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

                                    FORM 10-K

      FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
[X]  ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 1998

                                       OR

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

                         Commission File Number 1-10581

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

     Florida                                          No. 59-1513162  
-------------------------------              -----------------------------------
(State or other jurisdiction of
 incorporation or organization)             (I.R.S. employer identification no.)

 4890 W. Kennedy Blvd., Suite 400, Tampa, FL                     33609 
 ----------------------------------------------              -----------
(Address of principal executive offices)                      (Zip Code)

       Registrant's telephone number, including area code: (813) 281-0961
                                                          ------------------

          Securities registered pursuant to section 12(b) of the Act:
<TABLE>
<CAPTION>

 Title of each class                Name of each  exchange on which registered
 -------------------                -------------------------------------------
<S>                                         <C>                                                                                 
Common Stock, $.02 par value                    American Stock Exchange and Pacific Exchange, Inc.
12% Convertible Senior Subordinated Debentures  American Stock Exchange and Pacific Exchange, Inc.
Class A Redeemable Warrants                     American Stock Exchange and Pacific Exchange, Inc.
Class B Redeemable Warrants                     American Stock Exchange
</TABLE>
        Securities registered pursuant to section 12(g) of the Act: None

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 if 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 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. [ X ]

State the aggregate market value of the voting and non-voting common equity held
by  non-affiliates  of the  registrant.  The  aggregate  market  value  shall be
computed by reference to the price at which the common  equity was sold,  or the
average bid and asked  prices of such  common  equity,  as of a  specified  date
within 60 days prior to the date of filing.

 Title of Class               Aggregate Market Value  As of Close of Business on
----------------------------  ----------------------  --------------------------
Common Stock, $.02 par value    $10,618,140                  March 26, 1999

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

 Title of Class               Shares Outstanding      As of Close of Business on
----------------------------  ------------------      --------------------------
Common Stock, $.02 par value   8,443,192                     March 26, 1999

                      DOCUMENTS INCORPORATED BY REFERENCE
 Proxy Statement for the 1999 Annual Meeting of Stockholders - Incorporated by
                    Reference into Part III of this Form 10-K
<PAGE>
                                   Part I




         Item 1.           Business

         General

         Bentley  Pharmaceuticals,  Inc. (the  "Registrant") is an international
         pharmaceutical  company  engaged in the  manufacturing,  marketing  and
         distribution  of  pharmaceutical  products  in Spain and  export of its
         products  from  Spain to  countries  such as Russia,  Holland,  Poland,
         England and others. The Registrant  recently acquired rights to certain
         U.S. and international  patents and related technology covering methods
         to enhance the absorption of drugs delivered to biological tissues. The
         Registrant  plans to develop this technology and target U.S.,  European
         and other international markets with the new product applications.  The
         Registrant  was  organized  under the laws of the State of  Florida  in
         February 1974.

         In Spain, the Registrant  acquires,  licenses or develops and registers
         late stage products, and manufactures, packages and distributes its own
         products  and  products   under   contract  for  other   pharmaceutical
         companies.  The Registrant sold its French subsidiary,  Chimos/LBF S.A.
         (referred to herein as Chimos/LBF) in June 1997 which, until such time,
         consisted of the low margin  brokerage of fine  chemicals,  sourcing of
         raw materials and pharmaceutical intermediaries and the distribution of
         biotechnology  or orphan  drugs.  The  Registrant  marketed  disposable
         linens and other related  products in the United States until  December
         1998,  when it  discontinued  such  activities in order to focus on the
         acquisition  and development of permeation  enhancement  technology and
         potential  product  applications.  The  percentage of the  Registrant's
         total revenues for the year ended December 31, 1998 attributable to its
         operations in Spain and the United States are approximately 99% and 1%,
         respectively. The Registrant's pharmaceutical operations in Spain are a
         result of its 1992  acquisition of Rimafar S.A.  (subsequently  renamed
         and referred to herein as Laboratorios Belmac S.A.).

         During  1998,  the  Registrant  negotiated  to acquire a  manufacturing
         facility in the United  States and a portfolio of products from Schwarz
         Pharma.  The Registrant decided to abandon this effort in May 1998 and,
         consequently,  recorded a  non-recurring  charge of  $1,176,000  in the
         second  quarter  of 1998,  representing  previously  capitalized  costs
         related to this and other abandoned acquisitions.

         The strategic  focus of the  Registrant  has shifted in response to the
         evolution  of  the  global  health  care  environment.  The  Registrant
         emphasizes  product  distribution  in Spain,  strategic  alliances  and
         product acquisitions. Its overall strategy has been expanded due to the
         February 1999 acquisition of permeation enhancement  technology,  which
         will  require  limited  development   expenditures  while  providing  a
         multitude of opportunities for strategic partnerships and/or alliances,
         which  are  anticipated  to  lead to  milestone  payments  and  royalty
         arrangements  with the  strategic  partners  


                                       2
<PAGE>

         bearing the majority of development  costs. This technology is based on
         FDA GRAS (Generally Regarded As Safe) compounds, which should result in
         significantly reduced pre-clinical studies.

