory medication of the original ANAMANTLE HC® and contains
mucoadhesive properties that are designed to promote better adhesion to affected areas.
During the Second Quarter of 2006, we launched ANAMANTLE HC® GEL, the only topical
treatment for hemorrhoids and anal fissures containing 2.5% hydrocortisone and 3%
lidocaine.

FLORA-Q®
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.

VEREGEN
is an FDA-approved topical ointment indicated for the treatment of external genital and
perianal warts. The active ingredient in VEREGEN is a defined mixture of catechins
extracted from green tea, a novel active ingredient, that has been proven effective for
the treatment of external genital and perianal warts caused by certain strains of HPV.
External genital warts are one of the most common and fastest spreading venereal diseases
worldwide. It is estimated that approximately 14 million people in the U.S. are infected
with the strains of HPV that cause external genital warts. Current treatment for external
genital or perianal warts primarily consists of cryosurgery and the topical therapy
Aldara. VEREGEN is the first new treatment for external genital and perianal
warts since 1997. VEREGEN is patented through at least 2017. We intend to launch
VEREGEN during 2007.

ELESTRIN
is an FDA-approved estradiol transdermal gel indicated for the treatment of
moderate-to-severe vasomotor symptoms (hot flashes) in menopausal women. ELESTRIN has
been approved by the FDA as the lowest dose of estradiol currently available on the
market, fully 50% lower than the nearest current competitor. There has been a growing
trend in medical literature and general media in support of low-dose estrogen replacement
therapies and transdermal estradiol products. ELESTRIN will conform to the
recommendations directed to physicians by the FDA and the American College of
Obstetricians and Gynecologists to prescribe the lowest effective dose of estrogen to
control menopausal symptoms such as hot flashes. ELESTRIN is patented through at
least 2021. We intend to launch ELESTRIN during 2007.

Our
A. Aarons subsidiary, which commenced operations during the Third Quarter of 2006,
currently sells authorized generic versions of our ZODERM®, ANAMANTLE HC®, PAMINE®,
PAMINE® FORTE, CARMOL® 40 and KERALAC® brands. We anticipate that A. Aarons will
commence distribution of authorized generic versions of our other branded products that
are facing competition from generic or therapeutically equivalent products during 2007.

| | 9 | 
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---

Percentages
of our net sales by category for 2004, 2005 and 2006 were as follows:

|                         |  | Years Ended December 31,
|------------------------ |  | ------------------------
|                         |  | 2004                    
|Dermatology and Podiatry |  | 76                      
|Gastrointestinal         |  | 18                      
|Respiratory              |  | 4                       
|Nutritional              |  | 2                       

Financial
information for 2004, 2005 and 2006 is presented in our consolidated financial statements
included as part of this Annual Report on Form 10-K.

Products In Development

We
have developed internally and obtained from others rights to pharmaceutical agents in
various stages of development. We currently have two new products, VEREGEN and
ELESTRIN, that we intend to launch during 2007, and are also planning to launch
product line extensions for existing brands and reformulations of currently marketed
products.

On
January 30, 2006, we entered into a Collaboration and License Agreement with MediGene AG
for VEREGEN. Under the MediGene 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. MediGene has also granted 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.

On
October 31, 2006, we announced that MediGene had received approval from the FDA to market
VEREGEN as a new drug indicated for the treatment of external genital and perianal
warts. VEREGEN has patent protection through at least 2017. Under the MediGene
Agreement, we agreed to purchase exclusively from MediGene the active product ingredient,
a mixture of green tea catechins, required for our commercialization of the products in
the United States and have agreed to certain minimum purchase amounts contingent upon
regulatory approval. The MediGene Agreement further provides that MediGene and we may
engage in development and regulatory activities relating to products covered by the
MediGene Agreement for indications other than a treatment for external and perianal warts
to be applied three times per day (the EGW Indication) or new developments that would
extend the scope of the EGW Indication. If we decide to pursue these other activities,
MediGene and we will share the costs of such 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. 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, MediGene and we
each have the right to cease our participation in, and funding of, the development and
regulatory activities relating to that particular product.

During
2006, we paid MediGene an aggregate of $19,000,000 in consideration for development and
regulatory activities undertaken prior to the date of our agreement and as a result of
the FDA approving VEREGEN. The MediGene Agreement also contemplates additional
milestone payments that, when added to the milestones already paid by us, 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 other than the EGW Indication and also based upon our 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, we 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.

| | 10 | 
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---

The
MediGene Agreement 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.

The
VEREGEN license includes the use of a patent which expires during 2017 and several
other patent pending applications have been filed with the U.S. Patent and Trademark
Office, which may extend the patent life. However, VEREGEN should be difficult to
substitute generically due to the natural configurations of the catechins, which are
proprietary. As a result, we expect the useful life of VEREGEN will be beyond the
expiration date of its patent(s). We have estimated the economic life of the VEREGEN
license based upon the expected future cash flow contributions over the expected useful
life to be 15 years.

We
are in the process of creating and implementing our launch and initial marketing
strategies for VEREGEN and expect to launch VEREGEN during 2007 as soon as
commercial quantities of VEREGEN become available to us.

On
November 7, 2006, we entered into an agreement with BioSante Pharmaceuticals to market
its estradiol transdermal gel, ELESTRIN, in the United States. ELESTRIN is to be
prescribed for the treatment of moderate-to-severe hot flashes in menopausal women and is
available at several dosage levels. On December 19, 2006, we announced that BioSante had
received approval from the FDA to market ELESTRIN. ELESTRIN is the lowest dose of
estradiol approved by the FDA for the treatment of moderate-to-severe vasomotor symptoms
(hot flashes). In consideration for the grant of our right to market ELESTRIN, we
paid BioSante and its licensor for ELESTRIN an aggregate of $3.5 million during
October 2006. As a result of the FDAs approval of ELESTRIN, we are obligated to pay
$10.5 million in regulatory milestones, $7.0 million of which is due in March 2007, with
the remaining $3.5 million due in December 2007, a royalty on net sales (in the low teens), and sales-based
milestones.

The
ELESTRIN license includes the use of a patent covering ELESTRIN until 2021 and
several other pending patent applications have been filed with the U.S. Patent and
Trademark Office, which may extend the patent life. The term of the license agreement is
the later of the expiration of the patents or the 12th anniversary of the first sale of
the product. However, we can continue to commercialize ELESTRIN after the patents
expire or the 12th anniversary of the first sale of the product. After the term of the
license agreement expires, we are not required to pay a royalty to BioSante. We have
estimated the economic life of the ELESTRIN license based upon the expected future
cash flow contributions over the expected useful life to be 12 years.

We
are in the process of creating and implementing our launch and initial marketing
strategies for ELESTRIN and expect to launch ELESTRIN during 2007 as soon as
commercial quantities of ELESTRIN become available to us.

During
2006, we also agreed to development terms with Polymer Science, Inc. who will develop
delivery systems not currently used by us for future products that we intend to
commercialize. Polymer Science will manufacture the products that will incorporate these
new delivery systems exclusively for us. These products are being designed to help fill
physician and patient needs for the effective and convenient delivery of the active
ingredients to be incorporated in them. Initial launches of these products are expected
in 2007 and beyond.

Marketing and Sales

We
market and sell our products primarily through our full-time sales personnel and
wholesalers. As of February 28, 2007, we employed a national sales force, including
district managers, of 175 professional sales representatives. These representatives seek
to cultivate relationships of trust and confidence with dermatologists, podiatrists,
gastroenterologists and other specialists who write a high volume of prescriptions in our
core market segments. Our marketing and sales promotions principally target these doctors
through visits where our sales representatives provide information and product samples to
encourage these physicians to prescribe our products. In

| | 11 | 
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---

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 February 28, 2007, Doak Dermatologics had 129 sales representatives and district
managers who call on dermatologists and podiatrists throughout the United States. As of
February 28, 2007, our Kenwood Therapeutics division had 46 sales representatives and
district managers who call on gastroenterologists, colon and rectal surgeons and womens
health providers in the United States. We believe we have created an attractive incentive
program for our professional sales force that is based upon goals in prescription growth
and market share improvement. We also train our professional sales force on applicable
pharmaceutical sales and marketing ethics and guidelines and periodically apprise them of
new legal developments that may influence the methods by which they act. In accordance
with a growing trend among many states, we have adopted, and our professional sales force
is required to comply with, our Pharma Compliance Program. The policies included in our
Pharma Compliance Program are designed to provide guidance to our employees, including
our professional sales force, on the legal and ethical standards relating to the most
common marketing and sales activities, as well as other usual financial arrangements with
physicians, physician assistants and other healthcare practitioners.

We
expect to launch VEREGEN and ELESTRIN during 2007. VEREGEN will be promoted
primarily to dermatologists and womens health providers by both our Doak Dermatologics
and Kenwood Therapeutics sales forces. ELESTRIN will be promoted to womens health
providers by our Kenwood Therapeutics sales force. In connection with the launch of these
products, we anticipate hiring approximately 20 additional Kenwood Therapeutics sales
representatives during 2007 and incurring a corresponding amount of additional sales,
marketing and related expenses.

To
facilitate sales of our products internationally, we have, as of February 28, 2007,
entered into agreements with approximately 24 international marketing and distribution
partners to provide for distribution and promotion of our products in more than 37
countries. Net sales from our international operations accounted for $2,952,846 during 2006, or
approximately 2%, of our overall net sales for each of 2006, 2005 and 2004.

During
June 2004, we acquired 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 the terms of this acquisition, we have exclusive
distribution and marketing rights to these products for eight years in Australia, Japan,
the Commonwealth of Independent States (other than Armenia, Azerbaijan, Georgia and Moldova), Latvia, Lithuania, Estonia, Saudi 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. Through February 2007, we have entered into distribution agreements with
entities that will file regulatory applications and promote the products listed earlier
in this paragraph in the Commonwealth of Independent States, Saudi Arabia and the United
Arab Emirates. We are also currently in negotiations with a potential distribution
partner that intends to promote these products in Australia. We anticipate commencing the
distribution of certain of these products in Saudi Arabia, the United Arab Emirates, Estonia  and
Latvia during 2007.

One
of the novel marketing campaigns that we recently initiated and are continuing is our
Skin Cancer Screening Awareness Tour. During 2006, we custom-designed a recreational
vehicle into a Mobile Diagnosis Vehicle (MDv) from which Board-certified dermatologists
could perform skin cancer screenings. We then partnered with The Skin Cancer Foundation
in a cross-country tour to raise awareness about skin cancer and the importance of early
detection and treatment. At each stop along the tour, dermatologists conducted skin
cancer screenings and we educated the public about the dangers of actinic keratosis,
squamous cell carcinoma, basal cell carcinoma and melanoma, all different forms of skin
cancer. The main goal of the Tour is to encourage people to see their local
dermatologists for testing and treatment.

During
2006, the MDv visited 26 cities and screened 5,573 people, of which 33% were suspected to
have some form of pre-cancerous or cancerous condition. Through our extensive promotional
and public relations campaign, we spread the word that it is critical that people see
their dermatologist to get screened. We also created and maintain a website with a
dermatologist finder feature so that people can find a dermatologist in their area.

| | 12 | 
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We
intend to seek new markets in which to promote our product lines and will continue to
expand our sales 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 97% of our gross trade
accounts receivable at December 31, 2006 and 90% of our gross trade accounts receivable
at December 31, 2005. The following table presents a summary of our gross sales to
significant customers, all of whom are also wholesalers, as a percentage of our total
gross sales:

|                                |  | Years Ended December 31,
|------------------------------- |  | ------------------------
|Customer*                       |  | 2004                    
|AmerisourceBergen Corporation   |  | 15                      
|Cardinal Health, Inc.           |  | 36                      
|McKesson Corporation            |  | 25                      
|Quality King Distributors, Inc. |  | 11                      

---

|* |  | No
other customer had a percentage of our 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). 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.

DSAs
are a result of pharmaceutical wholesalers recently shifting from the traditional buy
and hold model (i.e., 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, such as us, pay wholesalers a fee for their distributing the pharmaceutical
providers products and providing other inventory management and administrative services)
in an effort to align wholesaler purchasing patterns with end-user demand. During 2005,
we entered into DSAs with Cardinal and McKesson which had effective dates during 2004. We
entered into a DSA with Kinray, Inc. during the Third Quarter of 2006. The terms of each
DSA require us, generally, to pay fees to the applicable wholesaler, which fees are
offset by any price appreciation of the inventory that such wholesaler has on-hand and
also by any discounts that we give such wholesaler for new product promotions. In return,
the wholesaler is obligated to maintain its inventory levels of our products at agreed
upon months-on-hand and to provide us with monthly inventory and sales reports. Based
upon these DSAs, we owe these wholesalers, as of December 31, 2006, an aggregate of
$1,778,711. We believe that these DSAs, among other things, improve our knowledge of
demand for our products, reduce the level of wholesale inventories of our products and
improve channel transparency because under the terms of the DSAs, the wholesalers provide
us with periodic reports of inventory and demand levels of our products.

Third Party Payors

Our
operating results and business success also depend on the availability of adequate third
party payor reimbursement to patients for our branded prescription 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

| | 13 | 
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---

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. While we focus on the
inclusion of our products in these formularies, this marketing channel is highly
competitive and we cannot assure that a significant percentage of our core products will
be covered by the formularies of the major managed care organizations and pharmacy
benefit managers.

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.

We
engage in a regular marketing campaign to raise the awareness of our brands to third
party payors. This campaign involves regularly scheduled targeted product mailings,
private meetings and attendance at industry conferences. 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 and all of our products
are manufactured and supplied to us by independent companies. Many of these companies
also manufacture and supply products for some of our competitors. We do not have
licensing or other supply agreements with most 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.

While
we could seek alternative sources to manufacture our products, we generally only contract
with one manufacturer with respect to each of our products, including our core products.
Other than with respect to VEREGEN, ELESTRIN, PAMINE® and SOLARAZE®, our
manufacturing contracts are currently in the form of purchase orders. Firm manufacturing
agreements are either being negotiated or are in place with respect to our core products,
VEREGEN, ELESTRIN, PAMINE® and SOLARAZE®. Further, we and the manufacturers
of our products generally rely on suppliers of raw materials used in the production of
our products. Some of these materials, including the active ingredients in VEREGEN,
ELESTRIN, PAMINE® and SOLARAZE®, are available from only one or a limited number
of sources.

In
addition, during 2006, we entered into a development agreement with Polymer Science
whereby they agreed to develop and supply us with delivery systems not currently utilized
by us for future products to be commercialized by us.

All
manufacturers of pharmaceutical products sold in the United States must comply with
current good manufacturing practices (cGMP) as determined by the FDA and their
manufacturing operations and processes are subject to FDA inspection. Failure to comply
with cGMP requirements can lead to the shutdown of a facility, the seizure of product
distributed by that the facility and other sanctions. 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.

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At
December 31, 2006, we had an aggregate of $2,212,260 of backlog orders, compared to an
aggregate of $1,134,668 of backlog orders at December 31, 2005. Our backlog at December
31, 2006 was primarily the result of our being temporarily out of stock of certain
products. All of our backlog orders at December 31, 2006 were filled during the First
Quarter of 2007. Likewise, all of our backlog orders at December 31, 2005 were filled
during the First Quarter of 2006.

Intellectual Property

We
have recently refocused our business strategy, which anticipates greater investment in
products with intellectual property protections. However, other than the ownership or
license of patents with respect to SOLARAZE®, which is patented through at least 2014,
VEREGEN, which is patented through at least 2017, and ELESTRIN, which is patented
through at least 2021, we do not have meaningful intellectual property or proprietary
protection for our other material branded pharmaceutical products, including ADOXA®. To
our knowledge, none of our patents infringes any patent 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.

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 trademark owned or used by others.

Competition

The
pharmaceutical industry is highly competitive. We currently compete primarily in the
dermatologic, podiatric and gastrointestinal markets and are becoming more involved in
the womens health market. We believe that competition for product sales is based
primarily on brand awareness, price, availability, product efficacy and customer service.

Most
of our currently marketed products do not have patent or other intellectual property
protections. Generic or therapeutically equivalent products for most of our brands 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 therapeutically equivalent products. Further, our branded products for
which there are no generic or therapeutically equivalent forms available may face
competition from different therapeutic treatments used for the same indications for which
our branded products are used.

Over
the past several years, generic or competitive and less expensive versions of many of our
products have been introduced, including for different strengths of ADOXA®, ZODERM®,
PAMINE®, ROSULA®, ANAMANTLE®HC and different formulations of KERALAC®,
which has resulted in reduced demand and significant decreases in our net sales of the
affected products. In order to maintain our sales, we may enter into agreements for
authorized generic versions of our products and we implement life cycle management
techniques such as creating new formulations and delivery methods.

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 Axcan Pharma, Barrier Therapeutics,

| | 15 | 
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CollaGenex Pharmaceuticals, Graceway
Pharmaceuticals, King Pharmaceuticals, Medicis, Salix Pharmaceuticals, Sciele Pharma,
Stiefel Laboratories, Valeant Pharmaceuticals and Wyeth Pharmaceuticals.

Government Regulation

Virtually
all aspects of our activities are regulated by federal and state statutes and
regulations, and by 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 U.S. Department of Agriculture, the U.S. Occupational
Safety and Health Administration and the U.S. Environmental Protection Agency, as well as
by comparable state agencies and 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 U.S. Department of Veterans
Affairs 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.

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 NDAs, 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. The FDA has committed generally to review and make a
decision concerning approval of 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 the 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

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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 not be received and that 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. The FDA issues OTC monographs for
particular 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 the 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. The 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, the 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, the 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. The 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 the 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. Recently,
the FDA has stated its intention to increase its enforcement in this area and has taken
action against certain products, none of which are ours, primarily on the basis of safety
concerns. 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 cGMPs 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

| | 17 | 
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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 cGMP requirements 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
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 cGMP requirements that apply to ordinary foods. In
addition, as authorized by DSHEA, the FDA proposed cGMP requirements specifically for
dietary supplements. If these regulations are finalized, they will be more detailed than
the requirements that currently apply.

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The
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
$20,000,000 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 February 28, 2007, we had approximately 300 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, 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, particularly ADOXA®,
KERALAC®/ KEROL, and SOLARAZE®. Ten of our core branded products accounted for a
total of approximately 87%, 81% and 73% of our net sales for 2006, 2005 and 2004,
respectively. We believe that the net sales of these core products, and line extensions,
if any, of such products, will constitute the majority of our overall net sales for the
foreseeable future unless and until we can develop sales of VEREGEN, ELESTRIN or
other new products. Accordingly, any factor that hurts the sales of our core products,
individually or collectively, could reduce our revenues and profitability. Net sales of
our core branded products could be adversely affected by the following factors, among
others:

| |  |  | competition
from generic or therapeutically equivalent products;
| | - |  | ----------------------------------------------------------------

| |  |  | 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;
| | - |  | -------------------------------------------------

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| |  |  | manufacturing
or supply interruptions;
| | - |  | --------------------------------------

| |  |  | legal
or regulatory action by the FDA and other government              regulatory agencies,
including changes that could render our              products obsolete or otherwise
affect the ability of our sales              force to market to prescribing physicians;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

Our revenues and
profitability would be adversely affected if we cannot launch VEREGEN or ELESTRIN
on a timely basis or if these products are not commercially accepted.

We
plan on launching VEREGEN and ELESTRIN for commercial distribution during 2007.
If, for any reason, our launch of either of these products is delayed, our revenues and
profitability will be adversely affected, which will have a corresponding negative impact
on our business, and would likely negatively affect the market price of our stock.
Factors out of our control that could delay the launch of VEREGEN or ELESTRIN
include manufacturing delays or problems, shortages of active product ingredients and
shipping delays. In addition, our sales of VEREGEN and ELESTRIN will be adversely
affected, and our revenues and profitability will be correspondingly impacted, if
physicians do not accept VEREGEN or ELESTRIN as acceptable treatment alternatives
for patients and do not write prescriptions for these products, our sales and marketing
efforts are ineffective or if the safety or efficacy of VEREGEN or ELESTRIN, on a
commercial scale, is not sustained.

ADOXA® net sales
make up a substantial portion of our revenues and profitability and failure to maintain
its sales would reduce our revenues and profitability.

Since
August 2004, we have sold ADOXA®, an oral antibiotic indicated for the treatment of
acne that is not patent protected. ADOXA® accounted for approximately 32%, 34% and 13%
of our net sales for 2006, 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 ADOXA® decreases and we fail to replace those sales, our revenues and profitability
would decrease.

Our sales suffer from
competition by generic or therapeutically equivalent products because we do not have
proprietary protection for most of our existing branded pharmaceutical products.

Most
of our currently marketed products do not have patent or other intellectual property
protections. Therapeutically equivalent products for most of our brands 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 therapeutically equivalent products. In addition, our branded products for
which there are no generic or therapeutically equivalent forms available may face
competition from different therapeutic treatments used for the same indications for which
our branded products are used. Over the past several years, generic or competitive and
less expensive versions of many of our products have been introduced, including for
different strengths of ADOXA®, ZODERM®, PAMINE®, ANAMANTLE®HC and different
formulations of KERALAC®, which has resulted in reduced demand and significant
decreases in our net sales of the affected products. In order to maintain our sales, we
may enter into agreements for authorized generic versions of our products and we
implement life cycle management techniques such as creating new formulations and delivery
methods. For example, we authorized generic versions of certain strengths of ADOXA® and
we also launched ADOXA PAKS®, designed to enhance patient compliance and physician
prescribing. These strategies may not be successful with respect to individual products
or in the aggregate. It is unlikely that once a generic or therapeutically equivalent
product is introduced, we will be able to maintain significant sales of the affected
product. If aggregate demand for ADOXA®, KERALAC®, ZODERM®, ANAMANTLE®HC or any
other material product line decreases and we fail to replace

| | 20 | 
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those sales, our revenues and
profitability will decrease, which will have an adverse effect on our business, financial
condition and results of operations and would likely negatively affect the market price
of our stock.

If we cannot purchase
or develop new products and bring them to market, our business could suffer.

In
2006, we refocused our business strategy primarily on in-licensing, developing and
bringing-to-market phase II and phase III drugs with long-term intellectual property
protection. We also intend to grow by expanding our existing, and entering into new,
joint venture relationships and strategic alliances with biotechnology companies.
Although we expect to launch VEREGEN and ELESTRIN in 2007, we cannot assure you
that we will continue to implement our refocused business strategy effectively. Factors
that could limit or restrict our ability to implement our strategy include:

| |  |  | we
may be unable to identify suitable products, product candidates or potential joint
venture partners              within our areas of expertise;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | we
may be unable to license or acquire the relevant technology or              enter into
strategic alliances on terms that would allow us to              make an appropriate
return from the product or alliance;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------

| |  |  | potential
product candidates may not receive required regulatory              approvals for
marketing or, on further study, be shown to have              harmful side effects, not
be efficacious or be less efficacious              than existing products or have other
characteristics that indicate              they are unlikely to be effective drugs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  |  | we
may not be able to gain market acceptance for any products that we do launch.
| | - |  | --------------------------------------------------------------------------------

While
we anticipate making future acquisitions and entering into development agreements in
accordance with our strategic plan, we might be unable to consummate any such
transactions. Further, we may not achieve anticipated sales levels for newly acquired or
licensed products or internally developed products or line extensions or those sales may
not be profitable. Our failure to do any of these things would have a negative effect on
the growth of our sales and profitability, and on our operations.

We may not be
successful in establishing additional, or expanding existing, joint venture partnerships
or strategic alliances, which could adversely affect our ability to develop and
commercialize products.

An
important element of our business strategy is entering into collaborations for the
development and commercialization of products. If we are unable to reach agreements with
suitable collaborators, we may fail to meet our business objectives. We face significant
competition in seeking appropriate collaborators. We cannot be sure that we will be able
to locate adequate research partners or that supplemental research will be available on
terms acceptable to us. Moreover, these collaboration arrangements are complex, costly to
negotiate and time consuming to document. Further, we may, upon entering into such
agreements, be required to make significant up-front payments to fund the projects. Even
if we are able to enter into collaborations, we cannot assure you that these arrangements
will result in successful product development or commercialization.

Delays in the research
and development or testing processes will cause a corresponding delay in revenue
generation from potential new products developed for or acquired by us, which could
adversely affect our business and our income.

We
expect to rely on our collaborators for the research and development of any Phase II and
Phase III drugs that we may in-license or acquire. For example, under our agreement with
MediGene AG, in addition to VEREGEN, we have acquired rights to additional potential
ointments or other topical formulations containing

| | 21 | 
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green tea catechins for the
treatment of dermatological diseases in humans. We cannot assure you that we will be able
to develop line extensions to our existing brands or any other products or technology,
including any products or line extensions to be developed under the MediGene and BioSante
agreements, in a timely manner, or at all. We evaluate our own and our collaborators
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 evaluations, we have abandoned in the past, and may
abandon in the future, our efforts on a particular product or technology. If we fail to
take a product or technology from the development stage to market on a timely basis or at
all, we may incur significant expenses without any financial return.

If we are not able to
obtain required regulatory approvals, we will not be able to commercialize additional new
product candidates, and our ability to generate revenue will be materially impaired.

Our
agreements with MediGene and BioSante involve the development of new pharmaceutical
products, which are subject to FDA approval and regulation. As part of our strategy, we
intend to enter into additional agreements to in-license or acquire additional new
pharmaceutical products that will also be subject to FDA approval and regulation. We
cannot assure you that the FDA will approve any products or applicable line extensions we
develop in a timely fashion, or at all. Failure to obtain regulatory approval for any of
our product candidates will prevent us from commercializing it.

We
have limited experience in filing and prosecuting the applications necessary to gain
regulatory approvals. We will also be relying at least in part on our strategic
collaborators and partners, and contract research organizations, to file and prosecute
the appropriate applications. Securing FDA approval requires the submission of extensive
preclinical and clinical data, information about product manufacturing processes and
inspection of facilities and supporting information to the FDA for each therapeutic
indication to establish the product candidates safety and efficacy. Our future products
may not be efficacious, may be only moderately efficacious or may prove to have
undesirable or unintended side effects, toxicities or other characteristics that may
preclude our obtaining regulatory approval or prevent or limit commercial use.

The
process of obtaining regulatory approvals is expensive, often takes many years, if
approval is obtained at all, and can vary substantially based upon, among other things,
the type, complexity and novelty of the product candidates involved. Changes in the
regulatory approval policy during the development period, changes in, or the enactment of
additional, statutes or regulations, or changes in regulatory review for each submitted
product application, may cause delays in the approval or rejection of an application.

The
FDA, and comparable authorities in other countries, have substantial discretion in the
approval process and may refuse to accept any application or may decide that our data is
insufficient for approval and require additional preclinical, clinical or other studies.
In addition, varying interpretations of the data obtained from preclinical and clinical
testing could influence how a product candidate is classified and delay, limit or prevent
regulatory approval of a product candidate. Any regulatory approval we ultimately obtain
may be limited or subject to restrictions or post-approval commitments that render the
product not commercially viable.

Even
if regulatory approval of a product is granted, the approval may be subject to
limitations on the indicated uses for which the product may be marketed or to the
conditions of approval, or contain requirements for costly post-marketing testing and
surveillance to monitor the safety or efficacy of the product.

The manufacture and
packaging of pharmaceutical products are subject to the requirements of the FDA and
similar foreign regulatory bodies. If our third party manufacturers fail to satisfy these
requirements, our product development and commercialization efforts may be materially
harmed.

The
manufacture and packaging of pharmaceutical products such as VEREGEN, ELESTRIN
and SOLARAZE®, as well as our other current and possible future products, are regulated
by the FDA and similar foreign regulatory bodies and must be conducted in accordance with
the FDAs cGMPs and comparable requirements of foreign regulatory bodies. Independent
companies manufacture and supply all of our products. Failure by our third party
manufacturers to comply with applicable regulations, requirements or guidelines could
result in sanctions being imposed on us, including fines, injunctions, civil penalties,
failure of regulatory authorities to grant marketing approval of our products, delays,
suspension or withdrawal of approvals, license revocation,

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seizures or recalls of product,
operating restrictions and criminal prosecutions, any of which could significantly and
adversely affect our business.

Changes
in the manufacturing process or procedure, including a change in the location where the
product is manufactured or a change of a third party manufacturer, require prior FDA
review and/or approval of the manufacturing process and procedures in accordance with the
FDAs cGMP. This review may be costly and time consuming and could delay or prevent the
launch of a product or the use of a facility to manufacture a product. Any such change in
facility would be subject to a pre-approval inspection by the FDA and the FDA would again
require demonstration of product comparability. Foreign regulatory agencies have similar
requirements.

The
FDA and similar foreign regulatory bodies may also implement new standards, or change
their interpretation and enforcement of existing standards and requirements, for
manufacture, packaging or testing of products at any time. If we or the manufacturers of
our products are unable to comply, we, and they, may be subject to regulatory
enforcement, civil actions or penalties, which could significantly and adversely affect
our business, and any such change may lead to an increase in cost of goods.

If VEREGEN,
ELESTRIN or other new product offerings fail to achieve market acceptance, the
revenues that we generate from their sales will be limited and our profitability could be
affected.

Market
acceptance of our products and any new products for which we obtain marketing approval
from the FDA or other regulatory authorities will depend upon the acceptance of these
products by physicians, patients and healthcare payors. Safety, efficacy, convenience and
cost-effectiveness, particularly as compared to competitive products, are the primary
factors that affect market acceptance. Physicians may elect to not recommend using our
products for any number of other reasons, including whether our products best meet the
particular needs of the individual patient. Even if a product displays a favorable
efficacy and safety profile in clinical trials, market acceptance of the product will not
be known until after it is launched.

We
have not yet begun to formally market VEREGEN or ELESTRIN. Our efforts to educate
the medical community and third-party healthcare payors on the benefits of these or any
of our future products will require significant resources, including the hiring of
additional sales representatives and training of the sales force about the benefits and
risks of our products, and may never be successful. In the case of VEREGEN, we will
also need to educate the medical community and third-party healthcare payors about
catechins extracted from green tea, a novel active ingredient, and there can be no
assurance that this novel active ingredient will find market acceptance.

If
our products fail to achieve and maintain market acceptance, or if new products or
technologies are introduced by others that are more favorably received than our products,
or if we are otherwise unable to market and sell our products successfully, our business,
financial condition, results of operations and future growth will suffer.

The introduction of
line extensions of our existing products or of new products that compete with our
existing products, or unanticipated generic competition, could result in unexpected
changes in our estimates for future product returns and reserves for obsolete inventory,
which would adversely affect our operating results.

One
of the principal strategies we employ to offset the impact of generic competition
affecting our products is 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 that 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.

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We depend on a limited
number of customers, and if we lose any of them, our business could be harmed. Further
consolidation of wholesalers of pharmaceutical products can negatively affect our
distribution terms and sales of our products.

Our
four largest customers, who are all wholesalers, accounted for an aggregate of
approximately 97%, 90% and 91% of our gross trade accounts receivable at December 31,
2006, 2005 and 2004, respectively. The following table presents a summary of gross sales
to our four largest customers as a percentage of our total gross sales:

|                               |  | Years Ended December 31,
|------------------------------ |  | ------------------------
|Customer(1)                    |  | 2004                    
|AmerisourceBergen Corporation  |  | 15                      
|Cardinal Health, Inc.          |  | 36                      
|McKesson Corporation           |  | 25                      
|Quality King Distributors, Inc |  | 11                      

---

|(1) |  | 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 customers.

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. Consequently, 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. Additional consolidation among pharmaceutical wholesalers could
limit our ability to compete effectively.

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.

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 and rebate rates and actual chargebacks and rebates 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.

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If our estimates for
returned products are incorrect, there may be a materially adverse impact on our net
sales as well as an impact on our operating results.

In
the pharmaceutical industry, customers are normally granted the right to return product
for a refund if the product has not been used by 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 to up to twelve months after the expiration date. Our return policy
conforms to industry standard practices. Management is required to estimate the level of
sales that will ultimately be returned pursuant to our return policy and to record a
related reserve at the time of sale. These amounts are deducted from our gross sales to
determine our net sales. We believe that we have sufficient data to estimate future
returns at the time of sale. Management periodically reviews the allowances for returns
and adjusts them based on actual experience. In order to reasonably estimate future
returns, we analyze both quantitative and qualitative information including, but not
limited to, actual return rates by product, the level of product in the distribution
channel, expected shelf life of the product, product demand, the introduction of
competitive or generic products that may erode current demand, our new product launches
and general economic and industry wide indicators. If we over or under estimate the level
of sales that will ultimately be returned, there may be a material impact to our
operating results.

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 three wholesale customers, two of whom are our largest two
customers, McKesson and Cardinal. The third wholesaler is Kinray. Our DSAs with McKesson,
Cardinal and Kinray became effective during 2004, 2004, and 2006, respectively. The terms
of these DSAs require us to pay fees for product distribution, inventory management and
administrative services that are offset 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 generally obligated
to maintain their inventory levels to an 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. The initial effects of our executing DSAs were that
each wholesaler initially reduced its inventory of our products and our sales to them
decreased and product returns increased. During 2006, we continued to experience
substantial product returns from McKesson and Cardinal that we believe are partially attributable
to the DSAs. As a result of the DSAs, we expensed an aggregate of $2,042,838 in service
fees during 2006.

Because we rely on
independent manufacturers for our products, any production or regulatory problems these
third parties experience could be disruptive to our inventory supply.

We
do not own or operate any manufacturing or production facilities and all of our products
are manufactured and supplied to us by independent companies. 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 or
supply problems. Although we believe we can obtain replacement manufacturers, if
necessary, the absence of agreements with some of our present suppliers may interrupt our
ability to sell our products and adversely affect our present and future sales. 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.

All
manufacturers of pharmaceutical products sold in the United States must comply with cGMP
requirements and manufacturing operations and processes are subject to FDA inspection.
Failure to comply with cGMP requirements can lead to the shutdown of a facility, the
seizure of product distributed by that the facility and other sanctions. 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.

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Any disruption in the
supply of raw materials for our products 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 and could adversely affect our sales.

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
VEREGEN, ELESTRIN, PAMINE® and SOLARAZE®, are available from only one source
or a limited number of sources. 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 inventories of
products 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; and
| | - |  | -------------------------------------------------------------------------------------------

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

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.

We selectively
outsource some of our non-sales and non-marketing services, and cannot assure you that we
will be able to obtain 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 these services or products in a
timely fashion, on acceptable terms, or at all.

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 in-licensing of products
and other acquisitions and product enhancement, we may need additional financing. Our
ability to grow is dependent upon,

| | 26 | 
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---

and may be limited by, among other
things, the availability of satisfactory financing arrangements. Our existing credit
facility 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. We intend to finance any new licensing or
acquisitions from one or more of the following:

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

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

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

If
we raise additional funds by issuing equity securities, our then-existing stockholders
could experience dilution and the terms of any new equity securities may have preferences
over our common stock.

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

Our
total consolidated long term debt, including current maturities, arising solely from the
term loan portion of our $110 million credit facility, was approximately $69 million as
of December 31, 2006. For a   discussion of our financial condition at December 31,
2006, see Managements Discussion and Analysis of Financial Condition and Results of
Operations- Liquidity and Capital Resources included elsewhere in this Annual Report.
Under this 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; and
| | - |  | ---------------------------------------------------------------------------------------------------------

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

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. Our ability to make payments on and, if
necessary, to refinance our debt will also be influenced by general economic, business,
financial, competitive, legislative, regulatory and other factors beyond our control. 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.

Further,
based upon our current projections, we expect to be in default under the fixed coverage
charge ratio set forth in our current syndicated credit facility beginning in the Third
Quarter of 2007. As a result of the projected default, the desire to reduce the interest
rates charged under the facility and to provide us increased

| | 27 | 
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flexibility to potentially enter
into future licensing, acquisition or other similar transactions, we currently expect to
enter into a new credit facility prior to the Third Quarter of 2007.

We may be subject to
product liability claims, and if we do 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. In the case
of new products, such as VEREGEN and ELESTRIN, those risks may not become fully
known until the product has been commercially available in the market for a period of
time. Consequently, consumers may bring product liability claims against us. We maintain
product liability insurance on our products that provides coverage of up to $20,000,000
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 you
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 product liability insurance at
reasonable premium rates, if at all.

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.

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 our directors
and officers insurance has increased and could continue to increase. In response to
increased premiums, 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.

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 business strategy and objectives.
We may not be able to attract and retain key personnel on acceptable terms. Many of our
key managerial, operational and scientific personnel would be difficult to replace. The
loss of such personnels services could delay the acquisition or development of products,
the achievement of our business objectives and limit our ability to operate our business
successfully.

RISKS RELATED TO
INTELLECTUAL PROPERTY

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

We
have recently refocused our business strategy, which anticipates greater investment in
products with intellectual property protections. However, other than patents with respect
to SOLARAZE®, VEREGEN and ELESTRIN, we do not have meaningful patents or patent
applications pending with respect to any other material products currently sold by us,
including ADOXA®. We mainly rely on unpatented proprietary technologies in the

| | 28 | 
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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.

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. Other market participants may
independently develop similar technologies or design around the patented aspects of our
technology. Challenges to the patents for SOLARAZE®, VEREGEN or ELESTRIN or
other products for which we may obtain rights 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. Because marketing patent protected products
represents a new business strategy for us, the cost of analyzing and responding to
intellectual property related challenges may be amplified by our lack of experience with
this business model.

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
existing 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. We also 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, technologies or brands, we may be required to license the disputed rights, if
the holder of those rights is willing, or to cease marketing the challenged product, or
to modify our products or brand names 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.

RISKS RELATED TO OUR
INDUSTRY

We face significant
competition within our industry.

The
specialty pharmaceutical industry is highly competitive. Many of our competitors are
larger and more well-established. Our competitors include Axcan Pharma, Barrier
Therapeutics, CollaGenex Pharmaceuticals, Graceway Pharmaceuticals, King
Pharmaceuticals, Medicis, Salix Pharmaceuticals, Sciele Pharma, Stiefel Laboratories,
Valeant Pharmaceuticals and Wyeth Pharmaceuticals. 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 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

| | 29 | 
| | -- | 

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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.

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. 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.

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.

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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 of our
current drugs that we and others market are not the subject of an approved application or
an OTC monograph.

The
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. The 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, the 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. The FDA has recently stated its intent to increase enforcement activities in
this area and has taken action against certain drugs, none of which are ours, pursuant to
its established enforcement policies primarily on the basis of safety concerns.

Many
of our brands, including KERALAC®, KEROL, CARMOL®40, ROSULA®, ZODERM®,
SELSEB®, LIDAMANTLE® and ANAMANTLE®, 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 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 an NDA to
the FDA for any of these drugs, the FDA may require us also to file an NDA or an ANDA for
that same drug in order to continue marketing it in the United States. Similarly, if the
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.

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, Massachusetts, Michigan, Minnesota, New Mexico, Ohio, Rhode Island,
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.

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

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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
reimportation 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 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 adversely affect our earnings.

Medicare,
Medicaid or similar governmental 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, became eligible and began enrolling for the
Part D Medicare Drug Benefit. 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.

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

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. While we focus on the inclusion of our
products in these formularies, this marketing channel is highly competitive and we cannot
assure that a significant percentage of our core products will be covered by the
formularies of the major managed care organizations and pharmacy benefit managers.

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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.

RISKS RELATED TO OUR
COMMON STOCK

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

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 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. On July 14,
2006, the plaintiff filed an amended complaint alleging a sole count for breach of
fiduciary duties arising out of substantially the same allegations made in the federal
securities class action lawsuit. 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.

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.

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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.

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 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 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.

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 President and Chief Executive Officer, and his wife, and Bradley
Glassman, Senior Vice President, Sales & Marketing.

The
Board of Directors has agreed to review our dual-class equity structure in the first half
of 2007.

Our founder and
President and Chief Executive Officer could exercise substantial control over our affairs.

At
February 28, 2007, Daniel Glassman, our founder and President and Chief Executive
Officer, and members of his immediate family (including his wife, Iris Glassman, and son,
Bradley Glassman), were the beneficial owners of approximately 13%, or 2,144,389 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 voting control over the election of our board of
directors and could influence 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.

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

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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

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| | -- | 

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

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

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

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

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

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

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

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

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, 2004 has
fluctuated from a low of $7.61 to a high of $25.00. A variety of factors in addition to
the foregoing that could cause the price of our common stock to fluctuate, perhaps
substantially, include:

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

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

| |  |  | current
events affecting the political, economic and social situation in the United States and
other              countries where we may sell our products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| |  |  | 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 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, fluctuations in the stock market in general and the
market for shares for emerging growth and specialty pharmaceutical companies in
particular can be unrelated to our operating performance or the operating performance of
other companies. Any such fluctuations in the future could reduce the market price of our
common stock.

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

We
currently have outstanding a substantial number of options to purchase shares of our
common stock. If the holders of all outstanding options exercised them, we would have an
additional 1,651,617 shares of common stock issued and outstanding as of December 31,
2006. The sale, or availability for sale, of such substantial amounts

| | 36 | 
| | -- | 

---

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 space at 383 Route 46 West, Fairfield,
New Jersey, under a lease expiring on January 31, 2013. The owner and manager of this
property is a limited liability company that is owned and controlled by Daniel Glassman,
our CEO and President. The lease obligates us to pay 3% increases in annual lease
payments per year.

We
lease an 11,500 square foot warehouse at a different location in Fairfield, New Jersey.
This lease has a term expiring on February 28, 2010.

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

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 by one of our former contract manufacturers 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. A March
19, 2007 trial date has been set with respect to this dispute. We believe that we have
meritorious defenses to the plaintiffs allegations and valid bases to assert our
counterclaims and demand for monetary damages.

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| | -- | 

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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 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, 2006, 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. Pursuant to a June 28, 2006 Scheduling Conference
with the Court and the Courts Pretrial Scheduling Order of that date, discovery in the
federal securities class action lawsuit has begun. Plaintiffs filed a motion for class
certification on January 15, 2007. Defendants response is due on April 2, 2007.

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. Plaintiffs in the state shareholder derivative actions filed a
consolidated amended derivative complaint on May 12, 2006. We and the individual
defendants filed our initial response on July 17, 2006 seeking to dismiss the alleged
derivative complaint in its entirety with prejudice. On October 30, 2006, the court
granted the defendants motion to dismiss and dismissed the derivative complaint with
prejudice. Plaintiffs filed a notice of appeal on December 14, 2006.

Further,
a federal shareholder derivative action was filed in the United States District Court 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. After we and
the other defendants filed on June 16, 2006 a motion to dismiss the derivative claim in
this action, the shareholder filed an amended complaint on July 14, 2006 alleging a sole
count for breach of fiduciary duties arising out of substantially the same allegations
made in the federal securities class action lawsuit. We and the individual defendants
have filed a motion to dismiss the alleged derivative complaint in its entirety with
prejudice.

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 it 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. During the Second Quarter 2006, our
Audit Committee completed its previously announced internal review related to the SECs
informal inquiry. The Audit Committee conducted its review with the assistance of
independent counsel. The Audit Committees conclusions were delivered to the full Board
of Directors, the SEC and the Companys independent accountants. During 2006, we
remediated the material weaknesses described in our 2005 Form 10-K, our Form 10-Q/A for
the quarter ended March 31, 2006, and our Forms 10-Q for the quarters ended June 30, 2006
and September 30, 2006, respectively.

| | 38 | 
| | -- | 

---

Settlement of Proxy
Contest

On
October 26, 2006, prior to the close of our 2006 Annual Meeting of Stockholders, we
entered into a global Settlement Agreement with Costa Brava Partnership III L.P. (Costa
Brava). Costa Brava owns approximately 9.9% of our Common Stock. Roark, Rearden and
Hamot, LLC (RRH) is the general partner of Costa Brava. Seth W. Hamot, one of our
directors, is the President of RRH.

Under
the terms of the Settlement Agreement, we and Costa Brava agreed that (1) based on the
preliminary vote estimate at the Annual Meeting, as only Seth Hamot and Douglas Linton
received the requisite common stockholder vote to be elected as directors, and in view of
the withdrawal of John Ross as a nominee for director, Mr. Hamot and Mr. Linton will
appoint William Murphy as the third common stockholder director; (2) in view of the
preliminary vote estimate, we will separate the position of Chairman of the Board and
Chief Executive Officer and will consider a proposal to eliminate our dual class stock
structure, each to occur no later than the earlier of our 2007 annual meeting of
stockholders or June 30, 2007; (3) Costa Brava will dismiss all pending litigation
against us in Delaware with prejudice; (4) we will pay Costa Brava $1.15 million in full
settlement of all litigation claims, which amount was accrued as of September 30, 2006;
and (5) Costa Brava will release us from all claims arising prior to the Settlement
Agreement.

At
a meeting of the Board of Directors held on November 7, 2006, Mr. Hamot and Mr. Linton
elected Mr. Murphy as the third common stock director. We paid Costa Brava the $1.15
million and on November 2, 2006, Costa Brava dismissed with prejudice all currently
pending litigation against us in Delaware. We also recorded an additional $950,000 of
expense for advisory and legal fees relating to the settlement of this matter. During
January 2007, our Board of Directors separated the positions of Chairman of the Board and
Chief Executive Officer.

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 material amounts or ranges of
reasonably possible losses in excess of recorded amounts.

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

The
information set forth in Item 1.01 of our Current Report on Form 8-K filed with the SEC
on October 27, 2006 and Item 4 of our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006 is incorporated herein by reference.

| | 39 | 
| | -- | 

---

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.

The
following table sets forth the range of high and low sales prices for shares of our
common stock for the periods indicated

|                             |  | Price Range
|---------------------------- |  | -----------
|                             |  | High       
|Year Ended December 31, 2005 |  |            
|First quarter                |  | $15.92     
|Second quarter               |  | 11.96      
|Third quarter                |  | 12.66      
|Fourth quarter               |  | 13.41      
|                             | 
|Year Ended December 31, 2006 | 
|First quarter                |  | $14.95     
|Second quarter               |  | 15.09      
|Third quarter                |  | 16.42      
|Fourth quarter               |  | 25.00      

As
of March 8, 2007, there were 157 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.

Securities authorized
for issuance under Equity Compensation Plans

Below is a table summarizing all
equity security issuances under our equity compensation plans previously approved by our
securityholders; we have no equity compensation plans that were not approved by our
securityholders:

|                                       | Number of   
securities to  
be issued upon  
exercise of  
outstanding  
options,  
warrants and 
rights  
(a) | Weighted- 
      average  
exercise  
price of  
outstanding  
options,  
warrants 
       and
rights  
(b) | Number of 
       securities

      remaining 
       available
for 
       future issuance 
under equity 
compensation 
       plans
(excluding 
       securities 
reflected in 
       column
(a)) 
(c)
|-------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1990 Stock Option Plan                 |                                                                                                                 | 12,600                                                                                                      |                                                                                                                                                                                                           
|                                       |                                                                                                                 |                                                                                                             |                                                                                                                                                                                                           
|1999 Incentive and Non-Qualified Stock |                                                                                                                
|Option Plan                            |                                                                                                                 | 1,639,017                                                                                                   |                                                                                                                                                                                                           
|                                       |                                                                                                                 |                                                                                                             |                                                                                                                                                                                                           
|Total                                  |                                                                                                                 | 1,651,617                                                                                                   |                                                                                                                                                                                                           
|                                       |                                                                                                                 |                                                                                                             |                                                                                                                                                                                                           

During
the quarter ended December 31, 2006 we did not repurchase any shares as part of any
publicly announced plans or programs or otherwise.

| | 40 | 
| | -- | 

---

ITEM 6: SELECTED
FINANCIAL DATA

The
following selected consolidated financial data set forth below as of and for each of the
years ended December 31, 2006, 2005, 2004, 2003 and 2002 have been derived from our
audited consolidated financial statements. You should read this table in conjunction with
our audited consolidated financial statements and related notes and Managements
Discussion and Analysis of Financial Condition and Results of Operations included
elsewhere in this Annual Report on Form 10-K. The income statement data for the years
ended December 31, 2002 and 2003 and the balance sheet data as of December 31, 2002, 2003
and 2004 are derived from audited financial statements not included in this Annual Report.

|                                                |  | Years Ended December 31,
|----------------------------------------------- |  | ------------------------
|                                                |  | 2002                    
|Statement of Income Data                        |  |                         
|Net sales                                       |  | $ 39,668,973            
|Cost of sales                                   |  | 4,568,461               
|                                                |  |                         
|Gross profit                                    |  | 35,100,512              
|Selling, general and administrative             |  | 21,534,143              
|Research and development                        |  | 356,089                 
|Depreciation and amortization                   |  | 1,139,531               
|Interest expense (income), net                  |  | (359,261                
|Losses (gains) on short-term investments        |  | 49,535                  
|Write-off of deferred financing costs           |  |                        
|                                                |  |                         
|Total expenses                                  |  | 22,720,037              
|                                                |  |                         
|Income before income tax expense                |  | 12,380,475              
|Income tax expense                              |  | 4,746,000               
|Net income                                      |  | $   7,634,475           
|                                                |  |                         
|Basic net income per common share               |  | $            0.73       
|                                                |  |                         
|Diluted net income per common share             |  | $            0.67       
|                                                |  |                         
|Shares used in computing basic net income per   | 
|common share                                    |  | 10,470,000              
|                                                |  |                         
|Shares used in computing diluted net income per | 
|common share                                    |  | 11,440,000              
|                                                |  |                         

---

|(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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |  | As of December 31,
|--------------------- |  | ------------------
|                      |  | 2002              
|Balance Sheet Data    |  |                   
|Working capital       |  | $28,162,830       
|Total assets          |  | 43,917,100        
|Long term liabilities |  | 155,362           
|Stockholders equity  |  | 38,193,716        

| | 41 | 
| | -- | 

---

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
included elsewhere in this Annual Report. The following discussion and analysis contains
forward-looking statements regarding our future performance and business strategy. 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 included
elsewhere in this Annual Report.

Overview

We
are a specialty pharmaceutical company that acquires, develops and markets prescription
and over-the-counter products in niche therapeutic markets, including dermatology,
podiatry, gastroenterology and womens health. Our business strategy contemplates our

| |  |  | in-licensing
phase II and phase III drugs and developing and              bringing to market products
with long-term intellectual property              protection or other significant
barriers to market entry;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | commercializing
brands that fill unmet patient and physician needs;
| | - |  | -------------------------------------------------------------------

| |  |  | expanding
existing partnerships and joint venture relationships              with biotechnology and
specialty pharmaceutical companies and              fostering new strategic alliances
designed to deliver a stronger              product portfolio; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | increasing
our focus on research and development activities to               continue to develop
products organically with longer lifecycles               and to extend indications for
our current product portfolio.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
have two primary business segments, our Doak Dermatologics subsidiary (which includes the
products we acquired from Bioglan Pharmaceuticals in 2004), specializing in therapies for
dermatology and podiatry, and our Kenwood Therapeutics division, providing
gastroenterology, womens health, respiratory and other internal medicine brands. To a
lesser extent, Kenwood Therapeutics also markets nutritional supplements and respiratory
products. At February 28, 2007, Doak Dermatologics had a dedicated sales force of 129
professional sales representatives, while Kenwood Therapeutics had a dedicated sales
force of 46 professional sales representatives. During 2006, we launched our A. Aarons
subsidiary, which markets authorized generic versions of Doaks and Kenwoods products.