         The Registrant's  sales by its primary product lines are as follows (In
         Thousands):

                                                 For the Year Ended December 31,
                                                 -------------------------------
                                                    1998       1997    1996
                                                    ----       ----    ----
         Pharmaceutical and Consumer 
             Health Care Products                 $15,148   $14,520   $22,924
         Disposable Linen Products                     95       382       209
                                                  --------  -------    ------
                             Total                $15,243   $14,902   $23,133
                                                  =======   =======   =======

         Product Lines

         The Registrant currently manufactures, markets and sells pharmaceutical
         products  in Spain and  exports  certain of those  products  to various
         countries.  The Registrant  discontinued  its disposable  linen product
         line during 1998.

         Pharmaceutical Manufacturing and Marketing in Spain

         Laboratorios   Belmac  S.A.,  the  Registrant's   subsidiary  in  Spain
         ("Laboratorios   Belmac"),   manufactures  and  markets  pharmaceutical
         products within four primary therapeutic  categories of cardiovascular,
         gastrointestinal, neurological, and infectious diseases. The Registrant
         manufactures  or distributes  approximately  80 dosage forms of various
         pharmaceuticals in its manufacturing  facility in Zaragoza,  Spain both
         for its own sales and under  contract  for  others.  The  manufacturing
         facility was  renovated in 1995 and brought into full  compliance  with
         European Union Good Manufacturing Practices (GMPs) for solid and liquid
         dosage  forms.  Among the  products  Laboratorios  Belmac  manufactures
         and/or  distributes,  each of which is registered with Spain's Ministry
         of Health, are:

                  Belmazol(R).  Belmazol,  whose generic name is omeprazole,  is
         used  primarily  for  hyperacidity  problems  related  to  ulcers  and,
         secondarily,  for the  treatment of  gastroesophageal  reflux  disease.
         Omeprazole   is  a  proton   pump   inhibitor,   which   inhibits   the
         hydrogen/potassium  ATPase enzyme  system at the  secretory  surface of
         gastric  parietal  cells.  Because this enzyme system is regarded as an
         acid pump within the gastric  mucosa,  it has been  characterized  as a
         gastric  acid pump  inhibitor  in that it blocks the final step of acid
         production. This compound has been used in combination with antibiotics
         for the  treatment  of ulcers when it is  suspected  that  Helicobacter
         pylori, a bacteria,  is the etiologic agent.  Omeprazole is marketed in
         the United States by Astra-Merck.

                  Controlvas(R). Controlvas, whose generic name is enalapril, is
         an angiotensin  converting  enzyme inhibitor useful in the treatment of
         hypertension and congestive heart failure. Enalapril is marketed in the
         United States by Merck & Company.

                                       3
<PAGE>


                  Belmalax(R).  Belmalax,  whose generic name is  lactulose,  is
         used primarily for treating  constipation in the elderly and, secondly,
         for the treatment of hepatic  encephalopathy,  a central nervous system
         impairment. The degradation of lactulose in the intestine acidifies the
         colon  contents.  Ammonia,  which  is a cause of  encephalopathy,  will
         migrate  into the  colon,  be  transformed  into the  ammonium  ion and
         eliminated from the body.

                  Senioral(TM).  Senioral is a combination product useful in the
         treatment of congestive symptoms of the upper respiratory tract.

                  Arzimol(TM).  Arzimol,  Bristol Myers Squibb's  Cefprozil,  is
         marketed in Spain by the Registrant under a distribution agreement with
         Bristol Myers Squibb.  Cefprozil is the largest selling oral antibiotic
         in the cephalosporin class in the United States.

                  EZ  Detect  Home  Test(TM).  The EZ Detect  Home Test  detects
         minute traces of blood in the stool. The presence of blood in the stool
         may indicate  bleeding  problems such as cancer of the colon or rectum,
         ulcers,   hemorrhoids,   polyps,  colitis,   diverticulitis  and  other
         intestinal disorders.  The test is more safe and sanitary and easier to
         use than other test kits on the  market.  The test is  manufactured  by
         Biomerica,  Inc.  in  Newport  Beach,  California  and  distributed  by
         Laboratorios Belmac.

                  EZ-H.P.(TM).  EZ-H.P.  is a rapid  version of the  original H.
         pylori   Test  GAP  that  was  the  first   test  of  its  kind  to  be
         commercialized.  The H.  pylori  Test GAP was  developed  to detect the
         presence of Helicobacter  pylori,  the bacterium  responsible for up to
         90% of all  ulcers.  The EZ-H.P.  can be used in  doctors'  offices and
         requires very few steps to perform compared to other products. The test
         is  manufactured  by Biomerica,  Inc. in Newport Beach,  California and
         distributed by Laboratorios Belmac.

                  Finedal(R).   Finedal   is  an   anti-obesity   agent  of  the
         amphetamine  class,  chlorbenzorex,  for the  treatment  of  obesity in
         conjunction  with  dietary  control but with  reduced  adverse  effects
         common to that class of compounds.