In
August 2004, we purchased certain assets of Bioglan Pharmaceuticals. As part of this
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. We paid approximately $191 million, including acquisition costs, for the
Bioglan assets.

During
2006, we entered into agreements with MediGene AG and BioSante Pharmaceuticals,
respectively, to commercialize VEREGEN and ELESTRIN, products with significant
intellectual property protection. Pursuant to our agreement for VEREGEN, we have been
granted 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, a novel active ingredient, 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 of 2006, we paid to MediGene
$5.0 million in consideration for development and regulatory activities undertaken prior
to the date of our agreement. We expensed this $5.0 million as a research and

| | 42 | 
| | -- | 

---

development payment. During the
Fourth Quarter of 2006, the FDA approved the marketing of VEREGEN as a new drug
indicated for the treatment of external genital and perianal warts. Under our agreement
with MediGene, the FDA approval triggered a $14 million milestone payment that we paid
during December 2006. We classified this $14 million payment as an intangible asset.
VEREGEN is patented through 2017 (additional pending patent applications may extend
its patent life).

Pursuant
to our agreement for ELESTRIN, we have been granted the exclusive right to market
ELESTRIN in the United States. ELESTRIN is an estradiol transdermal gel to be
prescribed for the treatment of moderate-to-severe hot flashes in menopausal women and is
available at several dosage levels. In consideration for the grant of our right to market
ELESTRIN, we paid BioSante and its licensor for ELESTRIN an aggregate of $3.5
million during October 2006, which we expensed as a research and development payment
during the Fourth Quarter of 2006. During the Fourth Quarter of 2006, the FDA approved
the marketing of ELESTRIN. ELESTRIN is the lowest dose of estradiol approved by
the FDA for the treatment of moderate-to-severe vasomotor symptoms. Under our agreement
with BioSante, the FDA approval of ELESTRIN triggered regulatory milestone payments
of $10.5 million, $7.0 million of which is payable in March 2007, with the remaining $3.5
million payable in December 2007. At December 31, 2006, we recorded this $10.5 million as
milestones payable that are non-interest bearing. We utilized an imputed interest rate of
7.35% to determine the principal owed of $10,115,083, and recorded a corresponding amount
as intangible assets during December 2006. ELESTRIN is patented through 2021
(additional pending patent applications may extend its patent life).

We
expect to launch VEREGEN and ELESTRIN during 2007. VEREGEN will be promoted
to physicians by both our Doak Dermatologics and Kenwood Therapeutics sales forces.
ELESTRIN will be promoted to physicians by our Kenwood Therapeutics sales force. In
connection with the launch of these products, we anticipate hiring approximately 20
additional Kenwood Therapeutics sales representatives during 2007 and incurring a
corresponding amount of additional sales, marketing and related expenses. Our net sales
and profitability would be adversely affected if, for any reason, we were unable to
launch VEREGEN and ELESTRIN on a timely basis.

With
the exception of SOLARAZE®, which is patented through at least 2014, VEREGEN, which
is patented through at least 2017, and ELESTRIN, which is patented through at least
2021, there is no meaningful intellectual property or proprietary protection for our
other material branded pharmaceutical products, including ADOXA®, and competing generic
or therapeutically equivalent versions for most of these other 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 therapeutically equivalent products. Since 2004, our net sales have been
negatively impacted by the onset and increase in generic or therapeutically equivalent
products competing on price with our brands. Increased competition from the sale of
generic or therapeutically equivalent products may cause a further decrease in sales that
would have an adverse effect on our business, financial condition and results of
operations. In addition, as a result of increased generic competition, the execution of
Distribution Service Agreements (DSAs) with three of our wholesale customers, two of whom
are our two largest customers, and a change in these customers market dynamics, we have
experienced an increase in product returns. Our branded products for which there are no
generic or therapeutically equivalent forms may also face competition from different
therapeutic treatments used for the same indications for which our branded products are
used.

We
derive a majority of our net sales from our core branded products: ADOXA®, KERALAC®/
KEROL, SOLARAZE®, ZODERM®, LIDAMANTLE®, ROSULA®, PAMINE®, ANAMANTLE®HC
and FLORA-Q®. These core branded products accounted for a total of approximately 87% of
our net sales for 2006 and approximately 81% of our net sales for 2005. Currently, only
SOLARAZE®, KEROL and FLORA-Q® do not face some sort of competition from generic
or therapeutically equivalent products.

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

| | 43 | 
| | -- | 

---

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 and/or received by an unrelated third party, as provided in Staff Accounting
Bulletin (SAB) 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 returns, rebates, chargebacks and discounts 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 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.

We
do not provide any forms of price protection to wholesale customers other than a
contractual right to three wholesale customers (who together accounted for 81% of our
gross sales in 2006) that our price increases and product purchase discounts offered
during a specified 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.

A.
Aarons first began selling products during the Third Quarter of 2006. We did not
recognize revenue for A. Aarons during 2006 because we did not have sufficient historical
data in accordance with Statement of Financial Accounting Standards (SFAS) No. 48,
Revenue Recognition When Right of Return Exists, in order for us to accrue and reserve
for returns of A. Aarons products. During 2006, A. Aarons shipped approximately $268,000
of products at each products respective gross selling price.

During
the Third Quarter of 2006, we began shipping our products to certain of our wholesale
customers under FOB Destination shipping terms. Under FOB Destination shipping terms, we
cannot record the shipment as a sale until the customer receives the shipment at its
designated location. These wholesalers required that we enter into agreements with them
to change our shipping terms to FOB Destination in order for our business practice with
them to conform to their standard operating procedures. For a discussion of the
quantitative effect during 2006 of this change in our shipping terms, see Results of
Operations- Year Ended December 31, 2006 compared to Year Ended December 31, 2005
included elsewhere in this Annual Report.

Allowances
for returns.In the pharmaceutical industry, customers are normally granted the right to
return product for a refund if the product has not been used by its expiration date,
which is typically two to three years from the date of

| | 44 | 
| | -- | 

---

manufacture. Our return policy
typically allows product returns for products within an eighteen-month window from six
months prior to the expiration date to up to twelve months after the expiration date. Our
return policy conforms to industry standard practices. Management is required to estimate
the level of sales that will ultimately be returned pursuant to our return policy and to
record a related reserve at the time of sale. These amounts are deducted from our gross
sales to determine our net sales. We believe that we have sufficient data to estimate
future returns at the time of sale. Management periodically reviews the allowances for
returns and adjusts them based on actual experience. If we over or under estimate the
level of sales that will ultimately be returned, there may be a material impact to our
financial statements.

During
March 2005, we entered into a DSA with Cardinal Health, having an effective date of July
2004; during September 2005, we entered into a DSA with McKesson having an effective date
of October 2004; and during September 2006, we entered into a DSA with Kinray having an
effective date of August 2006. 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. The terms of our DSAs are consistent
with the industrys movement toward fee-for-service. We believe that these agreements
will, among other things, improve our knowledge of demand for our products, reduce the
level of wholesale inventories of our products and improve channel transparency because
under the terms of the DSAs, the wholesalers provide us with periodic reports of
inventory and demand levels of our products.

Prior
to entering our first DSA in the first quarter of 2005, we followed the practice of
offering customers pricing incentives to ensure that supplies in the distribution channel
would be sufficient to avoid lack of stock. Although these promotions caused wholesaler
buying spikes, we believe the channel was not inflated. Based upon our review of the
wholesaler inventory that is available to us, we believe the level of product in the
channel is approximately 2.3 months at December 31, 2006. Subsequent to entering the
DSAs, we only offer customary new product launch incentives. Our new product sales are
disclosed under  Results of Operations. We record our incentive sales in the period in
which the related products are shipped or delivered, net of applicable allowances.

At
December 31, 2006 our return reserve was $26,348,128. In order to reasonably estimate
future returns, we analyze both quantitative and qualitative information including, but
not limited to, actual return rates by product, the level of product in the distribution
channel, expected shelf life of the product, product demand, the introduction of
competitive or generic products that may erode current demand, our new product launches
and general economic and industry wide indicators. Certain specifics regarding these
analyses are as follows:

| |  |  | Actual
return rates We track actual returns by product. We determine the
provision for our current sales using actual return rates. Our actual
returns by therapeutic category for 2006 and 2005 are detailed below.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Level
of product in the distribution channel We analyze and utilize wholesale inventory
reports provided to us by our largest wholesale customers. In particular,
the wholesale inventory reports provide us the current wholesaler demand by
product and actual product inventory held by the same wholesaler. We also
estimate the level of product in the distribution channel held by small
wholesale customers and retail chains that do not provide us inventory
reports based upon discussions with them and our actual sales to these
locations. Based upon gathering the information of the non-reporting
inventory locations, we estimate the additional weeks of product at these
locations. If our estimate for the non-reporting locations, a component of our allowance
for returns, were different by one week of demand, our return reserve at
December 31, 2006 would increase or decrease by approximately $752,000. We
believe a difference of one week of demand for the non-reporting locations
is not reasonably likely but is possible due to the subjective nature of
this estimate. The estimate for the non-reporting locations is based upon oral
communications we have had with some of our retail chain customers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We
also estimate product returns in-transit that are not included               in the
wholesale inventory reports and not received by us for               processing based
upon discussions we have with our return               processor and our customers. For
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 45 | 
| | -- | 

---

| |  |  | the
December 31, 2006 allowance               for returns, we used actual subsequent returns
and estimated the               time between when the customer removes our product from
their               inventory and the time we record the return credit. If our
              estimate for product returns in-transit, based upon actual
              subsequent returns, is different by one week, our return reserve
              at December 31, 2006 would increase or decrease by approximately
              $390,000. We believe a difference of one week for the returns
              in-transit is not reasonably likely but is possible due to the
              subjective nature of this estimate. The estimate for the returns
              in-transit is based upon oral communications we have had with some
              of our larger wholesale customers, wholesale customers return
              processing centers and our outsourced return processing center.
              The level of product in the distribution channel is used to
              determine the maximum return exposure and is compared against the
              product return reserve created by utilizing the actual return rate
              trends. The estimated return value at December 31, 2006 of all our
              products in the distribution channel was approximately
              $36,400,000. Our estimated return value of all our products in the
              distribution channel and our related allowance for returns at
              December 31, 2006 by therapeutic categories is below.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Estimated
shelf life We track our returns by lot numbers and compare the lot numbers
to when a range of sales may have occurred to determine an estimated average
shelf life. We use this historical average as part of our overall process of
estimating future returns.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Current
and projected demand We utilize prescription demand data provided by
Wolters Kluwer, an industry standard third party source, and wholesale
inventory reports provided by our wholesale customers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Competitive
or generic products that may erode current demand For competitive product
launches, including generics, we utilize our historical experience of
competitive product/ generic intrusion to estimate our return reserve
allowance.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | New
product launches For our new product launches, we utilize our historical
experience of new product sales in comparison to the same new product
returns to estimate our return reserve allowance.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our actual returns by therapeutic category for 2006 and 2005 are as
follows:

|Therapeutic Category by Company | Years Ended December 31, | *Range of 
Expiration 
Periods (in 
years)
|------------------------------- | ------------------------ | ------------------------------------------
|
|Doak Dermatologics, Inc.        |                          |                                           
|Keratolytic                     |                          | $  6,083,470                              
|Acne/Roseaca                    |                          | 6,591,817                                 
|Actinic Keratoses               |                          | 1,374,686                                 
|Anesthetics                     |                          | 1,872,861                                 
|Scalp                           |                          | 325,104                                   
|Cosmeceuticals/ Other           |                          | 233,301                                   
|                                |                          |                                           
|Total                           |                          | $16,481,239                               
|                                |                         
|Kenwood Therapeutics            |                         
|Gastrointestinal                |                          | $     676,222                             
|Respiratory                     |                          | 625,976                                   
|Nutritional                     |                          | 192,263                                   
|                                |                          |                                           
|Total                           |                          | $  1,494,461                              
|                                |                          |                                           
|TOTAL                           |                          | $17,975,700                               
|                                |                          |                                           

---

|* |  | Based
upon date of manufacture to labeled expiration date.
|- |  | ----------------------------------------------------------

| | 46 | 
| | -- | 

---

The
increase in the actual returns during 2006, in comparison to the same periods the prior
year, is due to a decrease in demand for many of our products as a result of increased
generic competition (for a listing of products that have generic competition, see
Results of Operations) and a change in our customers market dynamics. 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 wholesalers,
limiting the number of resale locations. Retailers have also implemented the same
programs.

Our
actual return credits issued to our customers for 2006 and 2005 are as follows:

|                        | Years Ended December 31,
|----------------------- | ------------------------
|
|AmerisourceBergen Corp. |                         
|Cardinal Health, Inc.   |                         
|McKesson Corporation    |                         
|Quality King            |                         
|Others                  |                         
|                        |                         
|TOTAL                   |                         
|                        |                         

Our
estimate of all our products in the distribution channel at an estimated return value and
our related allowance for returns at December 31, 2006 therapeutic categories is as
follows:

|Therapeutic Category 
by Company |  | Estimated Product 
in the Distribution 
Channel | Allowance for 
Returns
|-------------------------------- |  | ----------------------------------------------- | ----------------------
|Doak Dermatologics, Inc.         |  |                                                 |                       
|Keratolytic                      |  | $  5,458,733                                    |                       
|Acne/Roseaca                     |  | 17,317,255                                      |                       
|Actinic Keratoses                |  | 3,584,458                                       |                       
|Anesthetics                      |  | 2,064,597                                       |                       
|Scalp                            |  | 551,448                                         |                       
|Cosmeceuticals/Other             |  | 182,545                                         |                       
|                                 |  |                                                 |                       
|Total                            |  | $29,159,036                                     |                       
|                                 | 
|Kenwood Therapeutics             | 
|Gastrointestinal                 |  | $  6,064,025                                    |                       
|Respiratory                      |  | 880,430                                         |                       
|Nutritional/Other                |  | 302,757                                         |                       
|                                 |  |                                                 |                       
|Total                            |  | $  7,247,212                                    |                       
|                                 |  |                                                 |                       
|TOTAL                            |  | $36,406,248                                     |                       
|                                 |  |                                                 |                       

| | 47 | 
| | -- | 

---

Without
utilizing assumptions, we cannot currently specify when actual returns relate to a
current period or prior period due to the nature of the sales process. Therefore, we use
a number of assumptions when calculating our reserve estimates based upon the following
circumstances. We primarily sell our products to wholesalers. The wholesalers maintain
inventory of products consistent with their industry practices and perceived business
interests. The wholesalers resell their inventory of products to pharmacies, which may
also maintain an inventory of product. Thus, the date on which we sell the product to the
wholesaler may be different from the date of sale to the end-user. We produce our product
in quantity lots that we believe best optimize our purchasing power in light of
estimated demand. We retain lot information on product delivered to our customers. Each
lot produced fills a number of customer orders, often spanning a number of months that
may not coincide with our financial reporting periods. When our customers return product,
they do not usually specify the original sales date, but we can see and track the
respective product lots. We make assumptions in filling orders at the wholesalers. We
know the quantity sold from each lot and apply this historical lot information on product
sales to determine future potential returns. We also apply third party prescription data
and information from our largest wholesalers; and we make adjustments for estimated
product in the return channels in order to provide consistent cut-off periods with the
reports received from our largest wholesalers. Using this information, we estimate
returns on a quarterly basis.

Our
roll-forward of the allowances for returns is included in Results of Operations.

The
estimated product in the distribution channel at December 31, 2006 for the Companys two
largest wholesalers, Cardinal and McKesson, was $20,512,000 in the aggregate. The
estimated product in the distribution channel at December 31, 2006 for Quality King and
the non-reporting wholesalers and retailers was $225,000 and $15,670,000 (including
returns in transit), respectively.

Allowance
for rebates.At December 31, 2006, our rebate reserve was $3,086,464. Our contracts with
Medicaid, other government agencies and managed care organizations commit us to providing
those organizations with favorable pricing. This ensures that our products remain
eligible for purchase or reimbursement under these programs. Based upon our contracts and
the most recent experience with respect to sales through each of these channels and the
amount of product in the distribution channel net of the return reserve, we provide an
allowance for rebates. We monitor the rebate trends and adjust the rebate accrual to
reflect the most recent rebate experience. If our estimate for the amount of product in
the distribution channel net of the return reserve were different by one week of demand,
our rebate reserve at December 31, 2006 would increase or decrease by approximately
$184,000.

Without
utilizing assumptions, we cannot currently specify when actual credits relating to
rebates relate to a current period or prior period. The requests for rebates do not
provide the product lot number, which is our only method of relating product sales to a
specific time period. For rebates, we apply  specific percentages based on  trailing
historical experience.

Our
roll-forward of the allowances for rebates for 2006, 2005 and 2004 are as follows:

|                                            | 
|------------------------------------------- | 
|                                            | 
|                                            | 
|Allowance at January 1,*                    | 
|Rebates in current period relating to sales | 
|made in current period (a)                  | 
|Rebates in current period relating to sales | 
|made in prior period (a)                    | 
|Bioglan Liability (b)                       | 

| | 48 | 
| | -- | 

---

|                                            | Years Ended December 31,
|------------------------------------------- | ------------------------
|
|Current provision relating to sales made in |                         
|current period                              |                         
|Current provision relating to sales made in |                         
|prior period (c)                            |                         
|                                            |                         
|Allowance at December 31,*                  |                         
|                                            |                         

---

|* | Shown
within accrued expenses.
|- | ------------------------------

| | (a) |  | Based
upon usage period identified on the rebate                            information
provided by the managed care organization                            and the estimated
level of inventory in the                            distribution channel.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | We
acquired Bioglan liabilities as a part of the                            Bioglan
acquisition on August 10, 2004.
| | --- |  | -------------------------------------------------------------------------------------------------------------------

| | (c) |  | As
previously disclosed in our Annual Reports on Form                            10-K for
the years ended December 31, 2005 and 2004,                            respectively, we
changed our estimate for allowances                            for returns during 2004.
Due to the increase in the                            allowance for returns in 2004
relating to the change                            in estimate, the level of product in
the distribution                            channel net of the allowance for returns
decreased.                            The amount recorded as a change in estimate is
being                            classified in the current provision relating to sales
                           made in prior period.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Allowance
for Chargebacks.At December 31, 2006 our chargeback reserve was $135,086. Chargebacks
are 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. Based upon our contracts and the most
recent experience with respect to sales through this channel and the amount of product in
the distribution channel net of the return reserve, we provide an allowance for
chargebacks. We monitor the chargeback trends and adjust the chargeback accrual to
reflect the most recent chargeback experience. If our estimate for the amount of product
in the distribution channel net of the return reserve were different by one week of
demand, our chargeback reserve at December 31, 2006 would increase or decrease by
approximately $48,000.

Without
utilizing assumptions, we cannot currently specify when actual credits relating to
chargebacks relate to a current period or prior period. The requests for chargebacks do
not provide the product lot number, which is our only method of relating product sales to
a specific time period. For chargebacks, we apply a specific percentages based on the
trailing historical experience.

Our
roll-forward of the allowances for chargebacks for 2006, 2005 and 2004 is as follows:

|                                                  | Years Ended December 31,
|------------------------------------------------- | ------------------------
|
|Allowance at January 1,*                          |                         
|Chargebacks in current period relating to sales   |                         
|made in current period (a)                        |                         
|Chargebacks in current period relating to sales   |                         
|made in prior period (a)                          |                         
|Current provision relating to sales made in       |                         
|current period                                    |                         
|Current provision relating to sales made in prior |                         
|period (b)                                        |                         
|                                                  |                         
|Allowance at December 31,*                        |                         
|                                                  |                         

---

|* |  | Shown
within accounts receivable.
|- |  | ---------------------------------

| | 49 | 
| | -- | 

---

| | (a) |  | Based
upon receipt date of chargeback and the                            estimated level of
inventory in the distribution                            channel.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | As
previously disclosed in our Annual Reports on Form                            10-K for
the years ended December 31, 2005 and 2004,                            respectively, we
changed our estimate for allowances                            for returns during 2004.
Due to the increase in the                            allowance for returns in 2004
relating to the change                            in estimate, the level of product in
the distribution                            channel net of the allowance for returns
decreased.                            The amount recorded as a change in estimate is
being                            classified in the current provision relating to sales
                           made in prior period.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Intangible assets

We
have made acquisitions of products and businesses that include goodwill, license
agreements, product rights and other identifiable intangible assets. Our payments
relating to product acquisitions or license agreements are recorded as intangible assets
when we determine that technical feasibility for the acquired or licensed product has
been established, which, for us, historically has been after the FDA has approved the
product for commercialization. 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; and
| | - |  | ---------------------------------------------------------------------------------------------------

| |  |  | 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.

Under
SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), which eliminated
the amortization of purchased goodwill, goodwill is tested for impairment at least
annually and more frequently if an event occurs that indicates the goodwill may be
impaired. We performed the test at December 31, 2006 and noted that no impairment existed.

In
August 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. We paid approximately $191 million for the Bioglan assets, including
acquisition costs, which we funded through bank debt and working capital. 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 that are not deemed to have an
indefinite life. Intangible assets are amortized on a

| | 50 | 
| | -- | 

---

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.

During
June 2004, we acquired 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 the terms of this acquisition, we have exclusive
distribution and marketing rights to these products for eight years in Australia, Japan,
the Commonwealth of Independent States (other than Armenia, Azerbaijan, Georgia and
Moldova), Latvia, Lithuania, Estonia, Saudi Arabia, the United Arab Emirates, Kuwait and
Egypt in the Middle East, and Vietnam, Thailand and Cambodia in Southeast Asia. We have
determined the expected useful life of these products to be eight years based upon future
cash flows.

The
VEREGEN license includes the use of a patent which expires during 2017 and several
other patent pending applications have been filed with the U.S. Patent and Trademark
Office, which may extend the patent life. However, VEREGEN should be difficult to
substitute generically due to the natural configurations of the catechins, which are
proprietary. As a result, we expect the useful life of VEREGEN will be beyond the
expiration date of its patent(s). We have estimated the economic life of the VEREGEN
license based upon the expected future cash flow contributions over the expected useful
life to be 15 years.

The
ELESTRIN license includes the use of a patent covering ELESTRIN until 2021 and
several other pending patent applications have been filed with the U.S. Patent and
Trademark Office, which may extend the patent life. The term of the license agreement is
the later of the expiration of the patents or the 12th anniversary of the first sale of
the product. However, we can continue to commercialize ELESTRIN after the patents
expire or the 12th anniversary of the first sale of the product. After the term of the
license agreement expires, we are not required to pay a royalty to BioSante. We have
estimated the economic life of the ELESTRIN license based upon the expected future
cash flow contributions over the expected useful life to be 12 years.

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 that
product and 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 were 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 plans to promote the
Bioglan brands.

Deferred income
taxes

Deferred
income taxes are provided for the future tax consequences attributable to the differences
between the carrying amounts of assets and liabilities and their respective tax bases.
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, 2006 and December 31, 2005, we determined that no deferred tax asset
valuation allowance was necessary. We believe that our projections of future taxable
income make  it more likely than not that these deferred tax assets will be realized. If
our projections of future taxable income change  in the future, we may be required to
reduce deferred tax assets by a valuation allowance.

Inventory valuation
reserve

At
December 31, 2006, our inventory valuation reserve was $941,715. We provide 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. The reserve for estimated
inventory obsolescence was calculated based upon specific review of the inventory
expiration dates and the quantity on-hand at December 31, 2006 in comparison to our
expected inventory usage. The amount of actual inventory obsolescence and

| | 51 | 
| | -- | 

---

unmarketable inventory could differ
(either higher or lower) in the near term from the amounts accrued. Changes in our
estimates would be recorded in the income statement in the period of the change.

Allowance for bad
debts

At
December 31, 2006, our allowance for bad debts was $2,001,490. Based upon specific
analysis of our accounts receivable, including review of older account balances and
account balances resulting in customer short pays, we maintain a reserve. The amount of
actual customer defaults could differ (either higher or lower) in the near term from the
amounts accrued. Changes in our estimates would be recorded in the income statement in
the period of the change.

Results of Operations

Percentage of Net
Sales

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

|                      | Years Ended December 31,
|--------------------- | ------------------------
|
|Net sales             |                         
|Gross profit          |                         
|Operating expenses    |                         
|Operating income      |                         
|Interest expense, net |                         
|Income tax expense    |                         
|                      |                         
|Net income            |                         
|                      |                         

Year Ended December
31, 2006 Compared to Year Ended December 31, 2005

Net
sales for 2006 were $144,806,640, representing an increase of $11,424,446, or
approximately 9%, from $133,382,194 for 2005. The following table sets forth certain net
sales data for the periods indicated.

|Therapeutic Category by Company |  | 2005          |  | 2006          |  | Increase/(Decrease)
|------------------------------- |  | ------------- |  | ------------- |  | -------------------
|Dermatology & Podiatry          |  |               |  |               |  |                    
|Doak Dermatologics, Inc.        | 
|Keratolytic                     |  | $  23,733,544 |  | $  21,052,757 |  | $(2,680,787        
|Acne/Roseaca                    |  | 59,649,344    |  | 55,589,354    |  | (4,059,990         
|Actinic Keratoses               |  | 13,070,092    |  | 23,550,697    |  | 10,480,605         
|Anesthetics                     |  | 6,920,416     |  | 5,687,919     |  | (1,232,497         
|Scalp                           |  | 1,570,004     |  | 1,101,051     |  | (468,953           
|Cosmeceuticals                  |  | 4,661,372     |  | 4,240,655     |  | (420,717           
|Authorized Generic              |  | 609,761       |  | 3,142,430     |  | 2,532,669          
|Other                           |  | 130,338       |  | 155,135       |  | 24,797             
|                                |  |               |  |               |  |                    

| | 52 | 
| | -- | 

---

|Therapeutic Category by Company     |  | 2005         |  | 2006         |  | Increase/(Decrease)
|----------------------------------- |  | ------------ |  | ------------ |  | -------------------
|Total Doak Dermatologics, Inc.      |  | 110,344,871  |  | 114,519,998  |  | 4,175,127          
|(Dermatology & Podiatry)            | 
|                                    | 
|Kenwood Therapeutics                | 
|Gastrointestinal                    |  | 17,036,065   |  | 25,901,276   |  | 8,865,211          
|Respiratory                         |  | 4,088,897    |  | 2,339,557    |  | (1,749,340         
|Nutritional and Other               |  | 1,912,361    |  | 2,045,809    |  | 133,448            
|                                    |  |              |  |              |  |                    
|Total Kenwood Therapeutics          |  | 23,037,323   |  | 30,286,642   |  | 7,249,319          
|Total Bradley Pharmaceuticals, Inc. |  | $133,382,194 |  | $144,806,640 |  | $ 11,424,446       
|                                    |  |              |  |              |  |                    

For
2006, Doak Dermatologics net sales were $114,519,998, representing an increase of
$4,175,127, or 4%, from $110,344,871 for 2005. The increase in net sales was primarily
led by the actinic keratoses product SOLARAZE® of $10,480,605 and the authorized
generics of ADOXA® products pursuant to the profit sharing agreement with Par
Pharmaceutical of $2,532,669. Increased net sales were partially offset by decreases in
primarily the keratolytic products of $2,680,787; the acne/rosacea line of products of
$4,059,990; and the anesthetics line of products of $1,232,497. The keratolytic line of
products decrease was led by a decrease in CARMOL® 40 products of $5,533,261 partially
offset by the KERALAC® products of $3,130,105. The acne/rosacea line decrease of
products was led by a decrease in ADOXA® 100mg, 50s of $20,227,117; ADOXA® 50mg,
100s of $2,089,531; ROSULA® products of $1,205,710;   ZODERM® products of
$3,017,764; and other ADOXA® products of $3,293,100, which was partially offset by an increase in ADOXA® 150mg of $25,772,199.  The decrease in the anesthetics line of products was due to a decrease in net sales of the LIDAMANTLE® family of products and ZONALON®.

For
2006, Kenwood Therapeutics net sales were $30,286,642, representing an increase of
$7,249,319, or approximately 31%, from $23,037,323 for 2005. The increase was led by an
increase in gastrointestinal products of $8,865,211, partially offset by a decrease in
respiratory products of $1,749,340. The increase in gastrointestinal products was
primarily due to new product sales of ANAMANTLE® HC GEL, launched in the Second Quarter
of 2006, of $5,064,958 and an increase in FLORA-Q® of $1,258,141. The decrease in the
respiratory products was primarily due to a decrease in DECONAMINE® products of
$1,599,646.

Net
sales during 2006 were negatively impacted primarily by an increase in generic or
therapeutically equivalent products competing on price. In particular, 2006 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),
KERALAC® GEL and KERALAC® LOTION (First Quarter 2005), ZODERM® (Second Quarter
2005), ROSULA® AQUEOUS GEL and ROSULA® AQUEOUS CLEANSER (Second Quarter 2005),
KERALAC® CREAM (Third Quarter 2005), ADOXA® 50mg and 100mg tablets (Fourth Quarter
2005), ADOXA® 75mg tablets (Third Quarter 2006), ANAMANTLE® HC FORTE (Third Quarter
2006), KERALAC® NAILSTIK (Third Quarter 2006), KERALAC® OINTMENT (Third Quarter
2006), PAMINE® 2.5mg and PAMINE® Forte (Fourth Quarter 2006). In addition, the
Company has experienced or learned through industry intelligence that ROSULA® NS and
ZODERM® Redi-Pads have/will experience generic competition commencing during the First
Quarter of 2007. We expect our future sales of the above products to continue to be
negatively impacted by generic or therapeutically equivalent products.

As
noted above, some of the increases in our net sales for 2006 were the result of new
product launches. Some of the new product sales were the result of initial stocking
sales, which, historically, have resulted in reduced product sales for subsequent
quarters.

| | 53 | 
| | -- | 

---

As
of December 31, 2006, we had $2,212,260 of orders on backorder as a result of us being
out of stock. In addition, at December 31, 2006, we had $3,825,510 of held orders as a
result of our concerns of those orders not being able to be filled and delivered prior to
December 31, 2006 pursuant to our new shipping terms of FOB Destination with certain of
our customers which began in the Third Quarter of 2006. If the orders were shipped under
FOB Destination terms, but not delivered to the customers by December 31, 2006, we cannot
record the shipment as a sale during 2006. Further, as a result of the FOB Destination
shipping terms, we did not record $1,290,551 of sales since these products were in
transit at December 31, 2006. These wholesalers required that we enter into agreements
with them to change our shipping terms to FOB Destination in order for our business
practice with them to conform to their standard operating procedures.

During
2006, we were negatively impacted by a provision for our fee-for-service under our DSAs
of $2.0 million in comparison to $0.8 million for the prior year. This provision became
applicable because price increases and product purchase discounts attributable to
inventory held by the wholesalers with whom we have DSAs did not meet or exceed their
annual fee-for-service charges. The impact of these DSAs has also resulted in our
experiencing greater product returns from these wholesalers since the DSAs limit the
amount of inventory these wholesalers may hold at any given time.

Our
gross prescription demand for 2006, based upon information received from Wolters Kluwer,
was approximately $192 million. Our gross prescription sales, which do not include
charges for discounts, returns, chargebacks and rebates, for 2006 were approximately $182
million. The approximate $10 million difference between gross prescription demand and our
gross prescription sales was primarily due to the timing of customer purchases and
Wolters Kluwers projected gross prescription demand being calculated based upon retail
sale values.

As
stated under Critical Accounting Policies, we cannot currently specify exactly when
actual returns or credits relate to a current period or prior period, and therefore, we
cannot currently specify without utilizing assumptions how much of the provision recorded
relates to sales made in the prior periods. However, we believe the appropriate data is
available that allows us to reasonably estimate the level of product returns expected
from current sales activities, including quantitative and qualitative information such as
actual return rates by product, the level of product in the distribution channel,
expected shelf life of the product, product demand, the introduction of competitive or
generic products that may erode current demand, our new product launches and general
economic and industry wide indicators. To determine a reasonable basis for when a
returned product may have been sold, we track our returns by lot numbers and compare the
lot numbers to when a range of sales may have occurred to determine an estimated average
shelf life. We use this historical average as part of our overall process of estimating
future returns. We also believe the appropriate data is available that allows us to
reasonably estimate the level of credits associated with rebates or chargebacks expected
from current sales activities, including quantitative and qualitative information such as
the level of product in the distribution channel, the allowance for returns, and
historical rebates and chargebacks. To determine a reasonable basis for when a related
product rebate or chargeback may have been sold by us, we track our historical rebates or
chargebacks by the managed care organizations usage period or our receipt date.

| | 54 | 
| | -- | 

---

The
following table summarizes the changes in the return reserve during 2006 and 2005:

|Year 2005                                                     | 
|------------------------------------------------------------- | 
|Return reserve at January 1, 2005*                            | 
|Product returns in 2005 relating to sales in 2005 (a)         | 
|Product returns in 2005 relating to sales in prior period (a) | 
|Provision relating to sales in 2005                           | 
|Provision relating to sales in prior period                   | 
|                                                              | 
|Return reserve at December 31, 2005*                          | 
|                                                              | 
|Year 2006                                                     | 
|Return reserve at January 1, 2006*                            | 
|Product returns in 2006 relating to sales in 2006 (a)         | 
|Product returns in 2006 relating to sales in prior period (a) | 
|Provision relating to sales in 2006                           | 
|Provision relating to sales in prior period                   | 
|                                                              | 
|Return reserve at December 31, 2006*                          | 
|                                                              | 

---

|* |  | Shown
within accrued expenses.
|- |  | ------------------------------

|(a) |  | Based
upon our Returns Good Policy and our review of the                   average time between
the sold product lot numbers and return                   product lot numbers.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
provision for returns for 2006 increased in comparison to last year primarily due to an
increase in our actual product returns, resulting in higher actual return rates, and an
increase in gross sales. We experienced increased actual product returns primarily as a
result of increased competition from generic and therapeutically equivalent products that
competed against our brands on price.

As
of December 31, 2006, 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 2.3 months. After applying the December 31, 2006 return
reserve, we estimate the unreserved monthly inventory of our products at the wholesalers
and retailers to be 0.6 months.

With
the exception of SOLARAZE®, VEREGEN and ELESTRIN, there is no meaningful
intellectual property or proprietary protection for our other material branded
pharmaceutical products, including ADOXA®, and competing generic or therapeutically
equivalent versions for most of these other 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
therapeutically equivalent products. Since 2004, our net sales have been negatively
impacted by the onset and increase in generic or therapeutically equivalent products
competing on price with our brands. Increased competition from the sale of generic or
therapeutically equivalent products may cause a further decrease in sales that could have
an adverse effect on our business, financial condition and results of operations. In
addition, our branded products for which there are no generic or therapeutically
equivalent forms may also face competition from different therapeutic treatments used for
the same indications for which our branded products are used.

Further,
our net sales and profitability would be adversely affected if, for any reason, we were
unable to launch the commercialization of VEREGEN or ELESTRIN during 2007.

| | 55 | 
| | -- | 

---

Cost
of sales, which is comprised primarily of product costs and royalties, for 2006, were
$22,436,730, representing an increase of $2,619,054, or approximately 13%, from
$19,817,676 for 2005. The increase in cost of sales was primarily due to an increase in
net sales. The gross profit percentages for 2006 and 2005 were approximately 85%.

Selling,
general and administrative expenses, which are comprised primarily of selling expenses,
advertising and promotional fees and expenses, and legal and professional fees, for 2006,
were $78,779,696, representing a decrease of $858,602, or 1%, compared to $79,638,298 for
2005. The decrease in selling, general and administrative expenses reflects decreased
spending on advertising and promotional costs. The decrease was partially offset by a
non-cash compensation expense of $3,475,000 related to the adoption of SFAS No. 123R,
Stock-Based Compensation, legal and advisor fees and expenses of $2,099,728 relating to
the settlement of the proxy contest, which includes the $1,150,000 settlement fee paid to
Costa Brava and $3,976,000 related to an increase in salary and salary related expenses. The following
table sets forth the increase (decrease) in certain expenditures:

|                                   | Change from 2006 to 2005
|---------------------------------- | ------------------------
|Advertising and Promotional Costs  |                         
|Professional Fees                  |                         
|Share-Based Compensation Expense   |                         
|Salary and Salary Related Expenses |                         
|Other                              |                         

During
2005, the Company expensed $5,626,717 in professional fees relating to the SEC inquiry
and the restatement of the Companys 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 54.4% for 2006,
representing a decrease of 5.3 percentage points compared to 59.7% for 2005. The decrease
in the percentage was primarily a result of decreased spending on sales and marketing and
professional fees in response to increased competition from generic and therapeutically
equivalent products and fewer new product launches, without the proportionate decrease in
Net Sales.

We
expect to launch VEREGEN and ELESTRIN during 2007. In connection with the launch
of these products, we anticipate hiring approximately 20 additional Kenwood Therapeutics
sales representatives during 2007 and incurring a corresponding amount of additional
sales, marketing and related expenses.

Depreciation
and amortizationfor 2006 was $10,260,974, representing an increase of $85,985 from
$10,174,989 for 2005.

Research
and development, which is comprised primarily of initial licensing fees, for 2006, was
$10,427,157, representing an increase of $8,911,524, or 588%, compared to $1,515,633 for
2005. The increase in research and development expenses primarily relates to a $5,000,000
payment under our agreement with MediGene to market VEREGEN and a $3,500,000 payment
under our agreement with BioSante to market ELESTRIN.

Gain
on short-term investmentfor 2006 was zero in comparison to $103,166 for 2005.

Write-off
of deferred financing costsfor 2006 was zero in comparison to $3,988,964 for 2005 due to
the write-off of the deferred financing costs relating to the 4% senior subordinated
convertible notes and our credit facility during November 2005. The 4% notes and the
credit facility were repaid during November 2005.

Interest
incomefor 2006 was $2,680,210, representing an increase of $530,643 from 2005, because
of higher cash balances and higher interest rates.

| | 56 | 
| | -- | 

---

Interest
expensefor 2006 was $8,848,604, representing an increase of $1,358,747 from 2005. The
increase in interest expense was a result of our entering into our new $110 million
credit facility in November 2005, which has a higher interest rate than our old credit
facility.

Income
tax expensefor 2006 was $7,065,666, representing an increase of $2,017,666 from 2005.
The increase in income tax expense was primarily due to an increase in income before
income tax expense and an increase in the effective tax rate. The effective tax rate used
to calculate the income tax expense for 2006 was approximately 42%. The effective tax
rate used to calculate the income tax expense for 2005 was approximately 39%. The
increase in the effective tax rate was due to the adoption of SFAS No. 123R, which
results in a permanent tax difference when expensing qualified (incentive) stock options.

Net
incomefor 2006 was $9,668,023, representing an increase of $1,706,513, or 21%, from
$7,961,510 for 2005. Net income as a percentage of Net Sales for 2006 was 6.7%,
representing an increase of 0.7 percentage points compared to 6.0% for 2005. The increase
in net income in the aggregate was principally due an increase in net sales and a
decrease in selling, general and administrative expenses partially offset by an increase
in research and development expenses, interest expense and an increase in the effective
tax rate.

Doaks
net income for 2006 was $10,581,681, representing an increase of $2,843,749, from net
income of $7,737,932 for 2005 (net income derived by our Bioglan subsidiary during 2006
and 2005 is included in Doaks 2006 and 2005 net income, respectively). The increase in
Doaks net income in the aggregate was principally due to an increase in net sales and a
decrease in selling, general and administrative expenses, offset by a $5,000,000 payment
made under our agreement with MediGene to market VEREGEN. Kenwoods net loss for 2006
was $773,381, representing a decrease of $996,959, from net income of $223,578 for 2005.
The decrease in Kenwoods net income was primarily due to a $3,500,000 payment made under
our agreement with BioSante to market ELESTRIN, partially offset by an increase
Kenwoods net sales. During 2006, A.Aarons began operations. A.Aarons had a net loss of
$140,277 during 2006.

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     |                     

| | 57 | 
| | -- | 

---

|Therapeutic Category by Company     | 2004 | 2005        | Increase/
(Decrease)
|----------------------------------- | ---- | ----------- | --------------------
|Cosmeceuticals                      |      | 712,900     |                     
|Authorized Generic                  |      |            |                     
|                                    |      |             |                     
|Total Bioglan Pharmaceuticals       |      | 16,023,787  |                     
|                                    |      |             |                     
|Total Dermatology & Podiatry        |      | 72,886,351  |                     
|                                    |     
|Kenwood Therapeutics                |     
|Gastrointestinal                    |      | 17,675,446  |                     
|Respiratory                         |      | 4,336,983   |                     
|Nutritional                         |      | 1,477,229   |                     
|Other                               |      | 317,978     |                     
|                                    |      |             |                     
|Total Kenwood Therapeutics          |      | 23,807,636  |                     
|                                    |      |             |                     
|Total Bradley Pharmaceuticals, Inc. |      | $96,693,987 |                     
|                                    |      |             |                     

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 KERALAC® products of
$2,515,205. The KERALAC® products decrease was partially offset by new product
launches from KERALAC® CREAM, launched in the First Quarter 2005, of $7,502,281,
KERALAC® NAILSTIK, launched in the Third Quarter 2005, of $1,437,105 and KERALAC®
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 the Third Quarter of 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 for a
partial period during 2004 and 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), KERALAC® CREAM (Third Quarter 2005) and ADOXA®
             50mg and 100mg (Fourth Quarter 2005).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We
entered into DSAs with our two largest wholesale customers with               effective
dates covering 2005. The wholesale customers and we               agreed that the
wholesale customers would maintain lower inventory               quantities
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 58 | 
| | -- | 

---

| |  |  | than
they had on-hand. As a result, the 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 advantage 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. 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 were 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 in 2004 relating to sales in 2004 (a)         | 
|Product returns in 2004 relating to sales in prior period (a) | 
|Bioglan liability (b)                                         | 
|Provision relating to sales in 2004                           | 
|Provision relating to sales in prior period (c)               | 
|                                                              | 
|Return reserve at December 31, 2004*                          | 
|                                                              | 
|                                                              | 
|Year 2005                                                     | 
|Return reserve at January 1, 2005*                            | 
|Product returns in 2005 relating to sales in 2005 (a)         | 
|Product returns in 2005 relating to sales in prior period (a) | 
|Provision relating to sales in 2005                           | 
|Provision relating to sales in prior period                   | 
|                                                              | 
|Return reserve at December 31, 2005*                          | 
|                                                              | 

---

|* |  | Shown
within accrued expenses.
|- |  | ------------------------------

| | 59 | 
| | -- | 

---

| |  |  | 
| |  |  | 

| | (a) |  | Based
upon our Returns Good Policy and our review of                            the average
time between the sold product lot numbers                            and return product
lot numbers.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | We
acquired Bioglan liabilities as a part of the                            Bioglan
acquisition on August 10, 2004.
| | --- |  | -------------------------------------------------------------------------------------------------------------------

| | (c) |  | As
discussed below, we changed our estimate for                            allowance for
returns during 2004. The amount                            recorded as a change in
estimate is being classified                            in the current provision relating
to sales made in                            prior period.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During
the Fourth Quarter 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 0.7 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 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, was $17,926,084.

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.
|- |  | ----------------------------------------------------------------------------------------------------------------------

| | 60 | 
| | -- | 

---

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 development expensesfor 2005 were $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 Pharmaceutical 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% senior subordinated convertible notes and our
credit facility during November 2005. The 4% notes and the credit facility were repaid
during November 2005.

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

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 our old $125 million
credit facility in September 2004 and the subsequent replacement of that facility and the
4% senior subordinated convertible notes with our $110 million new credit 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.

Liquidity and Capital
Resources

Our
cash and cash equivalents, short-term investments and restricted cash and investments
were $71,692,665 at December 31, 2006 and $64,798,728 at December 31, 2005. Cash provided
by operating activities for 2006 was $28,754,377. The sources of cash primarily resulted
from net income of $9,668,023 (after giving effect to research and development expense
payments of $5,000,000 and $3,500,000, respectively, under our agreements with MediGene
and BioSante to market VEREGEN and ELESTRIN, respectively) plus non-cash charges
for depreciation and amortization of $10,260,974; non-cash charges for amortization of
deferred financing costs of $1,811,284; non-cash share based compensation expense of
$3,475,000; an increase in allowance for doubtful accounts of $571,092 primarily due to
an increase in accounts receivables associated with customer short-payments; a decrease
of deferred tax assets of $2,130,749; a decrease in prepaid income taxes of $1,719,306;
an increase in the return reserve of $1,414,048; an increase in the fee-for-

| | 61 | 
| | -- | 

---

service accrual under DSAs of
$1,027,748; an increase in accrued expenses of $2,150,470 primarily due to an increase in
the rebate payable which represents actual claims for rebate amounts received from
Medicaid and managed care providers and payable by us; and a decrease in inventories of
$403,728. The sources of cash were partially offset by a decrease in the rebate reserve
of $1,945,580, primarily attributable to a shift of patient medical coverage from
Medicaid to Medicare Part D, effective January 1, 2006, which has a lower rebate; a
decrease in accounts payable of $2,718,913 due to timing of vendor payments; an increase
in prepaid expenses and other of $606,620; and an increase in accounts receivable of
$217,194.

Cash
used in investing activities for 2006 was $1,168,306. The use of cash in investing
activities was due to the payment of $14 million in regulatory milestone payments to
MediGene as a result of the approval by the FDA of VEREGEN and the purchase of
property and equipment of $91,721, partially offset by the release of a restriction of
cash from entering into the new $110 million credit facility of $12,035,193 and sales of short-term investments-net of $888,222.

Cash
used in financing activities for 2006 was $7,775,812, resulting from the scheduled
payments of $9,000,000 under our New Facilitys (as described below) term note; payment
of notes payable of $27,694; and payment of deferred financing costs associated with the
New Facility of $775,000; partially offset by proceeds from the exercise of stock options
of $1,671,299 and a tax benefit due to exercise of non-qualified options of $355,583.

On
November 14, 2005, we entered into a new $110 million credit facility (the Facility)
with a syndicate of lenders led by Wachovia Bank. Our Facility, which has been amended
from time to time, is comprised of an $80 million term loan and a $30 million revolving
line of credit. The 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 Facility replaced our
then $125 million credit facility (the Old Facility) that was originated during
September 2004 by a syndicate of lenders also led by Wachovia Bank. Concurrently with the
closing of the 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 Facility.

As
of December 31, 2006, we had $69 million in borrowings under the Facilitys term loan
outstanding and no amounts outstanding under the Facilitys revolving line of credit.
Amounts outstanding under the 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 Facility
are entitled to customary facility fees based on unused commitments under the Facility
and outstanding letters of credit. At December 31, 2006, the effective interest rate
accrued by us under the Facility was 9.35%.

The
financial covenants under the 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; and
(iii) not less than $25 million of unrestricted cash and cash equivalents on our balance
sheet at all times. Further, the Facility limits our ability to declare and pay cash
dividends.

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 our Facility. On
May 15, 2006, we received a waiver of this default from our lenders under the Facility.
In connection with this waiver, which also allowed us to continue outstanding LIBOR Rate
Loans under the 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 Facility with respect to the
definition of Permitted Investments, the calculation of Consolidated EBITDA to allow us
to exclude, for financial covenant purposes, our initial $5.0 million payment to MediGene
on account of VEREGEN that we classified as an expense in accordance with GAAP, and
the delivery of budget information. Upon satisfaction of our obligations under the

| | 62 | 
| | -- | 

---

waiver, we were permitted to
decrease our restricted cash and investments under the Facility by $20 million, from $45
million to $25 million.

On
September 25, 2006, we further amended the Facility to, among other things, permit us to
repurchase up to $18 million of our outstanding common stock through March 31, 2007, and
up to $3 million of our outstanding common stock during the remainder of the term of the
Facility. In addition, this amendment allows us to exclude all such repurchases from the
calculation of the consolidated fixed charge coverage ratio and further modifies the
definition of Consolidated EBITDA to add back to Consolidated Net Income certain
professional, advisor and legal fees and costs incurred in connection with the 2006 proxy
contest or related litigation in an aggregate amount not to exceed $2.0 million and to
permit other adjustments relating to the effects on our recording of in-transit customer
purchases as sales resulting from changes in product shipping terms.

As
a result of our classifying at December 31, 2006 the $10.5 million of regulatory
milestone payments we owe BioSante during 2007 as milestones payable, we triggered a
technical default under the Facility. On March 9, 2007, we received a waiver of this
default from our lenders under the Facility. Concurrently, our lenders agreed to, among
other things, modify the definition of Consolidated EBITDA to add back the initial $3.5
million payment made by the Company on account of ELESTRIN under the BioSante License
during the Fourth Quarter of 2006 that the Company classified as an expense in accordance
with U.S. GAAP, and further modify the definitions of Excess Cash Flow to exclude cash
payments made with respect to Permitted Acquisitions and Permitted Acquisition and
Scheduled Funded Debt Payments to permit the payment by the Company of its other
obligations under the BioSante License. Further, pursuant to the March 9, 2007 waiver,
the lenders have the option of not requiring the Excess Cash Flow principal prepayment
due by March 31, 2007. This principal prepayment may be up to $2,600,000 and
is   included in current maturities of long-term debt.

As
result of the waiver by our lenders of defaults under the Facility during 2006, we have
classified as a long-term liability $53.4  million at December 31, 2006 that would have
otherwise been shown as current as a result of the defaults. Based upon our current
projections, we expect to be in default under the Fixed Coverage Charge Ratio set forth
in the Facility beginning in the Third Quarter of 2007. As a result of the projected
default, the desire to reduce the interest rates charged under the Facility and to
provide us increased flexibility to potentially enter into future licensing, acquisition
or other similar transactions, we currently expect to enter into a new credit facility
prior to the Third Quarter of 2007.

Pursuant
to our agreement with MediGene for VEREGEN, we paid to MediGene during December 2006
a $14 million milestone payment that was triggered as a result of MediGene receiving
approval from the FDA to market VEREGEN for the treatment of external genital and
perianal warts. We will commercialize VEREGEN in the United States and expect to
launch VEREGEN during the second half of 2007. We classified this $14 million
milestone payment during the Fourth Quarter of 2006 as an intangible asset. We have also
agreed to pay MediGene a royalty on VEREGEN net sales and sales-based milestones.

Pursuant
to our agreement with BioSante for ELESTRIN, we paid to BioSante and its licensor for
ELESTRIN during October 2006 an aggregate of $3.5 million that we expensed as a
research and development payment during the Fourth Quarter of 2006. As a result of the
FDA, during the Fourth Quarter of 2006, approving the marketing of ELESTRIN for the
treatment of moderate to severe vasomotor symptoms, especially hot flashes, associated
with menopause, we are required to pay BioSante and its licensor aggregate regulatory
milestone payments of $10.5 million, $7.0 million of which is payable in March 2007 with
the remaining $3.5 million payable in December 2007. At December 31, 2006, these $10.5
million in regulatory milestone payments have been recorded as milestones payable and are
non-interest bearing. We utilized an imputed interest rate of 7.35% to determine the
principal owed of $10,115,083, that we classified as an intangible asset during December
2006. We will commercialize ELESTRIN in the United States and expect to launch
ELESTRIN during 2007. We have also agreed to pay BioSante a royalty on net sales and
sales-based milestones.