                  Loperamida(R).  Loperamida,  whose  generic name is loperamide
         hydrochloride,  a product  launched by the Registrant in Spain in March
         1995,  is a compound  that  inhibits  gastrointestinal  motility and is
         useful in the treatment of diarrheal conditions and colitis. Loperamide
         hydrochloride  is  marketed  in  the  United  States  by  several  drug
         companies, including McNeil, Proctor & Gamble, Novo Pharm and Geneva.

                  Lactoliofil(R).  Lactoliofil is an anti-diarrheal  agent whose
         mechanism of action is the restoration of gastrointestinal flora.

                  Ergodavur(R), Neurodavur(R) and Neurodavur Plus(R). Ergodavur,
         Neurodavur  and  Neurodavur  Plus are vitamin B compounds  used for the
         enhancement of activity in the central and peripheral nervous systems.

                                       4
<PAGE>



                  Diflamil(R).  Diflamil is an anti-inflammatory  analgesic used
         in the treatment of arthritis.

                  Resorborina(R).  Resorborina  is a  compound  that  has  local
         anesthetic  and  anti-inflammatory  properties  for  the  treatment  of
         pharyngitis and mouth afflictions.

                  Onico-Fitex(R)  and Fitex  E(R).  Onico-Fitex  and Fitex E are
         compounds used to treat local fungal infections,  especially around the
         nail beds.

                  Otogen(R).  Otogen is a product used for the  treatment of ear
         infections and ear pain.

                  Spirometon(R).  Spirometon is a combination of  spironolactone
         and  bendroflumethazide  useful in the  treatment of  congestive  heart
         failure,  hypertension and edema.  (Spirometon  diuretics  preserve the
         body's supply of potassium).

                  Anacalcit(R).  Anacalcit is a calcium-binding product used for
         the treatment of kidney stones. The Spanish government has specifically
         requested that Laboratorios Belmac continue to manufacture this product
         as Laboratorios  Belmac is the only supplier of this type of product in
         Spain.

                  Rofanten(R).  Rofanten  is  the  Registrant's  formulation  of
         naproxen sodium, an anti-inflammatory/analgesic.

                  Relaxibys(R).  Relaxibys  is a  combination  of  an  analgesic
         (paracetamol)  and a  muscle  relaxant  (carisoprodol)  purchased  from
         Econature.

                  Generic  Antibiotics.  Laboratorios Belmac sells various other
         types of generic  antibiotics  for which  patent  protection  no longer
         exists,  such as  amoxicillin,  ampicillin  (Bactosone  Retard(R))  and
         injectable forms of penicillin.

         Controlvas and Belmazol,  together,  represent approximately 54% of the
         sales of Laboratorios Belmac.

         As the Spanish government did not recognize  international  conventions
         for patent  protection  for  pharmaceutical  products  until 1992,  the
         Registrant,  while owning the right to manufacture  the drugs described
         above as well as other  pharmaceuticals,  will  often be one of several
         companies  which has the right to  manufacture  and sell products which
         are  patent  protected  in  other  parts  of  the  world.  The  Spanish
         regulatory  authorities specify the amounts each company can charge for
         its products.  Therefore, the Registrant's competitors may sell similar
         products at the same, higher or lower prices. Many of these competitors
         are larger,  better capitalized and have larger sales networks than the
         Registrant.

         The  Registrant  maintains  an internal  marketing  and sales staff of
         approximately  74,  including  70  employees  and 4  independent  sales
         representatives   working  on   commission   in  Spain  to  market  the

                                       5

<PAGE>

         pharmaceuticals  it produces.  The Registrant's sales force competes by
         emphasizing highly individualized customer service in all major cities,
         provinces and territorial islands of Spain.

         In  1995,  the  Registrant  commenced  the  export  of  pharmaceuticals
         manufactured  by  Laboratorios   Belmac  outside  Spain  through  local
         distributors  and brokers,  particularly  in Eastern  Europe,  Northern
         Africa, China, the Middle East, Central and South America.

         Contract  Manufacturing.  Since Laboratorios  Belmac currently utilizes
         less than 100% of its plant capacity to  manufacture  its own products,
         Laboratorios   Belmac  has   engaged  in  contract   manufacturing   of
         pharmaceuticals  owned  by  other  companies  such  as  Rhone-Poulenc's
         subsidiary   Natterman   S.A.,   Italpharmaco,    Ratiopharm,    Juste,
         Wasserman-Chiese, Vir, Laboratorios Juventus, S.A. and Ethypharm. Other
         contracts are contemplated in the future.  The Registrant  manufactures
         these  pharmaceuticals to its customers'  specifications,  and packages
         them  with the  customers'  labels.  Occasionally,  to  assure  product
         uniformity and quality,  employees of these  customers will work at the
         Registrant's  manufacturing facility. As a result of Spain's entry into
         the European Union, Spain implemented new pharmaceutical  manufacturing
         standards  and the  Registrant  was  required to modify its facility to
         comply with these regulations.  Laboratorios  Belmac  accomplished such
         renovations  without  interruption of sales or  distribution.  After an
         inspection,  in July  1995 the  operating  areas of the  facility  were
         determined to be in compliance  with European GMPs by Spain's  Ministry
         of Health.  Additional  renovations  were undertaken in 1998 to further
         upgrade the Registrant's manufacturing facility.