As
of December 31, 2006, we had the following contractual obligations and commitments:

| | 63 | 
| | -- | 

---

|Period      | Operating 
Leases | Elestrin 
Payments | Senior Credit 
Facility (a) | Other 
Debt | Minimum 
Inventory 
Purchases (b) | Total 
Obligations and 
Commitments
|----------- | ----------------- | ------------------- | --------------------------- | ----------- | --------------------------------- | -----------------------------------
|Fiscal 2007 |                   | $2,024,162          |                             | $10,500,000 |                                   | $21,630,750                        
|Fiscal 2008 |                   | 1,826,728           |                             |            |                                   | 21,675,000                         
|Fiscal 2009 |                   | 1,476,456           |                             |            |                                   | 23,945,250                         
|Fiscal 2010 |                   | 962,598             |                             |            |                                   | 16,241,500                         
|Fiscal 2011 |                   | 791,965             |                             |            |                                   |                                   
|Thereafter  |                   | 926,888             |                             |            |                                   |                                   
|            |                   |                     |                             |             |                                   |                                    
|            |                   | $8,008,797          |                             | $10,500,000 |                                   | $83,492,500                        
|            |                   |                     |                             |             |                                   |                                    

---

|(a) |  | Senior
Credit Facility includes estimated interest expense                   based upon an
estimated interest rate of 9.35%. The Senior                   Credit Facility bears
interest at a variable rate (see Note G                   of the notes to our
consolidated financial statements). For                   the purpose of estimating the
future interest expense included                   above, we used the interest rate that
was in effect at                   December 31, 2006.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | For
more information on minimum inventory purchases, see                   Contract
Manufacturing Agreement in Note K.5 of the notes to                   our consolidated
financial statements.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
believe that our cash and cash equivalents and cash generated from operations together
with funds available under the Facility and the expected new credit facility will be
adequate to fund our current working capital requirements for at least the next twelve
months, including the costs and expenses associated with our anticipated launches of
VEREGEN and ELESTRIN. However, if we make or anticipate significant acquisitions,
we are unable to enter into a new credit facility, or unable to obtain a waiver for the
expected default under the fixed charge coverage ratio in the Third Quarter of 2007, we
may need to raise additional funds through additional borrowings by other means or the
issuance of debt or equity securities.

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
May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
Accounting Changes and Error Corrections (SFAS No. 154). SFAS No. 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 No. 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 No. 154 did not have
a material impact on our financial position or results of operations.

In
June 2006, the Emerging Issues Task Force (EITF) issued EITF Issue 06-3, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross versus Net Presentation). EITF Issue 06-3 provides
guidance related to the presentation in financial statements of any tax assessed by a
governmental authority that is directly imposed on a revenue-producing transaction
between a seller and a customer,

| | 64 | 
| | -- | 

---

including, but not limited to,
sales, use, value added, and some excise taxes. The EITF concluded that the presentation
of taxes within the scope of EITF Issue 06-3 on either a gross (included in revenues and
costs) or a net (excluded from revenues) basis is an accounting policy decision that
should disclosed. In addition, the aggregate amount of any such taxes that are reported
on a gross basis should be disclosed in interim and annual financial statements. The
guidance in EITF Issue 06-3 is effective for interim and annual reporting periods
beginning after December 15, 2006. The adoption of EITF Issue 06-3 is not expected to
have an impact on our consolidated financial statements.

In
July 2006, FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that we
recognize in our financial statements the impact of a tax position, if that position is
more likely than not of being sustained on audit, based on the technical merits of the
position. This interpretation is effective for fiscal years beginning after December 15,
2006, with the cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. We are still in the process of evaluating the
effects of FIN 48 and expect that its adoption will result in an opening retained
earnings adjustment of approximately $1 million to $2 million. We are also currently evaluating the
impact of FIN 48 on our future effective tax rates.

In
September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB
No. 108 establishes an approach that requires quantification of financial statement
misstatements based on the effects of the misstatement on each of a companys financial
statements and the related financial statement disclosures. This approach is commonly
referred to as the dual approach because it requires quantification of errors under
both the roll-over and iron curtain methods. SAB No. 108 allows registrants to initially
apply the dual approach either by (1) retroactively adjusting prior financial statements
as if the dual approach had always been used or by (2) recording the cumulative effect of
initially applying the dual approach as adjustments to the carrying values of assets and
liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening
balance of retained earnings. Use of this cumulative effect transition method requires
detailed disclosure of the nature and amount of each individual error being corrected
through the cumulative adjustment and how and when it arose. The adoption of SAB No. 108
did not have a material impact on our financial position or results of operations.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157).
SFAS No. 157 clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing an asset or liability and establishes a fair
value hierarchy that prioritizes the information used to develop those assumptions. Under
the standard, fair value measurements would be separately disclosed by level within the
fair value hierarchy. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years, with early adoption permitted. We have not yet determined the impact, if any, that
the implementation of SFAS No. 157 will have on our results of operations or financial
condition.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159), which permits entities to choose to measure many
financial instruments and certain other items at fair value that are not currently
required to be measured at fair value. SFAS 159 will be effective for us on January 1,
2008. We are currently evaluating the impact of adopting SFAS 159 on our financial
position, cash flows, and 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.

ENTSOL®
SPRAY, which is purchased by us in finished form from a supplier in Europe, is invoiced
and sold to us in Euros, rather than United States dollars. We expect to make purchases
several times per year. During 2006, our cost of sales relating to ENTSOL® SPRAY was
$197,459.

| | 65 | 
| | -- | 

---

We
purchase some 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 2006, our expenses, in United
States dollars, relating to Groupe Parima finished goods and samples were $2,571,612.
During 2006, we paid an additional $335,179, 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 2006 expenses, were $0.01 less than
$1.29, we would have incurred an additional $25,716 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 credit
facility. As of December 31, 2006, $69 million was outstanding under the credit 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 $690,000.

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. During 2006 and 2005, we did not enter into any hedging
activities.

ITEM 8: FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

Our
financial statements and related financial statement schedule at December 31, 2006 and
2005, and for each of the three years ended December 31, 2006, 2005 and 2004, and the
Independent Registered Public Accountants Report thereon, begin on page F-1 of this
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, 2006. Based on this

| | 66 | 
| | -- | 

---

evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that, our disclosure controls and
procedures were effective as of December 31, 2006.

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 and  without
management, to discuss the adequacy of internal control over financial reporting, and any
other matters that  they believe should be brought to the attention of the Audit
Committee.

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, 2006, based upon the criteria set
forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

Based
on these review activities, our management concluded that our internal control over
financial reporting was effective at December 31, 2006.

Our
management has issued a report of its assessment of internal control over financial
reporting as of December 31, 2006, 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 below, at December 31, 2006, we had implemented the following measures to
remediate the material weaknesses described in our 2005 Form 10-K and Form 10-Q/A
(Amendment No. 1) for the fiscal quarter ended March 31, 2006.

Information Technology Controls

| |  |  | Implemented
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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial Closing Process

| |  |  | Created
and implemented a financial closing checklist to help ensure financial close procedures
are               followed;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

| | 67 | 
| | -- | 

---

| |  |  | Effected
changes in assigned roles and responsibilities within the               accounting
department to complement the hiring of additional               accounting personnel and
enhance the segregation of duties within               the Company.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 2006 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.

| | 68 | 
| | -- | 

---

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders 
   Bradley 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 maintained
effective internal control over financial reporting as of December 31, 2006, 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 opinions.

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.

Because of its 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.

| | 69 | 
| | -- | 

---

In our opinion, managements
assessment that Bradley Pharmaceuticals, Inc. and Subsidiaries maintained effective
internal control over financial reporting as of December 31, 2006, is fairly stated, in
all material respects, based on criteria established in Internal Control  Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Also in our opinion, Bradley Pharmaceuticals, Inc. and Subsidiaries maintained,
in all material respects, effective internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal Control  Integrated
Frameworkissued 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, 2006 and 2005, and the related consolidated statements of income,
stockholders  equity and cash flows for each of the three years in the period ended
December 31, 2006 and our report dated March 14, 2007 expressed an unqualified opinion on
those financial statements.

New York, New York 
   March 14, 2007

ITEM 9B. OTHER INFORMATION

None.

| | 70 | 
| | -- | 

---

PART III

Incorporated
by reference to our definitive Proxy Statement for our 2007 Annual Meeting of
Stockholders to be filed with the SEC not later than April 30, 2007.

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
|--- |  | -------------------------------------------------------

|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)*
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 71 | 
| | -- | 

---

| |  | 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)
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3.5 |  | Fourth
Amendment to Distribution Agreement, dated as of February 1, 2005, by and between Par
               Pharmaceutical, Inc. and Bradley Pharmaceuticals, Inc.
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3.6 |  | Fifth
Amendment to Distribution Agreement, dated as of June 22, 2006, by and between Par
               Pharmaceutical, Inc. and Bradley Pharmaceuticals, Inc.
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|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)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 72 | 
| | -- | 

---

|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
(incorporated herein by reference to Exhibit                10.8.2 to the Companys
Annual Report on Form 10-K for the year                ended December 31, 2005)
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8.3 |  | Third
Amendment, dated as of September 25, 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 10.1 to                the Companys Form 8-K filed on September
28, 2006)
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8.4 |  | Fourth
Amendment, dated as of March 9, 2007, 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)
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Exclusive
Sublicense Agreement, dated November 7, 2006, between Bradley Pharmaceuticals, Inc. and
               BioSante Pharmaceuticals, Inc.**
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | 73 | 
| | -- | 

---

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

|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.
|- |  | -----------------------------------------------------------

|** |  | Confidential
treatment has been requested for certain portions that have     been omitted in the copy
of the exhibit filed with the Securities and     Exchange Commission. The omitted
information has been filed separately with     the Securities and Exchange Commission.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 74 | 
| | -- | 

---

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.

|March
14, 2006 |  |  |  | BRADLEY
PHARMACEUTICALS, INC.                                                                                                                             
|-------------- |  |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|               |  |  |  | By:
/s/ Daniel Glassman
      Daniel
Glassman 
                                                                      President and
Chief Executive Officer

| | 75 | 
| | -- | 

---

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                                                                                                         
|-------------- | ------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------
|               |                                                   |  |                                                                                                               
|March 14, 2007 | /s/Daniel Glassman

      (Daniel Glassman)       |  | President and Chief Executive Officer  
          (Principal Executive Officer)                               
|              
|               |                                                   |  |                                                                                                               
|March 14, 2007 | /s/R. Brent Lenczycki

      (R. Brent Lenczycki) |  | Vice President and 
          Chief Financial Officer
 
          (Principal Financial and Accounting Officer)
|               |                                                   |  |                                                                                                               
|March 14, 2007 | /s/Andre Fedida

      (Andre Fedida)             |  | Director                                                                                                      
|               |                                                   |  |                                                                                                               
|March 14, 2007 | /s/Michael Fedida

      (Michael Fedida)         |  | Director                                                                                                      
|               |                                                   |  |                                                                                                               
|March 14, 2007 | /s/Seth W. Hamot

      (Seth W. Hamot)           |  | Director                                                                                                      
|               |                                                   |  |                                                                                                               
|March 14, 2007 | /s/Leonard S. Jacob

      (Leonard S. Jacob)     |  | Non-Executive Chairman of the Board and Director                                                              
|               |                                                   |  |                                                                                                               
|March 14, 2007 | /s/Steven Kriegsman

      (Steven Kriegsman)     |  | Director                                                                                                      
|               |                                                   |  |                                                                                                               
|March 14, 2007 | /s/Douglas E. Linton

      (Douglas E. Linton)   |  | Director                                                                                                      
|               |                                                   |  |                                                                                                               
|March 14, 2007 | /s/William J. Murphy

      (William J. Murphy)   |  | Director                                                                                                      
|               |                                                   |  |                                                                                                               

| | 76 | 
| | -- | 

---





Bradley
Pharmaceutical, Inc. 
                                       INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                          | Page
|--------------------------------------------------------- | ----
|Bradley Pharmaceuticals, Inc. and Subsidiaries            |     
|                                                          |     
|Report of Independent Registered Public Accounting Firm   |     
|                                                          |     
|Consolidated Balance Sheets at December 31, 2006 and 2005 |     
|                                                          |     
|Consolidated Statements of Income for the Years Ended     |     
|December 31, 2006, 2005 and 2004                          |     
|                                                          |     
|Consolidated Statement of Stockholders Equity for the    |     
|Years Ended December 31, 2006, 2005 and 2004              |     
|                                                          |     
|Consolidated Statements of Cash Flows for the Years Ended |     
|December 31, 2006, 2005 and 2004                          |     
|                                                          |     
|Notes to Consolidated Financial Statements                |     

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

---

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders Bradley Pharmaceuticals, Inc.

We
have audited the accompanying consolidated balance sheets of Bradley Pharmaceuticals,
Inc. and Subsidiaries as of December 31, 2006 and 2005, and the related consolidated
statements of income, stockholders equity and cash flows for each of the three years in
the period ended December 31, 2006. 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, 2006 and 2005 and the consolidated results of their
operations and their consolidated cash flows for each of the three years in the period
ended December 31, 2006, in conformity with accounting principles generally accepted in
the United States of America.

As
discussed in Note A to the consolidated financial statements, the Company changed its
method of accounting for share-based compensation effective January 1, 2006 in connection
with the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment.

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, 2006, based on
criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March
14, 2007 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York

March 14, 2007

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

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries 
                                            CONSOLIDATED BALANCE SHEETS

|                                       
|---------------------------------------
|ASSETS                                 
|CURRENT ASSETS                         
|Cash and cash equivalents              
|Short-term investments                 
|Accounts receivable - net of allowances
|Inventories, net                       
|Deferred tax assets                    
|Prepaid expenses and other             
|Prepaid income taxes                   
|                                       
|Total current assets                   
|PROPERTY AND EQUIPMENT, NET            
|INTANGIBLE ASSETS, NET                 
|GOODWILL                               
|DEFERRED FINANCING COSTS               
|RESTRICTED CASH AND INVESTMENTS        
|OTHER ASSETS                           
|                                       
|TOTAL ASSETS                           
|                                       

The accompanying notes are an
integral part of these statements.

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

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries 
                                            CONSOLIDATED BALANCE SHEETS

|                                                                                                   |  | December 31,   |  
|-------------------------------------------------------------------------------------------------- |  | -------------- | -
|LIABILITIES AND STOCKHOLDERS EQUITY                                                               |  | 2006           |  
|CURRENT LIABILITIES                                                                                |  |                |  
|Current maturities of long-term debt                                                               |  | $   15,660,085 |  
|Milestone payable- ELESTRIN                                                                       |  | 10,115,083     |  
|Accounts payable                                                                                   |  | 4,948,754      |  
|Accrued expenses                                                                                   |  | 38,728,413     |  
|                                                                                                   |  |                |  
|Total current liabilities                                                                          |  | 69,452,335     |  
|LONG-TERM LIABILITIES                                                                              | 
|Long-term debt, less current maturities                                                            |  | 53,400,000     |  
|Deferred tax liabilities                                                                           |  | 2,054,145      |  
|                                                                                                   |  |                |  
|Total long-term liabilities                                                                        |  | 55,454,145     |  
|COMMITMENTS AND CONTINGENCIES (Note K)                                                             | 
|STOCKHOLDERS EQUITY                                                                               | 
|Preferred stock, $.01 par value; authorized, 2,000,000 shares;                                     |  |               |  
|issued - none                                                                                      | 
|Common stock, $.01 par value, authorized, 26,400,000 shares; issued                                |  | 169,656        |  
|16,965,578 shares at December 31, 2006, 16,820,084 shares at                                       | 
|December 31, 2005                                                                                  | 
|Common stock, Class B, $.01 par value, authorized, 900,000 shares;                                 |  | 4,298          |  
|issued 429,752 shares at December 31, 2006 and 2005                                                | 
|Additional paid-in capital                                                                         |  | 139,754,887    |  
|Accumulated other comprehensive gain (loss)                                                        |  | 1,143          |  
|Retained earnings                                                                                  |  | 50,977,625     |  
|Treasury stock - common stock - at cost  (877,058 shares at 
          December 31, 2006 and 2005) |  | (3,291,180     | )
|                                                                                                   |  |                |  
|                                                                                                   |  | 187,616,429    |  
|                                                                                                   |  |                |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                         |  | $ 312,522,909  |  
|                                                                                                   |  |                |  

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, |  
|------------------------------------- |  | ------------------------ | -
|                                      |  | 2006                     |  
|Net sales                             |  | $ 144,806,640            |  
|Cost of sales (1)                     |  | 22,436,730               |  
|                                      |  |                          |  
|                                      |  | 122,369,910              |  
|                                      |  |                          |  
|Selling, general and administrative   | 
|expenses                              |  | 78,779,696               |  
|Research and development              |  | 10,427,157               |  
|Depreciation and amortization         |  | 10,260,974               |  
|Interest expense                      |  | 8,848,604                |  
|Interest income                       |  | (2,680,210               | )
|Write-off of deferred financing costs |  |                         |  
|Gains on short-term investments, net  |  |                         |  
|                                      |  |                          |  
|                                      |  | 105,636,221              |  
|                                      |  |                          |  
|Income before income tax expense      |  | 16,733,689               |  
|Income tax expense                    |  | 7,065,666                |  
|                                      |  |                          |  
|NET INCOME                            |  | $     9,668,023          |  
|                                      |  |                          |  
|Net income per common share           | 
|Basic                                 |  | $              0.59      |  
|                                      |  |                          |  
|Diluted                               |  | $              0.58      |  
|                                      |  |                          |  
|Weighted average number               | 
|of common shares                      | 
|Basic                                 |  | 16,410,000               |  
|                                      |  |                          |  
|Diluted                               |  | 16,550,000               |  
|                                      |  |                          |  

(1) Amounts exclude amortization of
intangible assets related to acquired products.

The accompanying notes
are an integral part of these statements.

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

---

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

|                                                                                |                               |  |                                         |  | Additional paid-
              in capital |  | Accumulatedother  
  comprehensive 
              gain (loss) |                | Retained
              earnings |   |           |        |              |        |         |       |              |   |              
|------------------------------------------------------------------------------- | ----------------------------- |  | --------------------------------------- |  | ----------------------------------------- |  | ------------------------------------------------------------- | -------------- | ------------------------------- | - | --------- | ------ | ------------ | ------ | ------- | ----- | ------------ | - | -------------
|                                                                                | Common stock,  $.01 par value |  | Class B common
  stock,  $.01 par value |  |                                           |  |                                                               | Treasury Stock |                                 |   |          
|                                                                                | Shares                        |  | Amount                                  |  | Shares                                    |  | Amount                                                        |                |                                 |   |           | Shares |              | Amount |         | Total |             
|                                                                                |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              
|Balance at December 31, 2003                                                    | 15,752,287                    |  | $ 157,523                               |  | 429,752                                   |  | $ 4,298                                                       |                | $ 129,626,913                   |   | $ (17,045 | )      | $ 25,393,778 |        | 831,286 |       | $ (2,269,798 | ) | $ 152,895,669
|                                                                                |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              
|Stock options/ warrants
  exercised (1)                                         | 649,844                       |  | 6,498                                   |  |                                           |  |                                                               |                | 3,571,678                       |   |           |        |              |        |         |       |              |   | 3,578,176    
|Shares issued to
  employees                                                    | 5,236                         |  | 52                                      |  |                                           |  |                                                               |                | 124,984                         |   |           |        |              |        |         |       |              |   | 125,036      
|Registration cost for
  the
           
         follow-on offering             |                               |  |                                         |  |                                           |  |                                                               |                | (76,963                         | ) |           |        |              |        |         |       |              |   | (76,963      
|Purchase of treasury
  stock                                                    |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        | 42,000  |       | (831,982     | ) | (831,982     
|Distribution of treasury
  stock                                                |                               |  |                                         |  |                                           |  |                                                               |                | 166,702                         |   |           |        |              |        | (7,474  | )     | 14,155       |   | 180,857      
|Other comprehensive
  income/ (loss):                                           |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              
|Net income                                                                      |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        | 7,954,314    |        |         |       |              |   | 7,954,314    
|Net unrealized loss on
  
           
        available-for-sale securities     |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   | (61,215   | )      |              |        |         |       |              |   | (61,215      
|                                                                                |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              
|Total comprehensive
  income                                                    |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   | 7,893,099    
|                                                                                |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              
|Balance at December 31, 2004                                                    | 16,407,367                    |  | $ 164,073                               |  | 429,752                                   |  | $ 4,298                                                       |                | $ 133,413,314                   |   | $ (78,260 | )      | $ 33,348,092 |        | 865,812 |       | $ (3,087,625 | ) | $ 163,763,892
|                                                                                |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              
|Stock options/ warrants
  exercised (1)                                         | 412,717                       |  | 4,128                                   |  |                                           |  |                                                               |                | 813,508                         |   |           |        |              |        |         |       |              |   | 817,636      
|Purchase of treasury
  stock                                                    |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        | 14,000  |       | (208,805     | ) | (208,805     
|Distribution of treasury
  stock                                                |                               |  |                                         |  |                                           |  |                                                               |                | 27,638                          |   |           |        |              |        | (2,754  | )     | 5,250        |   | 32,888       
|Other comprehensive
  income:                                                   |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              
|Net income                                                                      |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        | 7,961,510    |        |         |       |              |   | 7,961,510    
|Net unrealized gain on
  
           
        available-for-sale securities     |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   | 72,310    |        |              |        |         |       |              |   | 72,310       
|                                                                                |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              
|Total comprehensive
  income                                                    |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   | 8,033,820    
|                                                                                |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              
|Balance at December 31, 2005                                                    | 16,820,084                    |  | $ 168,201                               |  | 429,752                                   |  | $ 4,298                                                       |                | $ 134,254,460                   |   | $ (5,950  | )      | $ 41,309,602 |        | 877,058 |       | $ (3,291,180 | ) | $ 172,439,431
|                                                                                |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              
|Stock options exercised
  (1)                                                   | 145,494                       |  | 1,455                                   |  |                                           |  |                                                               |                | 2,025,427                       |   |           |        |              |        |         |       |              |   | 2,026,882    
|Non-cash share based
  option 
           
        expense related to SFAS 123R |                               |  |                                         |  |                                           |  |                                                               |                | 3,475,000                       |   |           |        |              |        |         |       |              |   | 3,475,000    
|Other comprehensive
  income:                                                   |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              
|Net income                                                                      |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        | 9,668,023    |        |         |       |              |   | 9,668,023    
|Net unrealized gain on
  
           
        available-for-sale securities     |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   | 7,093     |        |              |        |         |       |              |   | 7,093        
|                                                                                |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              
|Total comprehensive
  income                                                    |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   | 9,675,116    
|                                                                                |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              
|Balance at December 31, 2006                                                    | 16,965,578                    |  | $ 169,656                               |  | 429,752                                   |  | $ 4,298                                                       |                | $  139,754,887                  |   | $  1,143  |        | $ 50,977,625 |        | 877,058 |       | $ (3,291,180 | ) | 187,616,429  
|                                                                                |                               |  |                                         |  |                                           |  |                                                               |                |                                 |   |           |        |              |        |         |       |              |   |              

|(1) |  | Amounts
include tax benefits resulting from the exercise of stock               options of
approximately $356,000, $238,000 and $830,000 for the               years ended December
31, 2006, 2005 and 2004, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, |  
|-------------------------------------------------- |  | ------------------------ | -
|                                                   |  | 2006                     |  
|Cash flows from operating activities:              |  |                          |  
|Net income                                         |  | $   9,668,023            |  
|Adjustments to reconcile net income to net cash    | 
|provided by operating activities:                  | 
|Depreciation and amortization                      |  | 10,260,974               |  
|Amortization of deferred financing costs           |  | 1,811,284                |  
|Write-off of deferred financing costs              |  |                         |  
|Deferred income taxes                              |  | 2,130,749                |  
|Distribution of treasury stock to fund 401(k)      |  |                         |  
|Increase in allowance for doubtful accounts        |  | 571,092                  |  
|Increase  in return reserve                        |  | 1,414,048                |  
|Increase (decrease) in inventory valuation reserve |  | (389,738                 | )
|Increase (decrease) in rebate reserve              |  | (1,945,580               | )
|Increase in fee-for-service reserve                |  | 1,027,748                |  
|Gains on short-term investments                    |  |                         |  
|Noncash compensation for services                  |  |                         |  
|Noncash share based compensation expense           | 
|relating to SFAS 123R                              |  | 3,475,000                |  
|Changes in operating assets and liabilities:       | 
|Accounts receivable                                |  | (217,194                 | )
|Inventories                                        |  | 403,728                  |  
|Prepaid expenses and other                         |  | (606,620                 | )
|Accounts payable                                   |  | (2,718,913               | )
|Accrued expenses                                   |  | 2,150,470                |  
|Prepaid income taxes                               |  | 1,719,306                |  
|                                                   |  |                          |  
|Net cash provided by operating activities          |  | 28,754,377               |  
|                                                   |  |                          |  
|Cash flows from investing activities:              | 
|Purchase of Bioglan Pharmaceuticals                |  |                         |  
|Release of a restriction/(restriction)  of cash    | 
|related to the $110 million credit facility        |  | 12,035,193               |  
|Payment for license-VEREGEN                       |  | (14,000,000              | )
|Purchase of international distribution rights      |  |                         |  
|Sales of short-term investments- net               |  | 888,222                  |  
|Purchase of property and equipment                 |  | (91,721                  | )
|                                                   |  |                          |  
|Net cash used in investing activities              |  | (1,168,306               | )
|                                                   |  |                          |  

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

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries 
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS 
   (Continued)

|                                                   |  | Years Ended December 31, |  
|-------------------------------------------------- |  | ------------------------ | -
|                                                   |  | 2006                     |  
|Cash flows from financing activities:              |  |                          |  
|Payment of notes payable                           |  | (27,694                  | )
|Payment of 4% convertible senior                   | 
|subordinated notes                                 |  |                         |  
|Proceeds from the $125 million credit              | 
|facilitys term loan                               |  |                         |  
|Payments of $125 million credit facilitys         | 
|term loan                                          |  |                         |  
|Proceeds from bridge loan                          |  |                         |  
|Payment of bridge loan                             |  |                         |  
|Proceeds from the $110 million credit              | 
|facilitys term loan                               |  |                         |  
|Payments of the $110 million credit                | 
|facilitys term loan                               |  | (9,000,000               | )
|Proceeds from exercise of stock options and        | 
|warrants                                           |  | 1,671,299                |  
|Tax benefit due to exercise of non-qualified       | 
|options and warrants                               |  | 355,583                  |  
|Payment of deferred financing costs                |  | (775,000                 | )
|Payment of offering and registration costs         |  |                         |  
|Purchase of treasury stock                         |  |                         |  
|                                                   |  |                          |  
|Net cash provided by (used in) financing           | 
|activities                                         |  | (7,775,812               | )
|                                                   |  |                          |  
|NET INCREASE (DECREASE) IN CASH AND CASH           | 
|EQUIVALENTS                                        |  | 19,810,259               |  
|Cash and cash equivalents at beginning of year     |  | 19,798,728               |  
|                                                   |  |                          |  
|Cash and cash equivalents at end of year           |  | $ 39,608,987             |  
|                                                   |  |                          |  
|Supplemental disclosures of cash flow information: | 
|Cash paid during the year for:                     | 
|Interest                                           |  | $   7,580,000            |  
|Income taxes                                       |  | $   2,850,000            |  

At December 31, 2006 and 2005, the
restricted cash and investments             amount applied to short-term investments was
$25,000,000 and             $32,964,807, respectively. See Note C. Additionally,
$7,084,415             non-cash investment activity resulted from the release from
            restricted cash to short-term investments during 2006.