         Laboratorios   Belmac   purchased   dossiers   and/or   submitted   new
         registrations  for 10 new products during 1998  including:  Fluoxitine,
         Diltiazem SR, Pentoxyfiline, SR and Acyclovir. The Spanish registration
         process  for  these  products  could  span  one  to  two  years  before
         authorization to market these products is received.

         Laboratorios  Belmac also formed a subsidiary  in Chile during 1998 and
         has also filed  registrations  to obtain  market  approval  for certain
         products which it intends to market in South America.

         Products to which the Registrant Owns Rights

         The  Registrant  acquired  patents and related  permeation  enhancement
         technology in February 1999 and plans to develop such  technology  into
         product  applications.  (See "--Research and Development").  Due to the
         expense and time commitment required to bring a pharmaceutical  product
         to market,  the  Registrant  is  seeking  co-marketing,  licensing  and
         promotional   arrangements   and  other   collaborations   with   other
         international   or  national   pharmaceutical   companies.   Generally,
         management believes that the Registrant can compete more effectively in
         certain markets through collaborative  arrangements with companies that
         have an  established  presence  in a  particular  geographic  area  and
         greater  resources  than  those  of  the  Registrant.  There  can be no
         assurance that the  Registrant  will have the resources to bring any of
         these products to market or, if such resources are available,  that the
         products can be successfully developed, manufactured or marketed.

                                       6
<PAGE>

         Partnership Venture

         In March  1994 a  wholly-owned  subsidiary  of the  Registrant,  Belmac
         Healthcare  Corporation,  formed a partnership through its wholly-owned
         subsidiary,  Belmac Hygiene,  Inc.,  with a wholly-owned  subsidiary of
         Maximed Corporation, which is headquartered in New York, and planned to
         market,  through this  partnership,  a range of hydrogel based feminine
         health care products,  including a  contraceptive,  an  antiseptic,  an
         antifungal  and an  antibacterial.  In December  1994,  the  Registrant
         commenced  litigation against its partner claiming  interference in the
         management  of  the   partnership  and   misrepresentation   under  the
         partnership  agreement.  The  Registrant  was awarded a judgment in the
         amount of $7.68 million in 1998,  which was affirmed by the U.S.  Court
         of Appeals.  The Registrant is seeking an assignment of the patents and
         related  know-how  from the  partnership  and its  partner  as  partial
         settlement of the judgment.  The partnership is not actively engaged in
         the  development  of  any  products.  In  addition  to  establishing  a
         receivable on its books, the Registrant has established a reserve equal
         to the receivable.

          Sources and Availability of Raw Materials

         The Registrant purchases, in the ordinary course of business, necessary
         raw materials  and supplies  essential to the  Registrant's  operations
         from numerous  suppliers.  There have been no availability  problems or
         supply shortages nor are any anticipated.

         Patents, Trademarks, Licenses and Registrations

         Few of  the  products  currently  being  sold  by  the  Registrant  are
         protected by patents owned by the Registrant.  However, where possible,
         patents and trademarks will be sought and obtained in the United States
         and in all countries of principal marketing interest to the Registrant.
         The Registrant has filed or has rights to patent applications. However,
         there  can  be no  assurance  that  its  rights  will  afford  adequate
         protection to the Registrant.  In addition,  the Registrant also relies
         on   unpatented   proprietary   technology  in  the   development   and
         commercialization  of its products.  There is no assurance  that others
         may not independently develop the same or similar technology.

         The Registrant also relies upon trade secrets,  unpatented  proprietary
         know-how  and  continuing  technological  innovations  to  develop  its
         competitive  position.  However,  there can be no assurance that others
         may not acquire or  independently  develop  similar  technology  or, if
         patents  in all major  countries  are not  issued  with  respect to the
         Registrant's  products,  that the  Registrant  will be able to maintain
         information  pertinent to such  research as  proprietary  technology or
         trade secrets.

         The  Registrant   recently  acquired  patents  and  related  permeation
         enhancement  technology  and  plans  to  develop  alternative  delivery
         methods  for  currently  marketed  products,  thereby  extending  their
         marketing exclusivity.  The patent coverage includes the United States,
         Japan, Korea and most major European markets.


                                       7

<PAGE>

         Laboratorios Belmac owns approximately 50 trademarks for pharmaceutical
         products  and one  patent,  which were  granted  by  Spain's  Bureau of
         Patents,  and Trademarks.  In Spain,  patents expire after 20 years and
         trademarks expire after 10 years, but can be renewed.  All prescription
         pharmaceutical  products marketed by Laboratorios  Belmac in Spain have
         been  registered  with and approved by Spain's  Ministry of Health.  To
         register a pharmaceutical  with the Ministry requires the submission of
         a registration  dossier which includes all  pre-clinical,  clinical and
         manufacturing  information.  The registration  process  generally takes
         approximately  two  years or more.  There  can be no  assurance  that a
         competitor  has not or will not  submit  additional  registrations  for
         products  substantially  similar  to  those  marketed  by  Laboratorios
         Belmac.

         Competition

         All of the  Registrant's  current and future products face  competition
         both from  existing  drugs and products and from new drugs and products
         being  developed  by  others.  This  competition  potentially  includes
         national and multi-national pharmaceutical and health care companies of
         all sizes. Many of these other  pharmaceutical and health care concerns
         have greater  financial  resources,  technical staffs and manufacturing
         and  marketing   capabilities   than  the  Registrant.   Acceptance  by
         hospitals,  physicians  and  patients  is crucial  to the  success of a
         pharmaceutical or health care product.

         The Registrant competes primarily in Spain, which is a large, developed
         population  center in Europe.  Since Spain is a member of the  European
         Union, the Registrant expects to be able to target the European Union's
         larger  population as  harmonization  eliminates  the barriers  between
         countries.  

         Laboratorios  Belmac competes with both large  multinational  companies
         and national Spanish companies, which produce most of the same products
         Laboratorios Belmac manufactures. For example, there are currently many
         companies,  such  as  Schering-Plough,  S.A.,  which  market  and  sell
         omeprazole.  Similarly,  many companies currently sell enalapril,  with
         Merck, Sharp & Dome de Espana, S.A. being the product leader. Others of
         the products sold by Laboratorios Belmac, such as Onico-Fitex, are more
         unusual  and  have  fewer  competitors.   The  contract   manufacturing
         performed by Laboratorios Belmac has a number of competitors, including
         Tadec Meiji Farma, Bama Geve, ReigJofre, Aristegui, and Esteve, S.A.

         Customers

         The incidence of certain  infectious  diseases,  which occur at various
         times in  different  areas of the  world,  affects  the  demand for the
         Registrant's  antibiotic  products when they are marketed in each area.
         Orders for the Registrant's  products are generally filled on a current
         basis,  and no order backlog  existed at December 31, 1998. No material
         portion of the  Registrant's  business is subject to  renegotiation  of
         profits or termination of contracts at the election of any governmental
         authority.  There were no customers during the years ended December 31,
         1998 or 1997,  which  accounted  for at least  10% of the  Registrant's
         consolidated revenues.  Sales of approximately  $2,200,000 to Pharmacie
         Centrale des Hopitaux by the Registrant's  subsidiary in France,  which
         has  since  been  sold,   accounted  for   approximately   10%  of  the
         Registrant's sales for the year ended December 31, 1996.


                                       8
<PAGE>

         
         Research and Development

         The Registrant has decreased its research and development spending over
         the past few  years.  Research  and  development  activities  have been
         performed in the past,  under  contract,  by various  universities  and
         consulting research  laboratories.  However, the Registrant's  strategy
         has recently shifted due to the February 1999 acquisition of permeation
         enhancement   technology,   which  will  require  limited   development
         expenditures while providing a multitude of opportunities for strategic
         partnerships and/or alliances; however, additional research will not be
         required.  The strategic alliances are anticipated to lead to milestone
         payments and royalty  arrangements with the strategic  partners bearing
         the majority of development costs. This technology is based on FDA GRAS
         (Generally  Regarded  As  Safe)  compounds,   which  should  result  in
         significantly reduced pre-clinical trials.

         The Registrant spent $153,000,  $324,000 and $29,000 in the years ended
         December  31,  1998,  1997 and  1996,  respectively,  on  research  and
         development  to  develop  new  products  and  processes  and to improve
         existing  products and processes.  Expenditures  in 1998 were primarily
         incurred  in Spain and were  concentrated  in the  development  of late
         stage products.  The Registrant intends to continue to carefully manage
         its research  and  development  activities  with the  establishment  of
         priorities  based on both  technical  and  commercial  criteria  and to
         carefully supervise such expenditures in view of its limited resources.
         Research and  development  expenditures in 1999 will be greater than in
         recent  years,  however,  due to planned  development  of the  recently
         acquired permeation enhancement technology described above.

         Laboratorios  Belmac is engaged in limited  research  of drug  delivery
         systems   ("DDS"),   such  as   sustained   release  and  time  release
         formulations, through a collaborative venture with a customer.

         Regulation

         The   development,   manufacture,   sale,  and   distribution   of  the
         Registrant's   products   are  subject  to   comprehensive   government
         regulation,  and the general trend is toward more stringent regulation.
         Government  regulation,  which includes detailed inspection and control
         over   research   laboratory   procedures,   clinical   investigations,
         manufacturing,   marketing,   and  distribution  practices  by  various
         federal,  state, and local agencies,  substantially increases the time,
         difficulty and cost incurred in obtaining and  maintaining the approval
         to market newly developed and existing products.