At December 31, 2006, license
agreement for ELESTRIN resulted in             recording of intangible asset and
milestone payable of $10,115,083.             See Note D and Note H.

The accompanying notes
are an integral part of these statements.

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

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries 
                                       NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

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

Bradley
Pharmaceuticals, Inc. (the Company) was originally incorporated in New Jersey in 1985.
The Company reincorporated in Delaware in 1998. The Company is a specialty pharmaceutical
company that acquires, develops and markets prescription and over-the-counter products in
niche therapeutic markets, including dermatology, podiatry, gastroenterology and womens
health. The Companys business strategy contemplates its (i) in-licensing phase II and
phase III drugs and developing and bringing to market products with long-term
intellectual property protection or other significant barriers to market entry, (ii)
commercializing brands that fill unmet patient and physician needs, (iii) expanding
existing partnerships and joint venture relationships with biotechnology and specialty
pharmaceutical companies and fostering new strategic alliances designed to deliver a
stronger product portfolio; and (iv) increasing its focus on research and development
activities to continue to develop products organically with longer lifecycles and to
extend indications for the Companys current product portfolio.

The
Company has two primary business segments, its Doak Dermatologics subsidiary (which
includes the products acquired from Bioglan Pharamaceuticals in 2004), specializing in
therapies for dermatology and podiatry, and its Kenwood Therapeutics division, providing
gastroenterology, womens health, respiratory and other internal medicine brands. To a
lesser extent, Kenwood Therapeutics also markets nutritional supplements and respiratory
products. During 2006, the Company launched its A. Aarons subsidiary, which markets
authorized generic versions of Doaks and Kenwoods products.

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

|1. |  | 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 and balances have been eliminated in consolidation.

|2. |  | Adoption
of New Accounting Standard - Share-Based Payment
|-- |  | ---------------------------------------------------------

Effective
January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123R (SFAS No. 123R), Share-Based Payment, as supplemented by
the interpretation provided by the United States Securities and Exchange Commission
(SEC) Staff Accounting Bulletin (SAB) No. 107, issued in March 2005. SFAS No. 123R
replaced SFAS No. 123, Stock-Based Compensation (SFAS No. 123), issued in 1995, and
requires stock-based compensation to be measured based on the fair value of the awards on
the grant date. The Company elected the modified prospective method of transition as
permitted by SFAS No. 123R and, as such, prior period financial statements have not been
restated. Under this method, the fair value of all stock options granted or modified
after adoption must be recognized in the consolidated statement of income and total
compensation cost related to nonvested awards not yet recognized, determined under the
original provisions of SFAS No. 123, must also be recognized in the consolidated
statement of income.

Prior
to January 1, 2006, we accounted for stock options under Accounting Principle Board
Opinion No. 25, Accounting for Stock Issued to Employees, an elective accounting policy
permitted by SFAS No. 123. Under this standard, since the exercise price of our stock
options granted is set equal to or above the market price on the date of the grant, we
did not record any expense to the consolidated statement of income related to stock
options. However, as required, we disclosed, in the notes to consolidated financial
statements, the pro forma expense impact of the stock option grants as if we had applied
the fair-value-based recognition provisions of SFAS No. 123.

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

---

Bradley Pharmaceuticals, Inc. and Subsidiaries 
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                
   December 31, 2006

The
adoption of SFAS No. 123R primarily impacted our accounting for stock options (See Note
B, Incentive and Non-Qualified Stock Option Plan and Note F, Income Taxes).

|3. |  | Cash
and Cash Equivalents
|-- |  | -------------------------

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

|4. |  | Short-term
Investments
|-- |  | ----------------------

The
Company accounts for investments under SFAS 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 represent
investments in AAA-rated commercial paper and other debt securities with maturities of
greater than three 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.

|5. |  | 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 97% and 90% of gross trade accounts receivable at December 31, 2006, and
2005, respectively. On December 31, 2006, on a gross trade accounts receivable basis,
Cardinal Health, Inc. (Cardinal) owed approximately $7,614,000 to the Company or 44% of
accounts receivable and McKesson Corporation (McKesson) owed approximately $7,520,000
to the Company or 43% of accounts receivable. On December 31, 2005, on a gross trade
accounts receivable basis, Cardinal owed approximately $8,962,000 to the Company or 50%
of accounts receivable and McKesson owed approximately $5,825,000 to the Company or 33%
of accounts receivable. The following table presents a summary of gross sales to
significant customers as a percentage of the Companys gross sales:

|                              |  | Years ended December 31,
|----------------------------- |  | ------------------------
|Customer*                     |  | 2006                    
|AmerisourceBergen Corporation |  | 13                      
|Cardinal                      |  | 36                      
|McKesson                      |  | 32                      
|Quality King Distributors     |  | 2                       

---

|* |  | No
other customer had a percentage of the Companys total gross             sales greater
than 5% during any of the years ended December 31,             2006, 2005 or 2004.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Supplemental
information on the accounts receivable balances at December 31, 2006 and 2005 are as
follows:

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

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries 
                                       NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

|                                       |  | December 31, | 
|-------------------------------------- |  | ------------ | 
|                                       |  | 2006         | 
|Accounts receivable                    |  |              | 
|Trade                                  |  | $17,417,268  | 
|Other                                  |  | 1,379,886    | 
|                                       |  |              | 
|                                       |  | 18,797,154   | 
|                                       |  |              | 
|Less allowances:                       | 
|Chargebacks                            |  | 135,086      | 
|Discounts                              |  | 392,244      | 
|Fee-for-service                        |  | 1,778,711    | 
|Doubtful accounts                      |  | 2,001,490    | 
|                                       |  |              | 
|                                       |  | 4,307,531    | 
|                                       |  |              | 
|Accounts receivable, net of allowances |  | $14,489,623  | 
|                                       |  |              | 

Trade
receivables consist of sales of product primarily to wholesale customers. Other
receivables primarily consist of a royalty due to the Company from Par Pharmaceutical
Companies, Inc. (Par) for the authorized generic version of ADOXA®.

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 payors, who are often governmental agencies and managed care buying groups. The
Company records an estimate of the amount 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 deducted from customers payments at the time
of sale. Typically, the Company offers a 2% discount based upon prompt payments by the
customer. 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. Changes in the Companys estimates
would be recorded in the income statement in the period of the change.

The
Company has Distribution and Service Agreements (DSAs) with three of its customers,
McKesson, Cardinal and Kinray, Inc. (Kinray). DSAs are a result of the wholesalers
shifting from the buy and hold model (i.e., 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
Company entered into a DSA with Kinray during the third quarter of 2006. The terms of the
DSAs require the Company to pay fees to Cardinal, McKesson or Kinray, which fees are
offset by any price appreciation of the inventory that Cardinal, McKesson or Kinray have
on-hand and also by any discounts that the Company gives to Cardinal, McKesson and Kinray
for new product promotions. In return, Cardinal, McKesson and Kinray 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 owed these customers $1,778,711 and $750,963 as of December
31, 2006 and 2005, respectively. The Company records fees-for-service as deductions from
gross sales in its consolidated statements of income.

The
Company also maintains a provision for doubtful accounts, with respect to which the
Company believes the probability of collecting 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

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

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries 
                                       NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

lower) in the near term from 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.

|6. |  | Accrued
Expenses
|-- |  | ----------------

Supplemental
information on the accrued expenses at December 31, 2006 and 2005 are as follows:

|                                   |  | December 31,
|---------------------------------- |  | ------------
|                                   |  | 2006        
|Employee compensation and benefits |  | $  2,941,655
|Rebate payable                     |  | 2,116,324   
|Rebate liability                   |  | 3,086,464   
|Deferred revenue                   |  | 57,226      
|Return reserve (see Note A.7)      |  | 26,348,128  
|Settlement reserve                 |  | 1,000,000   
|Royalty payable                    |  | 1,974,274   
|Other                              |  | 1,204,342   
|                                   |  |             
|Accrued expenses                   |  | $38,728,413 
|                                   |  |             

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 either rebate payable or rebate liability 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 principally 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.

Settlement
reserve represents the Companys estimate for potential settlements and the resolution of
contractual disagreements discussed in Note K.

|7. |  | Allowance
for returns
|-- |  | ---------------------

The
Company records an estimate for returns at the time of sale. The Companys return policy
typically allows 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. These amounts are deducted from the Companys gross sales to determine the
Companys net sales. The Companys estimates take into consideration both quantitative
and qualitative information including, but not limited to, actual return rates by
product, the level of product in the distribution channel, expected shelf life of the
product, product demand, the introduction of competitive or generic products that may
erode current demand, our new product launches and general economic and industry wide
indicators. The Company periodically reviews the reserves established for returns and
adjusts them based on actual experience. If the Company over or under estimates the level
of sales that will ultimately be returned, there may be a material impact to the
Companys financial statements.

|8. |  | Inventories
|-- |  | -----------

The
Company purchases raw materials and packaging components for some of its third party
manufacturing vendors. The Company uses these third party manufacturers to manufacture
and package finished goods held for sale, takes title to certain finished inventories
once manufactured, and warehouses such goods until final distribution and sale. Finished
goods consist of salable products that are primarily held at a third party

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

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries  
                                     NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

warehouse. 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, 2006 and 2005 are as follows:

|                  |  | December 31,
|----------------- |  | ------------
|                  |  | 2006        
|Finished goods    |  | $ 6,471,494 
|Raw materials     |  | 1,351,439   
|Valuation reserve |  | (941,715    
|                  |  |             
|Inventories, net  |  | $ 6,881,218 
|                  |  |             

|9. |  | 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.

|10. |  | 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. Under the impairment
test, 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 and Other Intangible Assets, 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,
2006 and December 31, 2005 and noted that no impairment existed.

|11. |  | Deferred
Financing Costs
|--- |  | ------------------------

Deferred
financing costs are amortized over the life of the related debt using the effective
interest rate method and charged to interest expense. Interest expense related to the
amortization of deferred financing cost was $1,811,284, $953,263 (includes $800,253 of amortization expense related to financing costs from a previous credit facility) and $567,889 for the
years ended December 31, 2006, 2005 and 2004, respectively, and is expected to be
$1,725,970, $1,446,510, $1,089,957 and $535,597 for the years ended December 31, 2007,
2008, 2009 and 2010, respectively.

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

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries   
                                    NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

Supplemental
information on deferred financing cost balances at December 31, 2006 and 2005 are as
follows:

|                              |  | December 31,
|----------------------------- |  | ------------
|                              |  | 2006        
|Cost                          |  | $ 6,762,328 
|Accumulated amortization      |  | (1,964,294  
|                              |  |             
|Deferred financing costs, net |  | $ 4,798,034 
|                              |  |             

|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 SAB 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. Estimates for sales discounts, chargebacks, rebates,
fees for service, and 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 for its branded business to
wholesale customers other than a contractual right to three 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 for its branded business, however,
guarantee that its wholesale customers will sell the Companys products at a profit.

Effective
August 2006, the Company changed the shipping terms with three wholesalers from FOB
shipping point to FOB destination. As a result of this change in shipping terms, the
Company did not record $1,290,551 of sales since these products were in transit at
December 31, 2006.

|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, in
particular its sales of ADOXA®, the Companys ability to develop sales of VEREGEN
and ELESTRIN, the products incorporating the delivery systems to be developed by
Polymer Science and other new products, competition from generic or comparable products,
the development of new competitive pharmaceuticals and technological advances to treat
the conditions addressed by the Companys core branded products, marketing or pricing
actions by one or more of the Companys competitors, the effectiveness of the Companys
sales and marketing efforts, legal or regulatory action by the U.S. Food and Drug
Administration (FDA) and other government regulatory agencies, including changes that
could affect the ability of the Companys sales force to market to prescribing
physicians, the outcome of the Companys federal securities class action lawsuit and
state and federal shareholder derivative lawsuits, the SEC inquiry (as discussed in Note
K.6), the adequacy of the Companys cash and cash flow to meet its working capital
requirements, the Companys ability to achieve sales and earnings estimates, the
Companys 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

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

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries 
                                       NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

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 products under development, delays in the
research and development or product testing process for newly licensed or acquired
products, 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, timing of payments on indebtedness, product liability
claims, and the outcome of disputes relating to trademarks, patents, license agreements
and other rights.

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, as well as restricted
cash, at December 31, 2006 and 2005 were principally held by three institutions, and are
in excess of their respective Federal Deposit Insurance Corporation (FDIC) insurance
limits. As of December 31, 2006 and 2005, four wholesale customers accounted for
$18,029,062 and $16,133,216 or 97% and 90%, respectively, of the gross trade accounts
receivable balance.

The
Company maintains $20,000,000 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 FDA. New drugs are typically subject to a 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.

For
the year ended December 31, 2006, five vendors that manufacture and package products for
the Company accounted for approximately 11%, 11%, 11%, 8% and 5% each of the Companys
cost of goods sold. 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. No other vendor,
packager or manufacturer accounted for more than 5%, 5% and 4% of the Companys cost of
goods sold for 2006, 2005 or 2004, 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.

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 for which 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.

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

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries  
                                     NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

|14. |  | Net
Income Per Common Share
|--- |  | ---------------------------

The
Company computes income per share in accordance with SFAS No. 128, Earnings per Share
(SFAS No. 128) which specifies the compilation, presentation and disclosure
requirements for income per share for entities with publicly held common stock or
instruments that 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. |  | 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, allowances for
doubtful accounts and returns, inventory reserves, the impairment of intangibles and
goodwill, the determination of useful lives of intangible assets and the realization of
deferred tax assets represent particularly sensitive estimates.

|17. |  | Advertising
|--- |  | -----------

The
Company expenses advertising costs as incurred. Total advertising costs charged to
expense amounted to approximately $8,622,823, $16,589,620, and $14,714,987 for the years
ended December 31, 2006, 2005 and 2004, respectively.

|18. |  | 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 $2,037,885,
$1,679,758, and $1,631,526 for the years ended December 31, 2006, 2005 and 2004,
respectively.

|19. |  | Research
and Development
|--- |  | ------------------------

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

|20. |  | Fair
Market Value of Financial Instruments
|--- |  | ------------------------------------------

The
estimated fair value of certain of the Companys financial instruments, including cash
and cash equivalents, restricted cash, short-term investments, accounts receivable,
accounts payable, milestone 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 outstanding balance of the Companys $110
million credit 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-16 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries   
                                    NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

|21. |  | New
Accounting Standards
|--- |  | ------------------------

In
May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
Accounting Changes and Error Corrections (SFAS No. 154). SFAS No. 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 No. 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 No. 154 did not have
a material impact on the Companys financial position or results of operations.

In
June 2006, the Emerging Issues Task Force (EITF) issued EITF Issue 06-3, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross versus Net Presentation). EITF Issue 06-3 provides
guidance related to the presentation in financial statements of any tax assessed by a
governmental authority that is directly imposed on a revenue-producing transaction
between a seller and a customer, including, but not limited to, sales, use, value added,
and some excise taxes. The EITF concluded that the presentation of taxes within the scope
of EITF Issue 06-3 on either a gross (included in revenues and costs) or a net (excluded
from revenues) basis is an accounting policy decision that should be disclosed. In addition,
the aggregate amount of any such taxes that are reported on a gross basis should be
disclosed in interim and annual financial statements. The guidance in EITF Issue 06-3 is
effective for interim and annual reporting periods beginning after December 15, 2006. The
adoption of EITF Issue 06-3 is not expected to have an impact on the Companys
consolidated financial statements.

In
July 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes-an Interpretation of FASB Statement No. 109 (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that the
Company recognize in its financial statements the impact of a tax position, if that
position is more likely than not of being sustained on audit, based on the technical
merits of the position. This interpretation is effective for fiscal years beginning after
December 15, 2006, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. The Company is still in the
process of evaluating the effects of FIN 48 and expects that its adoption will result in
an opening retained earnings adjustment of approximately  $1.0 million to $2.0 million. The Company is also
currently evaluating the impact of FIN 48 on its future effective tax rates.

In
September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB
No. 108 establishes an approach that requires quantification of financial statement
misstatements based on the effects of the misstatement on each of a companys financial
statements and the related financial statement disclosures. This approach is commonly
referred to as the dual approach because it requires quantification of errors under
both the roll-over and iron curtain methods. SAB No. 108 allows registrants to initially
apply the dual approach either by (1) retroactively adjusting prior financial statements
as if the dual approach had always been used or by (2) recording the cumulative effect of
initially applying the dual approach as adjustments to the carrying values of assets and
liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening
balance of retained earnings. Use of this cumulative effect transition method requires
detailed disclosure of the nature and amount of each individual error being corrected
through the cumulative adjustment and how and when it arose. The adoption of SAB No. 108
did not have a material impact on the Companys financial position or results of
operations.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157).
SFAS No. 157 clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing an asset or liability and establishes a fair
value hierarchy that prioritizes the information used to develop those assumptions. Under
the standard, fair value measurements would be separately disclosed by level within the
fair value hierarchy. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years, with early adoption permitted. The Company has not yet determined the impact, if
any, that the implementation of SFAS No. 157 will have on its results of operations or
financial condition.

| | F-17 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries  
                                      NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS No. 159) which permits entities to choose to measure
many financial instruments and certain other items at fair value that are not currently
required to be measured at fair value. SFAS No. 159 will be effective for the Company on
January 1, 2008. The Company is currently evaluating the impact of adopting SFAS No. 159
on its financial position, cash flows, and results of operations.

NOTE B - 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, 2006, options to acquire shares remain outstanding
under this Plan.

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, 2006 and 2005, there were 770,973
and 692,959 shares available for future grant, respectively. Grants cancelled or
forfeited are available for future grants. Options typically vest over three 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, 2004 to December 31, 2006:

|                           |  | Number of 
Options | Weighted 
Average 
Exercise 
Price
|-------------------------- |  | ------------------ | ----------------------------------
|Balance, January 1, 2004   |  | 1,795,653          |                                   
|                           |  |                    |                                   
|Granted                    |  | 187,900            |                                   
|Exercised                  |  | (544,476           | )                                 
|Canceled or forfeited      |  | (49,285            | )                                 
|                           |  |                    |                                   
|Balance, December 31, 2004 |  | 1,389,792          |                                   
|                           |  |                    |                                   
|Granted                    |  | 998,900            |                                   
|Exercised                  |  | (412,717           | )                                 
|Canceled or forfeited      |  | (100,886           | )                                 
|                           |  |                    |                                   
|Balance, December 31, 2005 |  | 1,875,089          |                                   
|                           |  |                    |                                   
|Granted                    |  | 135,250            |                                   
|Exercised                  |  | (145,494           | )                                 
|Canceled or forfeited      |  | (213,228           | )                                 
|                           |  |                    |                                   
|Balance, December 31, 2006 |  | 1,651,617          |                                   
|                           |  |                    |                                   

| | F-18 | 
| | ---- | 

---

Bradley Pharmaceuticals, Inc. and Subsidiaries 
                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

The following table summarizes the Companys options at December 31,
2006:

|                            |  | Number of 
Options | Weighted
Average 
Exercise 
Price | Weighted 
Average 
Remaining 
Contractual 
Life (Years) | Aggregate 
Intrinsic Value
|--------------------------- |  | ------------------ | --------------------------------- | ------------------------------------------------------- | --------------------------
|Vested and expected to vest |  | 1,564,247          |                                   | $13.90                                                  |                           
|                            |  |                    |                                   |                                                         |                           
|Exercisable                 |  | 940,393            |                                   | $13.64                                                  |                           
|                            |  |                    |                                   |                                                         |                           

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 6.0
years.

Included
in the total options outstanding on December 31, 2006 and 2005, were 465,096 and 464,245
options outstanding and exercisable held by 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/or employees that
have over 10% ownership.

The
following table summarizes option data as of December 31, 2006:

|Range of Exercise 
Prices |  | Number 
Outstanding | Weighted 
Average 
Remaining 
Contractual 
Life (yrs) | Weighted 
Average 
Exercise 
Price | Number 
Exercisable | Weighted 
Average 
Exercise 
Price
|------------------------- |  | ------------------- | ----------------------------------------------------- | ---------------------------------- | ------------------- | ----------------------------------
|$ 1.13 - $ 1.13           |  | 900                 |                                                       | 1.8                                |                     | $1.13                             
|1.75 - 1.91               |  | 4,200               |                                                       | 1.4                                |                     | 1.84                              
|2.00 - 2.25               |  | 22,500              |                                                       | 2.1                                |                     | 2.07                              
|7.05 - 9.97               |  | 167,600             |                                                       | 5.2                                |                     | 7.57                              
|10.11 - 11.58             |  | 66,565              |                                                       | 9.3                                |                     | 10.98                             
|11.90 - 14.33             |  | 955,918             |                                                       | 8.9                                |                     | 13.26                             
|14.75 - 20.18             |  | 268,383             |                                                       | 8.7                                |                     | 15.63                             
|20.31 - 27.12             |  | 165,551             |                                                       | 7.2                                |                     | 24.85                             
|                          |  |                     |                                                       |                                    |                     |                                   
|                          |  | 1,651,617           |                                                       |                                    |                     |                                   
|                          |  |                     |                                                       |                                    |                     |                                   

The
Company used a Black-Scholes valuation model to estimate the fair value of stock options
granted in 2006 and expensed consistent with the provisions of SFAS No. 123R, SAB No. 107
and the Companys 2005 and 2004 pro forma disclosures of net earnings, including the fair
value of stock-based compensation. Key input assumptions used to estimate the fair value
of stock options include the expected term until the exercise of the option, expected
volatility of the Companys stock, the risk free-rate of return, option forfeiture rates,
and dividends, if any. The expected term of the options is based on the historical
weighted average exercise behavior of officers and non officers. The expected volatility
is derived from the historical volatility of the Companys stock on the secondary
markets. The risk-free interest rate is the yield from a treasury bond corresponding to
the expected term of the option. Option forfeiture rates are based on the Companys
historical forfeiture rates. The Company has not paid dividends and does not expect to
pay dividends in the near future.

The
fair value of each option granted for purposes of recording stock compensation expense in
2006 and the pro forma disclosures required for 2005 and 2004 have been estimated on the
grant date using the Black-Scholes Option Valuation Model. The following assumptions were
made in determining the estimated fair value of stock options:

| | F-19 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries 
                                       NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

|                        |  | 2006           |  | 2005       |  | 2004    | 
|----------------------- |  | -------------- |  | ---------- |  | ------- | 
|Dividend yield          |  | 0%             |  | 0%         |  | 0%      | 
|Risk-free interest rate |  | 4.51%-4.78%    |  | 4.34%-5.0% |  | 5.0%    | 
|Expected life in years  | 
|Directors and officers  |  | 5 to 6 years   |  | 7 years    |  | 7 years | 
|Others                  |  | 4 to 4.5 years |  | 5 years    |  | 5 years | 
|Expected volatility     |  | 54%-65%        |  | 60%-78%    |  | 60%     | 

The
weighted average fair market values of the options granted during 2006, 2005 and 2004
were $7.79, $8.92, and $14.00, respectively. The exercise price of all options granted
during the years ended December 31, 2006, 2005 and 2004 equaled or was greater than the
market price on the grant date.

During
2006, there were 145,494 options exercised with a total intrinsic value of $932,707.
During 2005 there were 412,717 options exercised with a total intrinsic value of
$4,492,193.