         United States. The steps required before a pharmaceutical  agent may be
         marketed in the United States  include (i)  preclinical  laboratory and
         animal tests, (ii) the submission to the FDA of an Investigational  New
         Drug  Application  ("IND"),  which must become  effective  before human
         clinical trials may commence,  (iii) adequate and well-controlled human
         clinical  trials to establish the safety and efficacy of the drug, (iv)
         the  submission of a New Drug  Application  ("NDA") to the FDA, and (v)
         the FDA approval of the NDA prior to any commercial sale or shipment of
         the drug. In addition 

                                       9
<PAGE>


         to   obtaining   FDA   approval  for  each   product,   each   domestic
         drug-manufacturing  establishment  must be  registered  with  the  FDA.
         Domestic   manufacturing   establishments   are   subject  to  biennial
         inspections by the FDA and must comply with current GMPs for drugs.  To
         supply  products for use in the United  States,  foreign  manufacturing
         establishments  must  comply  with  GMPs and are  subject  to  periodic
         inspection by the FDA or by regulatory  authorities  in such  countries
         under reciprocal agreements with the FDA.


         Clinical trials are typically conducted in three sequential phases that
         may overlap. In Phase I, the initial introduction of the pharmaceutical
         into healthy  human  volunteers,  the emphasis is on testing for safety
         (adverse effects), dosage tolerance, metabolism, excretion and clinical
         pharmacology. Phase II involves studies in a limited patient population
         to determine the efficacy of the  pharmaceutical  for specific targeted
         indications,  to determine  dosage  tolerance and optimal dosage and to
         identify  possible  adverse  side  effects  and  safety  risks.  Once a
         compound  is found to be  effective  and to have an  acceptable  safety
         profile in Phase II  evaluations,  Phase III trials are  undertaken  to
         evaluate  clinical  efficacy  further  and to  further  test for safety
         within an expanded patient population at multiple clinical study sites.
         The FDA reviews both the  clinical  plans and the results of the trials
         and may  discontinue  the  trials at any time if there are  significant
         safety issues.

         The results of the preclinical and clinical trials are submitted to the
         FDA in the form of a NDA for marketing  approval.  The approval process
         is  affected  by a number of  factors,  including  the  severity of the
         disease,  the availability of alternative  treatments and the risks and
         benefits demonstrated in clinical trials.  Additional animal studies or
         clinical trials may be requested  during the FDA review process and may
         delay   marketing   approval.   After  FDA  approval  for  the  initial
         indications,  further  clinical  trials  would  be  necessary  to  gain
         approval for the use of the product for any additional indications. The
         FDA may also  require  post-marketing  testing to monitor  for  adverse
         effects, which can involve significant expense.

         Under the Orphan Drug Act, the FDA may  designate a product or products
         as having  Orphan Drug status to treat a "rare  disease or  condition,"
         which is a disease or condition  that affects  populations of less than
         200,000  individuals  in the United  States or, if victims of a disease
         number  more than  200,000,  the sponsor  establishes  that it does not
         realistically  anticipate  its  product  sales  will be  sufficient  to
         recover its costs.  If a product is designated an Orphan Drug, then the
         sponsor is entitled to recover its costs and the sponsor is entitled to
         receive  certain  incentives to undertake the development and marketing
         of the product,  including  limited tax credits and  high-priority  FDA
         review of a NDA.  In  addition,  the  sponsor  that  obtains  the first
         marketing  approval for a designated Orphan Drug for a given indication
         is  eligible  to receive  marketing  exclusivity  for a period of seven
         years.

         Spain.  As a manufacturer  in Spain,  which is a member of the European
         Union, Laboratorios Belmac is subject to the regulations enacted by the
         European Union. Prior to Spain's entry into the European Union in 1993,
         the  pharmaceutical  regulations  in  Spain  were  less  stringent  and
         Laboratorios  Belmac,  along with all  Spanish  companies,  have had to
         modify  their  procedures  to adapt to the new  

                                       10

<PAGE>

         regulations,  which are similar to the  regulations  promulgated by the
         United States Food & Drug  Administration  discussed above. In general,
         these regulations are essentially consistent with the FDA and require a
         manufacturer of a proposed  pharmaceutical to show efficacy and safety.
         The development  process in Spain goes through the same phases (i.e. I,
         II, III) as in the United States to assure their safety and efficacy. A
         dossier on each  pharmaceutical is prepared,  which takes approximately
         two  years  or  more  for  review  by  the  Ministry  of  Health.   The
         pharmaceutical  can then only be sold to the public with a prescription
         from a medical doctor.

         General. Continuing reviews of the utilization, safety, and efficacy of
         health  care  products  and their  components  are being  conducted  by
         industry,  government agencies,  and others. Such studies, which employ
         increasingly  sophisticated  methods  and  techniques,  can  call  into
         question the utilization,  safety, and efficacy of previously  marketed
         products and in some cases have resulted, and may in the future result,
         in the  discontinuance  of such  products  and give rise to claims  for
         damages  from persons who believe they have been injured as a result of
         their use. The  Registrant  has product  liability  insurance  for such
         potential  claims;  however,  no such  claims  have ever been  asserted
         against the Registrant.

         The  cost  of  human   health  care   continues  to  be  a  subject  of
         investigation and action by governmental agencies,  legislative bodies,
         and  private  organizations.  In the United  States,  most  states have
         enacted  generic  substitution  legislation  requiring or  permitting a
         dispensing pharmacist to substitute a different  manufacturer's version
         of a drug  for  the  one  prescribed.  Federal  and  state  governments
         continue  their  efforts  to  reduce  costs of  subsidized  heath  care
         programs, including restrictions on amounts agencies will reimburse for
         the use of products. Efforts to reduce health care costs are also being
         made in the private  sector.  Health care  providers  have responded by
         instituting  various cost reduction and  containment  measures of their
         own. It is not  possible to predict the extent to which the  Registrant
         or the health care industry in general might be affected by the matters
         discussed above.

         Many   countries,   directly  or   indirectly   through   reimbursement
         limitations, control the selling price of certain health care products.
         Furthermore,  many  developing  countries  limit the importation of raw
         materials and finished products.  In Western Europe,  efforts are under
         way by the European  Union to harmonize  technical  standards  for many
         products, including drugs and medical devices, and to make more uniform
         the  requirements  for marketing  approval from the various  regulatory
         agencies.   The  Registrant  is  subject  to  reimbursement  status  of
         prescription products in Spain and periodically products are identified
         as  non-reimbursable  by the social  security  system.  Although  these
         products can continue to be marketed, the non-reimbursable status could
         reduce the market size of such products.

         Although  the  Registrant  marketed  disposable  linen  products in the
         United States until  December  1998,  the majority of the  Registrant's
         sales are in Spain.  International  operations  are  subject to certain
         additional  risks  inherent in conducting  business  outside the United
         States,  including  price and currency  exchange  controls,  changes in
         currency exchange rates,  limitations on foreign participation in local
         enterprise,  expropriation,  nationalization,  and  other  governmental
         action.


                                       11
<PAGE>


         To  the  best  of  its  knowledge,   the  Registrant  is  presently  in
         substantial compliance with all existing applicable  environmental laws
         and does not  anticipate  that such  compliance  will  have a  material
         effect on its future  capital  expenditures,  earnings  or  competitive
         position with respect to any of its operations.

         Employees

         The Registrant and its subsidiaries employ  approximately 141 people, 6
         of whom are employed in the United  States and 135 in Spain as of March
         26, 1999. Of such employees,  approximately 48 are principally  engaged
         in  manufacturing  activities,  74 in sales and marketing,  including 4
         independent sales  representatives,  3 in product development and 16 in
         management and administration. In general, the Registrant considers its
         relations with its employees to be good.

         Financial   Information   Relating  to  Geographic  Areas  and  Foreign
         Operations

         For information regarding the Registrant's foreign operations, see Note
         12 of Notes to Consolidated Financial Statements.

         Item 2.  Properties
                  ----------

         United States

         The Registrant's  corporate  headquarters are presently  located at Two
         Urban Centre,  Suite 400, 4890 West Kennedy Boulevard,  Tampa,  Florida
         33609 and include  2,500 square feet,  which are occupied in accordance
         with a lease  agreement  which expires in October 1999.  The Registrant
         has entered into a five year lease  agreement,  which  expires in March
         2004,  whereby  it has leased  3,200  square  feet of office  space and
         laboratory  space at 65 Lafayette  Road,  North  Hampton,  NH, where it
         plans to relocate its corporate headquarters in the summer of 1999.

         Spain

         Manufacturing is performed at the Registrant's  facilities in Zaragoza,
         Spain.  These  facilities  were  renovated  in 1995 to comply  with the
         requirements  for European GMPs and further  renovated during 1998. The
         facilities, which are owned by the Registrant, consist of approximately
         55,000  square feet  located in a prime  industrial  park and seated on
         sufficient   acreage  that  would  allow  for  future  expansion.   The
         manufacturing  facility  is capable  of  producing  tablets,  capsules,
         suppositories, creams, ointments, lotions, liquids and sachets, as well
         as microgranulated and  microencapsulated  products.  The facility also
         includes  analytical  chemistry,  quality control and quality assurance
         laboratories. The GMPs certification allows the Registrant to undertake
         contract  manufacturing  for a number of  international  pharmaceutical
         companies either engaged in or contemplating emergence into the Spanish
         market or for export. The Registrant's  administrative offices in Spain
         are located in Madrid in approximately  5,500 square feet of renovated,
         leased offices, which leases expire in 2000.

                                       12
<PAGE>


         The  Registrant's  facilities are deemed suitable and provide  adequate
         productive  capacity  for the  foreseeable  future.  In the  event  the
         Registrant considers it necessary or appropriate,  the Registrant is of
         the opinion that comparable facilities can be located.

         Item 3.  Legal Proceedings
                  -----------------

         Not applicable.

         Item 4.  Submission of Matters to a Vote of Security Holders
                  ---------------------------------------------------

         Not applicable.