Unvested
options as of December 31, 2006, and changes in such options during the twelve month
period then ended are summarized below:

|                                    |  | Number of 
Options | Weighted Average 
Grant Date Fair 
Value Per Share
|----------------------------------- |  | ------------------ | --------------------------------------------------
|Unvested Balance, January 1, 2006   |  | 1,107,256          |                                                   
|Granted                             |  | 135,250            |                                                   
|Vested                              |  | (318,054           | )                                                 
|Expired or forfeited                |  | (213,228           | )                                                 
|                                    |  |                    |                                                   
|Unvested Balance, December 31, 2006 |  | 711,224            |                                                   
|                                    |  |                    |                                                   

|1. |  | Impact
on Net Income
|-- |  | --------------------

Our
net income for 2006 includes $3,475,000 ($2,923,000, or $0.18 per share on a fully
diluted basis, net of tax) of total compensation cost for share-based payment
arrangements, which was charged to selling, general and administrative expenses. For
2006, the related income tax benefits of the compensation cost for share-based payment
arrangements were $552,000.

Compensation
costs for stock options with tiered vesting terms are recognized ratably over the vesting
period. As of December 31, 2006 the total unrecognized compensation expense related to
unvested share-based compensation arrangements granted under the Plans is $5,726,000.
This expense will be recognized over a weighted average period of 24 months, assuming no
changes to the underlying assumptions. The total fair value of shares vested during 2006
and 2005 was $3,165,091 and $2,388,389, respectively.

The
following table shows the effect on results for 2005 and 2004 as if we had applied the
fair-value-based recognition provisions of SFAS No. 123R to measure stock-based
compensation expense for the option grants:

| | F-20 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries 
                                       NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

|                                             |  | 2005 (a)        |   | 2004 (a)        |  
|-------------------------------------------- |  | --------------- | - | --------------- | -
|Net income, as reported                      |  | $ 7,961,510     |   | $ 7,954,314     |  
|Deduct: Total share-based employee           | 
|compensation expense determined under fair   | 
|value based method for all awards, net of    | 
|related tax effects                          |  | (1,351,684      | ) | (1,656,229      | )
|                                             |  |                 |   |                
|Pro forma net income for basic               | 
|computation                                  |  | $ 6,609,826     |   | $ 6,298,085     |  
|                                             |  |                 |   |                
|Net income, as reported                      |  | $ 7,961,510     |   | $ 7,954,314     |  
|Deduct: Total share-based employee           | 
|compensation expense determined under fair   | 
|value based method for all awards, net of    | 
|related tax effects                          |  | (1,351,684      | ) | (1,656,229      | )
|Add: After-tax interest expense and other    | 
|from 4% convertible senior subordinated      | 
|notes due 2013 (b)                           |  |                |   | 1,024,340       |  
|                                             |  |                 |   |                
|Pro forma net income for diluted computation |  | $ 6,609,826     |   | $ 7,322,425     |  
|                                             |  |                 |   |                
|Net income per share:                        | 
|Basic- as reported                           |  | $          0.50 |   | $          0.51 |  
|Basic- pro forma                             |  | $          0.41 |   | $          0.40 |  
|Diluted- as reported                         |  | $          0.49 |   | $          0.49 |  
|Diluted- pro forma (b)                       |  | $          0.40 |   | $          0.40 |  

| | (a) |  | Amounts
have been adjusted to reflect the provisions of SFAS No. 123R to      conform to current
presentation.
| | --- |  | --------------------------------------------------------------------------------------------------------------

| | (b) |  | Adjustments  of $897,461 for the after-tax interest expense from the 4%      convertible
senior subordinated notes due 2013 and 1,620,000 shares from      the convertible notes
were excluded from the calculation in 2005 because      the affect of including them
would be anti-dilutive.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | Impact
on Cash Flows
|-- |  | --------------------

Prior
to the adoption of SFAS No. 123R, the Company presented cash flows resulting from the tax
benefits of deductions from the exercise of stock options as operating cash flows in the
Statement of Cash Flows. SFAS No. 123R requires cash flows resulting from the tax
benefits from tax deductions in excess of the compensation cost recognized for those
options (excess tax benefits) to be classified as financing cash flows. The Company
realized a tax benefit from the exercise of stock options during 2006 of $355,583.

|3. |  | Impact
on Income Taxes
|-- |  | ----------------------

With
the adoption of SFAS No. 123R on January 1, 2006, the Companys effective tax rate
increased from 39% in 2005 to 42% in 2006 primarily because expensing qualified
(incentive) stock options results in a permanent tax difference.

NOTE C - 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.

| | F-21 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries 
                                       NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

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
following is a summary of available-for-sale securities for December 31, 2006:

|                                    |  | Cost        | Gross 
Unrealized 
       Gain | Gross Fair 
Value
|----------------------------------- |  | ----------- | ------------------------------ | -----------------
|Municipal bonds                     |  | $32,082,535 |                                | $1,143           
|                                    |  |             |                                |                  
|Total available-for-sale securities |  | $32,082,535 |                                | $1,143           
|                                    |  |             |                                |                  

The
following is a summary of available-for-sale securities for December 31, 2005:

|                                    |  | Cost        | Gross 
Unrealized 
Loss | Gross Fair 
Value
|----------------------------------- |  | ----------- | ----------------------- | -----------------
|Municipal bonds                     |  | $32,970,757 |                         | $(5,950          
|                                    |  |             |                         |                  
|Total available-for-sale securities |  | $32,970,757 |                         | $(5,950          
|                                    |  |             |                         |                  

During
the years ended December 31, 2005 and 2004, the Company had net realized gains on sales
of available-for-sale securities of $103,166 and $35,328, respectively. The net
adjustment to unrealized gains during fiscal 2006 and 2005 on available-for-sale
securities included in accumulated other comprehensive income totaled $7,093 and $72,310,
respectively, and the net adjustment to unrealized losses during fiscal 2004 on
available-for-sale securities included in stockholders equity totaled $61,215. The
Company views its available-for-sale securities as available for current operations.

The
Company had no held-to-maturity investments at December 31, 2006 and 2005.

The
amortized cost and estimated fair value of the available-for-sale securities at December
31, 2006, 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
                                                                             Value
|------------------------------------ |  | ----------------- | ---------------------------------------------------------------------------------------------------------
|Due in one year or less              |  | $         8,254   |                                                                                                          
|Due after one year through two years |  | $             -0- |                                                                                                          
|                                     |  |                  
|Due after two years                  |  | $32,074,281       |                                                                                                          
|                                     |  |                   |                                                                                                          
|Total                                |  | $32,082,535       |                                                                                                          
|                                     |  |                   |                                                                                                          

As
of December 31, 2006 and 2005, the Company had a restriction on the ability to use its
short-term investment from the $110 million credit facility (see Note G). The total
amount of restricted cash and investments from the $110 million credit facility at
December 31, 2006 and December 31, 2005 was $25,000,000 and $45,000,000, respectively.
The following table exhibits the application of the restriction on the short-term
investments at December 31, 2006 and 2005:

| | F-22 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries    
                                    NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS 
                                                 December 31, 2006

|                                                       |  | December 31,
|------------------------------------------------------ |  | ------------
|                                                       |  | 2006        
|Unapplied short-term investments                       |  | $ 32,083,678
|Amount of short-term investments applied to restricted | 
|cash and investments                                   |  | (25,000,000 
|Short-term investments                                 |  | 7,083,678   
|Amount of cash and cash equivalents applied to         | 
|restricted cash and investments                        |  |            

NOTE D - INTANGIBLE
ASSETS

Details
of intangible assets are summarized as follows:

|                         |  | December 31, 2006 | December 31, 2005       
|------------------------ |  | ----------------- | ------------------------
|                         |  | Cost              | Accumulated
Amortization
|Trademarks               |  | $123,961,617      |                         
|Core technology          |  | 42,300,000        |                         
|Patents                  |  | 10,327,454        |                         
|Licenses                 |  | 26,839,969        |                         
|Covenants not to compete |  | 162,140           |                         
|                         |  |                   |                         
|                         |  | $203,591,180      |                         
|                         |  |                   |                         

Trademarks,
core technology, patents and licenses are all intangible assets with definite useful
lives and therefore continue to be amortized under SFAS No. 142. Currently Marketed
Products (CMPs) are included in Trademarks and they represent a composite intangible
asset that, among other things, includes the brand name, distributor and customer
relationships and physician and patients experience with the applicable products. The
composite intangible assets included in the CMPs are a group of complementary intangible
assets having the same useful lives, marketed to the same physicians and sold to
essentially the same distributors. The Company amortizes its intangibles utilizing the
straight-line method primarily because the Company cannot determine a reliable pattern in
which the economic benefits of the intangible assets are expected to be used. The
Companys opportunities to commercialize the underlying value of these intangible assets
generally allows for new and modified products that provide relatively inconsistent
anticipated revenue streams. Amortization periods for intangible assets as of December
31, 2006 are summarized as follows:

|                |  | Weighted Average 
Amortization Period
|--------------- |  | -------------------------------------
|Trademarks      |  | 19                                   
|Core technology |  | 20                                   
|Patents         |  | 10                                   
|Licenses        |  | 13                                   

| | F-23 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

The
table below outlines the CMPs and their weighted average useful life included in
Trademarks as of December 31, 2006 and 2005:

|                 | Cost | Weighted Average
Useful Life
|---------------- | ---- | ----------------------------
|Trademarks       |      | $  18,261,617               
|CMPs             |      | 105,700,000                 
|                 |      |                             
|Total Trademarks |      | $123,961,617                
|                 |      |                             

Our
intangible assets by therapeutic category including cost, accumulated amortization,
weighted average amortization period, and aggregate and estimated amortization expense
are as follows:

|                        | December 31, 2006 | December 31, 2005       
|----------------------- | ----------------- | ------------------------
|                        | Cost              | Accumulated
Amortization
|Dermatology & Podiatry1 |                   | $176,624,181            
|Gastrointestinal        |                   | 250,851                 
|Respiratory             |                   | 15,386,964              
|Nutritional             |                   | -0-                     
|Other 2                 |                   | 11,329,184              
|                        |                   |                         
|                        |                   | $203,591,180            
|                        |                   |                         

|1 |  | Includes
a $14 million milestone payment pursuant to the MediGene          Agreement,triggered by
the FDA approval VEREGENTM paid during          December 2006.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 |  | Includes
a $10.1 million in milestone payables pursuant to the BioSante
         Agreement,triggered by the FDA approval ELESTRINTM to be paid during
         2007.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

Amortization
periods for intangible assets as of December 31, 2006 by therapeutic category are
summarized as follows:

|                       | Weighted Average
Amortization Period
|---------------------- | ------------------------------------
|Dermatology & Podiatry |                                     
|Gastrointestinal       |                                     
|Respiratory            |                                     
|Nutritional            |                                     
|Other                  |                                     

The
following relates to the Companys intangible assets with definite useful lives:

|                               | Dermatology 
       &
Podiatry | Gastrointestinal | Respiratory | Nutritional | Other | Total   
|------------------------------ | ------------------------------ | ---------------- | ----------- | ----------- | ----- | --------
|Aggregate Amortization Expense |                                |                  |             |             |       |         
|                               |                                |                  |             |             |       |         
|Year ended December 31, 2004   |                                | $3,551,751       |             | $16,719     |       | $557,779
|Year ended December 31, 2005   |                                | 8,783,662        |             | 16,719      |       | 556,700 
|Year ended December 31, 2006   |                                | 8,877,221        |             | 16,719      |       | 521,207 
|                               |                               
|Estimated Amortization Expense |                               
|                               |                                |                  |             |             |       |         
|Year ending December 31, 2007  |                                | $9,622,768       |             | $16,719     |       | $549,704

| | F-24 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

|Year ending December 31, 2008 |  | 9,621,118 |  | 16,719 |  | 502,665 |  |  |  | 848,940 |  | 10,989,442 | 
|----------------------------- |  | --------- |  | ------ |  | ------- |  | - |  | ------- |  | ---------- | 
|Year ending December 31, 2009 |  | 9,621,114 |  | 3,748  |  | 361,548 |  |  |  | 848,940 |  | 10,835,350 | 
|Year ending December 31, 2010 |  | 9,621,102 |  | 53     |  | 361,548 |  |  |  | 848,940 |  | 10,831,643 | 
|Year ending December 31, 2011 |  | 9,621,102 |  |       |  | 361,548 |  |  |  | 848,940 |  | 10,831,590 | 

Intangible
assets arose principally from the following transactions:

MediGene
AG License

On
January 30, 2006, the Company entered into a Collaboration and License Agreement with
MediGene AG for VEREGENTM. Under the MediGene 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, a novel active
ingredient, 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 MediGene 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 has agreed to
certain minimum purchase amounts (See Note K) contingent upon regulatory approval. Under
the MediGene 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 MediGene Agreement further provides that the parties may engage
in development and registration activities relating to products covered by the MediGene
Agreement for indications other than the EGW Indication or new developments that would
extend the scope of the EGW Indication. If the parties 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 MediGene 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 of 2006, the Company paid MediGene $5,000,000 in consideration for
development and registration activities undertaken prior to the date of the Agreement.
The Company expensed the $5,000,000 as a research and development payment during the
First Quarter of 2006 since there was no FDA approval at the time of the payment.
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 that, 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 MediGene Agreement also contemplates additional
milestone payments that, 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 other than the EGW
Indication 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
MediGene 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

| | F-25 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

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.

On
October 31, 2006, the Company announced that it had been notified by MediGene that
Medigene received approval from the FDA to market VEREGENTM, a
new drug indicated for the treatment of external genital and perianal warts and patented
through 2017. The product is expected to launch during the second half of 2007. As
required by the MediGene Agreement, a $14 million milestone payment triggered by the FDA
approval was paid to MediGene during December 2006. The Company classified this $14
million payment as an intangible asset when the product  was approved by the FDA.

The
license includes the use of a patent which expires during 2017 and several other patent
pending applications have been filed to the U.S. Patent and Trademark Office, which may
extend the patent life beyond 2017. However, VEREGENTM should
be difficult to substitute generically due to the natural configurations of the
catechins, which are proprietary. As a result, the Company expects the useful life of
VEREGENTM will be beyond the expiration date of patent(s). The
Company has estimated the economic life of the license based upon the expected future
cash flow contributions over the expected useful life to be 15 years.

BioSante
Pharmaceuticals License

On
November 7, 2006, the Company entered into an agreement with BioSante Pharmaceuticals
(BioSante) to market its estradiol transdermal gel, ELESTRINTM (f/k/a
Bio-E-Gel®) (estradiol), in the United States. ELESTRINTM,
which was approved by the FDA in the Fourth Quarter 2006, is to be prescribed for the
treatment of moderate-to-severe hot flashes in menopausal women and is available at
several dosage levels. ELESTRINTM is the lowest dose of
estradiol approved by the FDA for the treatment of these moderate-to-severe vasomotor
symptoms. In consideration for the grant of the Companys right to market ELESTRINTM,
the Company paid BioSante and its licensor for ELESTRINTMan
aggregate of $3.5 million during October 2006, which was expensed as research and
development during the Fourth Quarter of 2006, since there was no FDA approval at the
time of payment. Under the Companys agreement with BioSante, the FDA approval of ELESTRINTM triggered
regulatory milestones of $10.5 million, $7.0 million of which is payable in March 2007,
with the remaining $3.5 million payable in December 2007. Pursuant to the agreement the
Company is also obligated to pay a royalty on net sales (in the low teens) and
sales-based milestones. At December 31, 2006, the $10.5 million in regulatory milestones
have been recorded as a milestone payable and are non-interest bearing. The Company
utilized an imputed interest rate of 7.35% to determine the principal owed of
$10,115,083. The Company classified the $10,115,083 as an intangible asset during
December 2006 when the product  was approved by the FDA. The product is expected to launch during
2007.

The
license includes the use of a patent covering ELESTRINTM until
2021 and several other patent pending applications have been filed with the U.S. Patent
and Trademark Office, which may extend the patent life. The term of the license
agreement is the later of the expiration of patents or the 12th anniversary of the first
sale of the product. However, the Company can continue to commercialize ELESTRINTM after
the patents expire or the 12th anniversary of the first sale of the products. After the
term of the license agreement expires, the Company is not required to pay a royalty to
BioSante. The Company has estimated the economic life of the license based upon the
expected future cash flow contributions over the expected useful life to be 12 years.

Bioglan
Pharmaceuticals Company

On
August 10, 2004, the Company, through its wholly-owned subsidiary, Bioglan  (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.

| | F-26 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

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 Bioglan 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 a $125 million facility, consisting
of a $75 million term loan and a $50 million revolving line of credit. The $125 million
facility was replaced with the $110 million facility on November 14, 2005. For more
information on the Companys credit facility, see Note G.

The
FDA approved ADOXA® in 2001 as an Abbreviated New Drug
Application (ANDA). ADOXA® is not patent protected and
is subject to 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, 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 SkyePharma
plc 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. The Company currently pays royalties of 12.5% of net SOLARAZE®sales
to SkyePharma plc.

ZONALON® is
an FDA-approved product that is off-patent. ZONALON® is
currently manufactured for the Company on a purchase order basis by DPT Laboratories.

The
Company has a non-exclusive license for certain technology incorporated into the TX
SYSTEMS® product and Cardinal currently supplies the
product on a purchase order basis.

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. The purchase price was
allocated as follows:

|                                                |  | 
|----------------------------------------------- |  | 
|Accounts receivable, net                        |  | 
|Inventories                                     |  | 
|Deferred tax asset, net                         |  | 
|Prepaid expenses and other current assets       |  | 
|Property and equipment                          |  | 
|Intangibles assets subject to amortization:     | 
|Patent (10 year useful life)                    |  | 
|Core technology (20 year useful life)           |  | 
|Trademarks (20 year useful life)                |  | 
|                                                |  | 
|Total intangible assets subject to amortization |  | 
|Goodwill                                        |  | 
|Other assets                                    |  | 
|                                                |  | 
|Total assets acquired                           |  | 
|                                                |  | 
|Current liabilities                             |  | 

| | F-27 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

|                                        |  | 
|--------------------------------------- |  | 
|Long-term debt, less current maturities |  | 
|                                        |  | 
|Total liabilities assumed               |  | 
|                                        |  | 
|Net assets acquired                     |  | 
|                                        |  | 

Assets,
excluding intangible assets, and liabilities were recorded at their net book value, which
approximated their fair market value at the date of purchase.

The
amount paid in excess of the fair value of the net tangible assets was allocated to
separately identified intangible assets based upon an independent valuation analysis.

The
Company believes the core technology acquired during the Bioglan acquisition will provide
the Company future economic benefit beyond the relevant patent expiration date. Many
dermatology brands and technology survive patent expirations. One of the Companys core
competencies is the Companys marketing and life-cycle management of unpatented
technologies. The Company has historically extended product lives by repackaging,
reformulating and focusing sales and marketing, and the Company expects to continue these
activities for its current and future products.

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, for a period of 12 months after the acquisition, the Company was
able to receive credit on Bioglan products sold by Bioglan prior to the Companys
acquisition and returned to the Company within the 12 months immediately following the
acquisition, to the extent the amount of such returns exceeded Bioglans product return
reserve as of the acquisition 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 accounting for this potential receivable as a gain
contingency under SFAS No. 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, 2006 and 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,
|---------------------------- | --------------------------------
|                             | 2006                            
|Net sales                    |                                 
|                             |                                 
|Net income                   |                                 
|                             |                                 
|Basic net income per share   |                                 
|                             |                                 
|Diluted net income per share |                                 
|                             |                                 
|                             |                                 

| | F-28 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

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.

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 Commonwealth of Independent States (other than Armenia, Azerbaijan,
Georgia and Moldova), Latvia, Lithuania, Estonia, 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. Through February 2007, the Company entered into distribution
agreements with entities that will file regulatory applications and promote the products
listed earlier in this paragraph in the Commonwealth of Independent States, Saudi Arabia
and the United Arab Emirates. The Company is also currently in negotiations with a
potential distribution partner that intends to promote these products in Australia. The
Company anticipates commencing the distribution of certain of these products in Saudi
Arabia, the United Arab Emirates, Estonia and Latvia during 2007. The Company 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, 2006, approximately $2.6 million in distribution rights included in intangible assets
and $360,000 in royalties. The Company determined the expected useful life of these
products to be eight years based upon future cash flows.

Goodwill

Goodwill
for Kenwood Therapeutics at December 31, 2006 and 2005 was $290,196. Goodwill for Doak
Dermatologics (including Bioglan) at December 31, 2006 and 2005 was $27,188,111. During
2005, the Company increased goodwill by $547,354 primarily due to termination of a
pre-existing lease from the Bioglan acquisition. On August 10, 2004, the Company acquired
certain assets and assumed certain liabilities of Bioglan, 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 and then sub-lease. 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.

NOTE E - PROPERTY AND
EQUIPMENT

Property
and equipment are summarized as follows:

|                         | December 31,
|------------------------ | ------------
|                         | 2006        
|Furniture and Fixtures   |             
|Equipment                |             
|Leasehold Improvements   |             
|                         |             
|                         |             
|Accumulated Depreciation |             
|                         |             
|                         |             
|                         |             

| | F-29 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

NOTE F - INCOME TAXES

The
provision for income tax expense is as follows:

|         | Years Ended December 31,
|-------- | ------------------------
|         | 2006                    
|Current  |                         
|Federal  |                         
|State    |                         
|         |                         
|         |                         
|         |                         
|Deferred |                         
|Federal  |                         
|State    |                         
|         |                         
|         |                         
|         |                         
|         |                         
|         |                         

The
following is a summary of the items giving rise to deferred tax assets (liabilities) at
December 31, 2006 and 2005.

|                                      | December 31,
|------------------------------------- | ------------
|                                      | 2006        
|Current                               |             
|Allowance for doubtful accounts       |             
|Allowance on sales                    |             
|Inventory reserves and capitalization |             
|Other                                 |             
|                                      |             
|                                      |             
|                                      |             
|                                      |             
|                                      |             
|Long-term                             |             
|Intangibles and fixed assets          |             
|                                      |             
|                                      |             

As
of December 31, 2006 and 2005, 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 both 2006 and 2005, deferred tax
assets and current taxes payable were reduced by $296,886 relating to these warrants.
Additionally during the years ended December 31, 2006, 2005 and 2004, the Company
recorded approximately $356,000, $238,000 and $830,000 of tax benefits directly to paid
in capital resulting from the exercise of stock options.

| | F-30 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

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 $3.1
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:

|                                      | Years Ended December 31,
|------------------------------------- | ------------------------
|                                      | 2006                    
|Tax at statutory rate                 |                         
|State income tax expense, net of      |                         
|Federal tax effect                    |                         
|Share-based compensation expense from |                         
|incentive stock options as result of  |                         
|SFAS No. 123R                         |                         
|Other                                 |                         
|                                      |                         
|Effective tax rate                    |                         
|                                      |                         

With
the adoption of SFAS No. 123R on January 1, 2006, the Companys effective tax rate
increased from approximately 39% in 2005 to 42% in 2006 primarily because expensing
qualified (incentive) stock options results in a permanent tax difference.

NOTE G - SENIOR CREDIT
FACILITY AND LONG-TERM DEBT

Credit
Facility

On
November 14, 2005, the Company entered into a new $110 million credit facility, or the
Facility, with a syndicate of lenders led by Wachovia Bank, which has been amended from
time to time. The Facility is comprised of an $80 million term loan and a $30 million
revolving line of credit. The Facilitys term loan and revolving line of credit both
mature on November 14, 2010 and are secured by a lien upon substantially all of the
Companys assets, including those of its subsidiaries, and is guaranteed by the Companys
domestic subsidiaries.

Amounts
outstanding under the Facility, as amended to date, 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 Facility and outstanding letters of credit. At
December 31, 2006, the effective interest rate accrued by the Company was 9.35%.

The
financial covenants under the 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; (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; and (iii) not less than $25 million of unrestricted cash
and cash equivalents on its balance sheet at all times. Further, the Facility limits the
Companys ability to declare and pay cash dividends. As of December 31, 2006, the Company
is in compliance with the financial covenants under the Facility.

On
January 3, 2006, the Company received a notice from the administrative agent under the
Facility stating that the Company was in default under the 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

| | F-31 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

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 Facility. In connection with this
waiver, 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 previous
Facility and the convertible 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 30, 2005,
and Annual Report on Form 10-K for the year ended December 31, 2005, the Company would
increase, from $25 million to $45 million, the amount of restricted cash and investments
it will maintain at all times on its balance sheet, not incur any borrowings under the
revolving credit line portion of its Facility and provide them with monthly cash reports.
The Companys lenders ceased their accrual of default interest under the 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
Facility. On May 15, 2006, the Company received a waiver of this default from its lenders
under the Facility. In connection with this waiver, which also allowed the Company to
continue outstanding LIBOR Rate Loans under the 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 Facility with respect to the definition of Permitted Investments, the
calculation of Consolidated EBITDA to allow the Company to exclude, for financial
covenant purposes, the Companys initial $5.0 million payment to MediGene that the
Company classified as an expense in accordance with GAAP, and the delivery of budget
information. Upon satisfaction of its obligations under the waiver, the Company was
permitted to decrease its restricted cash and investments under the Facility by $20
million, from $45 million to $25 million.

On
September 25, 2006, the Company and its lenders further amended the Facility to, among
other things, permit the Company to repurchase up to $18 million of its outstanding
common stock through March 31, 2007, and up to $3 million of its outstanding common stock
during the remainder of the term of the Facility. In addition, this amendment allows the
Company to exclude all such repurchases from the calculation of the consolidated fixed
charge coverage ratio and further modifies the definition of Consolidated EBITDA to add
back to Consolidated Net Income certain professional, advisor and legal fees and costs
incurred in connection with the 2006 proxy contest or related litigation in an aggregate
amount not to exceed $2 million and to permit other adjustments relating to the effects
on the Companys recording of in-transit customer purchases as sales resulting from
changes in product shipping terms.

As
a result of the Company classifying at December 31, 2006 the $10.5 million of regulatory
milestone payments owed to BioSante during 2007 as a milestone payable, the Company
triggered a technical default under the Facility. On March 9, 2007, the Company received
a waiver of this default from its lenders under the Facility. Concurrently, the Companys
lenders agreed to, among other things, modify the definitions of Consolidated EBITDA to
add back the initial $3.5 million payment made by the Company for ELESTRINTM under
the BioSante License during the Fourth Quarter of 2006 that the Company classified as an
expense in accordance with U.S. GAAP, and further modify the definitions of Excess Cash
Flow to exclude cash payments made with respect to Permitted Acquisitions and Permitted
Acquisition and Scheduled Funded Debt Payments to permit the payment by the Company of
its other obligations under the BioSante License. Further, pursuant to the March 9, 2007
waiver, the lenders have the option of not requiring the Excess Cash Flow principal
prepayment due by March 31, 2007.

| | F-32 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

This principal prepayment may be up to  $2,600,000 and is included in current maturities of long-term debt.

As
of December 31, 2006, the Company has $69 million in borrowings under the Facilitys term
loan outstanding, no amounts outstanding under the Facilitys revolving line of credit
and approximately $72 million in cash and cash equivalents, short-term investments and
restricted cash and investments.

As
result of the waiver of the defaults on January 26, 2006, May 15, 2006 and March 9, 2007,
the Company has classified as a long-term liability $53.4 million at December 31, 2006
that would have otherwise been shown as current as a result of the defaults. Based upon
the Companys current projections, the Company will be in default under the Fixed
Coverage Charge Ratio set forth in the Facility beginning in the Third Quarter of 2007.
As a result of the projected default, the desire to reduce the interest rates charged
under the Facility and provide the Company increased flexibility to potentially enter
into future licensing, acquisition or other similar transactions, the Company currently
expects to enter into a new credit facility prior to the Third Quarter of 2007.

Long-term
debt consists of the following:

|                                             | December 31,
|-------------------------------------------- | ------------
|                                             | 2006        
|Facility                                     |             
|Other                                        |             
|                                             |             
|Total debt                                   |             
|Less current maturities:                     |             
|Facility                                     |             
|Other                                        |             
|                                             |             
|Total current maturities                     |             
|                                             |             
|                                             |             
|Total long-term debt less current maturities |             
|                                             |             

The
annual scheduled maturities of long-term debt as of December 31, 2006 were as follows:

|Years Ending December 31, | 
|------------------------- | 
|2007                      | 
|2008                      | 
|2009                      | 
|2010                      | 
|                          | 
|Total                     | 
|                          | 

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 approximates their fair
values at December 31, 2006 and 2005.

NOTE H - MILESTONE
PAYABLE

BioSante
Milestone

On
November 7, 2006, the Company entered into the Sublicense Agreement with BioSante for
ELESTRINTM. On December 18, 2006, ELESTRIN TM was
approved by the FDA, triggering a milestone payable to BioSante and its licensor for
ELESTRIN TM by the Company of $7.0 million due in March 2007.
In addition, the

| | F-33 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

FDA approval triggered another
milestone payable to BioSante and its licensor for ELESTRIN TM by
the Company of $3.5 million due in December 2007. The milestone payable to BioSante and
its licensor for ELESTRIN TM are non-interest bearing. For the
ELESTRIN TM milestone payable, the Company is utilizing an
imputed interest rate of 7.35%.

NOTE I - RELATED PARTY
TRANSACTIONS

Transactions
With an Affiliated Company

During
the year ended December 31, 2004, 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. Daniel Glassman, the Companys Chief Executive Officer, President and member of
the Companys Board of Directors, is a majority owner of Medimetrik. Medimetrik is a
privately held entity that currently has no operations but was principally engaged in the
business of market research services. It ceased providing services to the Company in June
2004 after its assets were sold to an unrelated third party.

Transactions
With Shareholders and Officers

The
Company currently leases approximately 33,000 square feet of office space at 383 Route 46
West, Fairfield, New Jersey, under a lease expiring on January 31, 2013. The owner and
manager of this property is a limited liability company (LLC) that is owned and
controlled by the Glassman family. The purpose of the LLC is to own and manage the
property at 383 Route 46 West. 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 $654,000, $614,000 and
$487,000 in 2006, 2005 and 2004, respectively. As of December 31, 2006, the estimated
assets of the LLC were approximately $1.6 million and the estimated liabilities were $1.4
million. Daniel and Iris Glassman own 10% and their children, including Bradley Glassman,
Senior Vice President Sales and Marketing of the Company, own 90% of this LLC.

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 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. As of July 1, 2006, Mr. Kriegsman resigned as Chairman of the
Companys Audit Committee but remained as a member 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 that was responsible for identifying and implementing the Companys
strategic plans. The committee was formed in the First Quarter of 2004 and as a result of
the issuance of the restricted stock, the Company expensed $125,036 during the First
Quarter of 2004.

On
October 26, 2006, the Company entered into a global Settlement Agreement (Settlement
Agreement) with Costa Brava Partnership III L.P., of which Roark, Rearden and Hamot, LLC
(RRH) is its general partner (Seth W. Hamot, a member of the Companys Board of
Directors, is the President of RRH) (collectively, Costa Brava). The Settlement
Agreement was executed prior to the close of the Companys 2006 Annual Meeting of
Stockholders. Costa Brava owns approximately 9.9% of the Companys Common Stock. For more
information on the Settlement Agreement, see Note K.6.

| | F-34 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

NOTE J - STOCKHOLDERS
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 stockholders of the
Company for a vote, and each Class B share entitles the holder thereof to five votes upon
certain matters submitted to the stockholders 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 stockholders 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
that 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 authorized 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
|-- |  | ---------------------

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 expired on October
26, 2006. 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. 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. The Facility permits the Company
to repurchase up to $18 million of its outstanding common stock through March 31, 2007,
and up to $3 million of its outstanding common stock during the remainder of the term of
the Facility. The Company has not established a new repurchase program.

|2. |  | Incentive
and Non-Qualified Stock Option Plan
|-- |  | ---------------------------------------------

For
information on the Companys Incentive and Non-Qualified Stock Plans, see Note B -
Incentive and non-qualified stock option plan.

|3. |  | Reserved
Shares
|-- |  | ---------------

The
following table summarizes shares of common stock reserved for issuance at December 31,
2006:

|Reserved for                                                     | Exercise 
Price | Number 
of shares 
Issuable
|---------------------------------------------------------------- | --------------- | ---------------------------
|Warrants for consulting services (expiring July 9, 2008)         |                 | $2.34                      
|Options available to be granted under the 1999 Stock Option Plan |                 | N/A                        
|Options outstanding under the 1990 and 1999 Stock Option Plans   |                 | (see Note B)               
|                                                                 |                 |                            
|                                                                 |                 | 2,428,554                  
|                                                                 |                 |                            

All
warrants listed above are exercisable at December 31, 2006.

| | F-35 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

The
number of shares covered by each outstanding warrant, 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, 2004 to December 31, 2006:

|                           | Number of
Warrants | Weighted Average
Exercise Price
|-------------------------- | ------------------ | -------------------------------
|Balance, January 1, 2004   |                    | 126,058                        
|                           |                    |                                
|Granted                    |                    | -0-                            
|Exercised                  |                    | (110,571                       
|Canceled or forfeited      |                    | (8,500                         
|                           |                    |                                
|Balance, December 31, 2004 |                    | 6,987                          
|                           |                    |                                
|Granted                    |                    | -0-                            
|Exercised                  |                    | -0-                            
|Canceled or forfeited      |                    | -0-                            
|                           |                    |                                
|Balance, December 31, 2005 |                    | 6,987                          
|                           |                    |                                
|Granted                    |                    | -0-                            
|Exercised                  |                    | -0-                            
|Canceled or forfeited      |                    | (987                           
|                           |                    |                                
|Balance, December 31, 2006 |                    | 6,000                          
|                           |                    |                                

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.

NOTE K - COMMITMENTS
AND CONTINGENCIES

|1. |  | Operating
Leases
|-- |  | ----------------

As
of December 31, 2006, the Company had operating lease commitments related to offices, a
warehouse and automobiles. Minimum future payments are as follows:

|Years Ending December 31, | Operating
Leases
|------------------------- | ----------------
|2007                      |                 
|2008                      |                 
|2009                      |                 
|2010                      |                 
|2011                      |                 
|Thereafter                |                 
|                          |                 
|                          |                 
|                          |                 

See
Note I  for discussion of the lease on the 383 Route 46 West premises.

| | F-36 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

Expenses
associated with operating leases for the years ended December 31, 2006, 2005 and 2004
were $1,924,239, $1,761,576 and $913,131, respectively.

On
August 10, 2004, the Company acquired certain assets and assumed certain liabilities of
Bioglan Pharmaceuticals Company and certain subsidiaries, including the 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 sublease the Malvern facilities, and the Company expected that
future sublease rentals would substantially offset lease costs under the existing Bioglan
lease agreement, and no liability would be recognized. On July 15, 2005, after
unsuccessful attempts to secure a subtenant, 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 and 2006, the Company entered into DSAs with three 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.5.

|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, 2011, 2010, 2009, 2008 and 2007, these
minimum purchase requirements are zero, $1,252,667, $2,772,000, $3,872,000 and
$2,519,333, respectively.

| | F-37 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

|6. |  | Legal
Proceedings
|-- |  | -----------------

Contract
Disputes

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 for the Company. A March 19, 2007
trial date has been set with respect to this dispute. The Company believes that it has
meritorious defenses to the plaintiffs allegations and valid bases to assert the
Companys counterclaims and demand for monetary damages. 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.

In
addition, the Company and the licensor of one of the Companys products currently
disagree as to the interpretation of certain provisions in their license that relate to
sales based milestones that may be payable by the Company. During the Fourth Quarter of
2006, the Company accrued $500,000 as a probable resolution of this contractual
disagreement.

Stockholder
Lawsuits

The
Company, along with certain of its officers and directors, were named defendants in
thirteen federal securities lawsuits that were consolidated on May 5, 2005 in the United
States District Court 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 its initial response on July 20, 2005 seeking
to dismiss the amended consolidated complaint in its entirety with prejudice. On March
23, 2006, 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 intends to vigorously defend itself. Pursuant to a
June 28, 2006 Scheduling Conference with the Court and the Courts Pretrial Scheduling
Order of that date, discovery in the federal securities class action lawsuit has begun.
Plaintiffs filed a motion for class certification on January 15, 2007. Defendants
response is due on April 2, 2007.

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. Plaintiffs in the state shareholder derivative
actions filed a consolidated amended derivative complaint on May 12, 2006. The Company
and the individual defendants filed its initial response on July 17, 2006 seeking to
dismiss the alleged derivative complaint in its entirety with prejudice. On October 30,
2006, the court granted the defendants motion to dismiss and dismissed the derivative
complaint with prejudice. Plaintiffs filed a notice of appeal on December 14, 2006.

Further,
a federal shareholder derivative action was filed in the United States District Court 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. After the Company and the other defendants filed on June 16, 2006 a motion to
dismiss the derivative claim in this action, the shareholder filed an amended complaint
on July 14, 2006 alleging a sole count for breach of fiduciary duties arising out of
substantially the same allegations made in the federal securities class action lawsuit.
The Company and the individual defendants have filed a motion to dismiss the alleged
derivative complaint in its entirety with prejudice.

| | F-38 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

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 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 the inquiry may divert the efforts and attention of the Companys
management team from normal business operations. During the Second Quarter 2006, the
Audit Committee completed its previously announced internal review related to the SECs
informal inquiry. The Audit Committee conducted its review with the assistance of
independent counsel. The Audit Committees conclusions were delivered to the full Board
of Directors, the SEC and the Companys independent accountants. Furthermore, during
2006, the Company remediated the material weaknesses described in our 2005 Form 10-K, our
Form 10-Q/A for the quarter ended March 31, 2006, and our Forms 10-Q for the quarters
ended June 30, 2006 and September 30, 2006, respectively.

Settlement
of Proxy Contest

On
October 26, 2006, the Company entered into the global Settlement Agreement with Costa
Brava. The Settlement Agreement was executed prior to the close of the Companys 2006
Annual Meeting of Stockholders. Costa Brava owns approximately 9.9% of the Companys
Common Stock.

Under
the terms of the Settlement Agreement, the Company and Costa Brava agreed that (1) based
on the preliminary vote estimate at the Annual Meeting, as only Seth Hamot and Douglas
Linton received the requisite common stockholder vote to be elected as directors, and in
view of the withdrawal of John Ross as a nominee for director, Mr. Hamot and Mr. Linton
will appoint William Murphy as the third common stockholder director; (2) in view of the
preliminary vote estimate, the Company will separate the position of Chairman of the
Board and Chief Executive Officer and will consider a proposal to eliminate the Companys
dual class stock structure, each to occur no later than the earlier of the Companys 2007
annual meeting of stockholders or June 30, 2007; (3) Costa Brava will dismiss all pending
litigation against the Company in Delaware with prejudice; (4) the Company will pay Costa
Brava $1.15 million in full settlement of all litigation claims, which amount was accrued
as of September 30, 2006; and (5) Costa Brava will release the Company from all claims
arising prior to the Settlement Agreement.

At
a meeting of the Board of Directors held on November 7, 2006, Mr. Hamot and Mr. Linton
elected Mr. Murphy as the third common stock director. The Company paid Costa Brava the
$1.15 million and on November 2, 2006, Costa Brava dismissed with prejudice all currently
pending litigation against the Company in Delaware. The Company also recorded an
additional $950,000 of expense for advisory and legal fees relating to the settlement of
this matter. During January 2007, the Board separated the positions of Chairman of the
Board and Chief Executive Officer.

General
Litigation

The
Company and its operating subsidiaries are parties to other routine actions and
proceedings incidental to the Companys 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

| | F-39 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

operations. The Company discloses
material amounts or ranges 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 2006 and 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 $498,000, $414,000 and $277,000 incurred for the
years ended December 31, 2006, 2005 and 2004, respectively.

|8. |  | Authorized
Generic Agreement
|-- |  | ----------------------------

On
December 13, 2005, the Company entered into a Licensing and Distribution Agreement with
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 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, 75mg 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 2006 and 2005, the Company earned $3,227,689 and $607,302, respectively, in
royalty revenue under the Agreement.

The
Agreement commenced on December 13, 2005 and continues, unless otherwise earlier
terminated, for a period of ten 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 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 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.

|9. |  | Collaboration
and License Agreements
|-- |  | ------------------------------------

For
Collaboration and License Agreements entered into by the Company during 2006 with
MediGene AG and BioSante, see NOTE D - INTANGIBLE ASSETS.

NOTE L - 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

| | F-40 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

reconciliation of the weighted
average basic common shares outstanding to weighted average diluted common shares
outstanding for the years ended December 31, 2006, 2005 and 2004 are as follows:

|                               | 2006 | 2005             | 2004
|------------------------------ | ---- | ---------------- | ----
|Basic Shares                   |      | 16,410,000       |     
|Dilution:                      |     
|Convertible Notes              |      |                 |     
|Stock options and warrants     |      | 140,000          |     
|                               |      |                  |     
|Diluted shares                 |      | 16,550,000       |     
|                               |      |                  |     
|                               |      |                  |     
|Net income as reported         |      | $  9,668,023     |     
|After-tax interest expense and |     
|other from Convertible Notes   |      |                 |     
|                               |      |                  |     
|Adjusted net income            |      | $  9,668,023     |     
|                               |      |                  |     
|                               |      |                  |     
|Net income per share           |     
|Basic                          |      | $           0.59 |     
|Diluted                        |      | $           0.58 |     
|                               |      |                  |     

In
addition to stock options and warrants included in the above computation for the year
ended December 31, 2006, options to purchase 481,384 shares of common stock at prices
ranging from $14.93 to $27.12 per share were outstanding and not included for the purpose
of calculating per share amounts for the year ended December 31, 2006. Further, in
addition to stock options and warrants included in the above computation for the year
ended December 31, 2005, options to purchase 1,604,636 shares of common stock at prices
ranging from $11.18 to $27.12 per share were outstanding and not included and in addition
to stock options and warrants included in the above computation for the year ended
December 31, 2004, options to purchase 222,000 shares of common stock at prices ranging
from $23.18 to $27.12 per share were outstanding and not included. These options were
excluded from the calculation of diluted income per share because the exercise price of
the option was greater than the average market price of the common shares or because of
the anti-dilutive impact on the calculation of certain options associated with
unrecognized compensation and related tax benefits.

In
connection with the closing of the $110 million Facility on November 14, 2005, the
Convertible Notes were 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 Convertible Notes have been
extinguished, the Company no longer has 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 M - BUSINESS
SEGMENT INFORMATION

The
Companys three reportable segments are Doak Dermatologics (dermatology and podiatry),
which includes the previously reported Bioglan Pharmaceuticals Corp. (dermatology),
Kenwood Therapeutics (gastrointestinal, womens health, respiratory, nutritional and
other) and A.Aarons (generic), which began operations in the Second Quarter of 2006. 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; Kenwood Therapeutics products are marketed, promoted and distributed primarily
to physicians practicing in the field of internal medicine/ gastroenterology and womens
health; and A.Aarons products are the generic versions of some of Doak Dermatologics
and Kenwood Therapeutics products.

| | F-41 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

The
Company previously reported Bioglan Pharmaceuticals Corp. as a separate reportable
segment. Effective January 1, 2006, based upon the following, the Company started to
report both Bioglan Pharmaceuticals Corp. and Doak Dermatologics as a single reportable
segment, Doak Dermatologics:

| | 1. |  | Bioglan
Pharmaceuticals Corp. is now operated and managed                   within one management
group as Doak Dermatologics.                   Accordingly, Bioglan Pharmaceuticals
Corp.s chief operating                   decision maker does not regularly review its
operating results                   in order to make decisions about resources to be
allocated                   solely to Bioglan Pharmaceuticals Corp.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. |  | Both
Doak Dermatologics and Bioglan Pharmaceuticals Corp. have                   similar (a)
types of products (dermatology and podiatry); (b)                   types of production
processes (both are outsourced and have                   similar gross profit
percentages); (c) classes of customers                   for their products (both are
marketed to dermatologists and                   podiatrists); (d) methods used to
distribute their products                   (both are distributed through the Companys
third party                   warehouse to primarily large drug wholesalers using the
same                   sales force); and (e) types of regulatory environments.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
accounting policies used to develop segment information correspond to those described in
the summary of significant accounting policies in the notes to these financial
statements. The reportable segments are distinct business units with no inter-segment
sales. The following information about the three segments are for the years ended
December 31, 2006, 2005 and 2004:

|                                                   | Years Ended December 31,
|-------------------------------------------------- | ------------------------
|                                                   | 2006                    
|Net sales:                                         |                         
|*Doak Dermatologics, Inc.                          |                         
|Kenwood Therapeutics                               |                         
|A.Aarons                                           |                         
|                                                   |                         
|                                                   |                         
|                                                   |                         
|Depreciation and amortization:                     |                         
|*Doak Dermatologics, Inc.                          |                         
|Kenwood Therapeutics                               |                         
|A.Aarons                                           |                         
|                                                   |                         
|                                                   |                         
|                                                   |                         
|Income (loss) before income tax expense (benefit): |                         
|*Doak Dermatologics, Inc.                          |                         
|Kenwood Therapeutics                               |                         
|A.Aarons                                           |                         
|                                                   |                         
|                                                   |                         
|                                                   |                         
|Income tax expense (benefit):                      |                         
|*Doak Dermatologics, Inc.                          |                         
|Kenwood Therapeutics                               |                         
|A.Aarons                                           |                         
|                                                   |                         
|                                                   |                         
|                                                   |                         
|                                                   |                         
|Net income (loss):                                 |                         
|*Doak Dermatologics, Inc.                          |                         
|Kenwood Therapeutics                               |                         
|A.Aarons                                           |                         
|                                                   |                         
|                                                   |                         
|                                                   |                         

| | F-42 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

|                                   | Years Ended December 31,
|---------------------------------- | ------------------------
|                                   | 2006                    
|                                   |                         
|Geographic information (revenues): |                         
|*Doak Dermatologics, Inc.          |                         
|United States                      |                         
|Other countries                    |                         
|                                   |                         
|                                   |                         
|                                   |                         
|Kenwood Therapeutics               |                         
|United States                      |                         
|Other countries                    |                         
|                                   |                         
|                                   |                         
|                                   |                         
|A.Aarons                           |                         
|United States                      |                         
|Other countries                    |                         
|                                   |                         
|                                   | $                      
|                                   |                         
|Net sales by category:             |                         
|Dermatology and                    |                         
|Podiatry                           |                         
|Gastrointestinal                   |                         
|Respiratory                        |                         
|Nutritional                        |                         
|Other                              |                         
|                                   |                         
|                                   |                         
|                                   |                         

|                         | December 31,
|------------------------ | ------------
|Total Assets:            | 2006        
|Doak Dermatologics, Inc. |             
|Kenwood Therapeutics     |             
|A.Aarons                 |             
|**Unallocated assets     |             
|                         |             
|                         |             
|                         |             

| |  | 
| |  | 

|* |  | Includes
Bioglan Pharmaceuticals Corp.
|- |  | --------------------------------------

|** |  | Unallocated
assets include cash and cash equivalents,                   short-term investments,
accounts receivable, deferred tax                   assets, prepaid expenses and other,
prepaid income taxes,                   deferred financing costs and restricted cash and
investments.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(a) |  | Certain
amounts have been consolidated to be consistent with current year presentation.
|--- |  | ---------------------------------------------------------------------------------------

The
Companys sales and cost of goods sold are product identifiable and recorded to each
business segment by product. Additionally, certain operating expenses, such as those
attributable to product marketing, are product specific and also charged directly to the
product and corresponding segment. The Company allocates all other expenses that are not
product identifiable to each of the segments based on a percentage of the net sales of
each segment to the Company totals. Accordingly, the expense allocation percentages can
differ between years depending on the segments proportionate share of net sales.

| | F-43 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

NOTE N - QUARTERLY
FINANCIAL INFORMATION (UNAUDITED)

The
table below lists the quarterly financial information for fiscal 2006 and 2005. All
figures in thousands, except per share amounts, and certain amounts do not total to the
annual amounts due to rounding.

|                                                  | Quarter Ended 2006 | Quarter Ended 2005
|------------------------------------------------- | ------------------ | ------------------
|                                                  | March              | June              
|Net sales                                         |                    | $ 34,753          
|Cost of sales (1)                                 |                    | 5,006             
|                                                  |                    |                   
|Gross profit                                      |                    | 29,747            
|                                                  |                    |                   
|Selling, general and                              |                   
|administrative                                    |                    | 19,893            
|Depreciation and                                  |                   
|amortization                                      |                    | 2,550             
|Research and development                          |                    | 5,263             
|Write-off of deferred                             |                   
|financing costs                                   |                    |                  
|Interest expense                                  |                    | 2,114             
|Interest income                                   |                    | (427              
|Losses (gains) on                                 |                   
|short-term investments                            |                    |                  
|                                                  |                    |                   
|                                                  |                    | 29,393            
|Income (loss) before income tax expense (benefit) |                    | 354               
|Income tax expense (benefit)                      |                    | 149               
|                                                  |                    |                   
|Net income (loss)                                 |                    | 205               
|                                                  |                    |                   
|Basic net income (loss)                           |                   
|per common share                                  |                    | $     0.01        
|                                                  |                    |                   
|Diluted net income                                |                   
|(loss) per common share                           |                    | $     0.01        
|                                                  |                    |                   
|                                                  |                    |                   
|Number of shares- basic                           |                    | 16,380            
|                                                  |                    |                   
|Number of shares- diluted                         |                    | 16,500            
|                                                  |                    |                   

|(1) |  | Amounts
exclude amortization of intangible assets related to acquired products.
|--- |  | -------------------------------------------------------------------------------

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.

| | F-44 | 
| | ---- | 

---

Bradley
Pharmaceuticals, Inc. and Subsidiaries
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006

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.

| | F-45 | 
| | ---- | 

---

SCHEDULE II

BRADLEY
PHARMACEUTICALS, INC. AND SUBSIDIARIES 
                                           VALUATION
AND QUALIFYING ACCOUNTS 
                                     YEARS ENDED DECEMBER 31, 2004,
2005 AND 2006(IN THOUSANDS)

|Classification | Balance
Beginning of
Year | Additions 
(Deductions)                       | Charged to 
Costs and 
Expenses | Balance End 
of Year
|-------------- | ------------------------- | --------------------------------------------- | ------------------------------- | --------------------
|2004           |                           | Allowance for doubtful accounts(1)(3)         |                                 | $     290           
|               |                           | Allowance for chargebacks and discounts(1)(3) |                                 | $  1,341            
|               |                           | Allowance for rebates(2)(3)                   |                                 | $  4,089            
|               |                           | Allowance for returns(2)(3)                   |                                 | $     926           
|2005           |                           | Allowance for doubtful accounts(1)            |                                 | $     764           
|               |                           | Allowance for chargebacks and discounts(1)    |                                 | $     823           
|               |                           | Allowance for rebates(2)                      |                                 | $  2,954            
|               |                           | Allowance for returns(2)                      |                                 | $24,075             
|2006           |                           | Allowance for doubtful accounts(1)            |                                 | $  1,430            
|               |                           | Allowance for chargebacks and discounts(1)    |                                 | $     457           
|               |                           | Allowance for rebates(2)                      |                                 | $  5,032            
|               |                           | Allowance for returns(2)                      |                                 | $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
| | ---- |  | -------------------------------