                                       13
<PAGE>


                                     Part II

         Item 5.  Market for Registrant's Common Equity and Related Stockholder
                  --------------------------------------------------------------
                  Matters 
                  -------

         On July 31, 1990 and March 27,  1996,  the  Registrant's  Common  Stock
         began trading on the American Stock Exchange and the Pacific  Exchange,
         Inc.,  respectively,  under the symbol BNT.  The  following  table sets
         forth the high and low sales prices for the Common Stock as reported on
         the American Stock Exchange for the periods indicated.

         Quarter Ended                High Sales Price       Low Sales Price
         -------------                ----------------       ---------------

         March 31, 1997                     $4.25                $2.56
         June 30, 1997                       3.69                 2.75
         September 30, 1997                  3.63                 2.56
         December 31, 1997                   3.25                 2.13

         March 31, 1998                     $3.38                $2.13
         June 30, 1998                       3.06                 2.19
         September 30, 1998                  2.38                  .81
         December 31, 1998                   1.69                  .81

         As of March  26,  1999  there  were  1,970  holders  of  record  of the
         Registrant's  Common  Stock,  excluding  shares held in street name. No
         dividends  have ever been declared or paid on the  Registrant's  Common
         Stock and the Registrant  does not  anticipate  paying any dividends in
         the foreseeable future.

         Item 6.    Selected Financial Data
                    -----------------------

         The following  selected  consolidated  financial data of the Registrant
         and  its   subsidiaries   has  been  derived   from  the   Registrant's
         consolidated  financial statements.  The selected financial data should
         be read in conjunction  with the  Registrant's  consolidated  financial
         statements  and the  notes  thereto,  which  should  be  read in  their
         entirety and are included elsewhere in this Annual Report on Form 10-K.
         All per share  information  prior to July 25, 1995 has been adjusted to
         give  retroactive  effect to a  one-for-ten  reverse stock split of the
         Registrant's   Common  Stock  effected  on  that  date.  (See  Item  7.
         Management's Discussion and Analysis of Financial Condition and Results
         of Operations.)


                                       14
<PAGE>
<TABLE>
<CAPTION>
  



         Summary of Operations
                                                                   Fiscal Year Ended
                                                                   December 31,  
                                       -------------------------------------------------------------------        

(In  thousands, except per share       1998(1)         1997(2)        1996(3)       1995(3)       1994(4)
data)                                  -------         -------        -------       -------       -------


<S>                                  <C>            <C>             <C>            <C>           <C>    
Sales                                  $15,243        $14,902         $23,133        $31,437       $27,010

Cost of sales                            6,601          8,010          15,638         25,586        21,931
                                     ---------          -----          ------         ------      --------

Gross margin                             8,642          6,892           7,495          5,851         5,079
                                                                                    

Operating expenses                      10,710          8,438           8,794          8,198         9,050
                                     ---------          -----           -----          -----      --------

Other (income) expense                     808          2,269           1,174            (21)         (393)  
                                     ---------          -----           -----         ------      -------
                                                                                                     

Loss before extraordinary item          (2,876)        (3,815)         (2,473)        (2,326)       (3,578)
                                     ---------        -------         -------        -------      --------

Net loss                               $(2,876)       $(3,815)        $(2,919)       $(2,326)      $(3,578)
                                      ========        =======        ========       ========      ========

Loss  per  Common   Share  before
extraordinary item                       $(.35)         $(.97)          $(.79)         $(.83)       $(1.56)
                                     =========         ======          ======         ======      ========

Basic net loss per Common Share          $(.35)         $(.97)          $(.92)         $(.83)       $(1.56)
                                     =========         ======          ======         ======      ========

Weighted average number of
Common Shares outstanding                8,431          4,072           3,334          2,999         2,395
                                     =========          =====           =====          =====      ========

Balance Sheet Information
                                                                   At December 31,
                                     ---------------------------------------------------------------------

(In thousands)                          1998(1)        1997(2)         1996(3)        1995(3)      1994(4)
                                        -------        -------         -------        -------      -------

Working capital                          $6,835        $10,758          $4,265         $3,113       $1,928

Non-current assets                        7,857          6,034           6,746          6,523        5,644

Total assets                             20,318         21,043          16,558         16,290       16,332

Non-current liabilities                   5,700          5,549           5,513          2,252          336

Redeemable Preferred
Stock                                       -0-          2,338           2,203          2,068        2,256

Common Stockholders'
Equity                                    8,992          8,905           3,295          5,316        4,980
</TABLE>

             (1) Operating  expenses in 1998  include  non-recurring  charges of
                 $1,176,000  related to the write-off of previously  capitalized
                 acquisition costs,  which resulted from abandoning the attempts
                 to  acquire  certain   assets  from  Schwarz  Pharma as well as
                 certain other acquisitions. All of the Registrants' outstanding
                 Redeemable Preferred  Stock  was converted into Common Stock in
                 October 1998.

                                       15

<PAGE>

             
             (2) Revenues   declined   during  1997  due  to  the   Registrant's
                 divestiture  of  Chimos/LBF  on June 26, 1997.  Other  (income)
                 expense for the year ended December 31, 1997 included  interest
                 expense of $1,086,000  and a provision for loss on  disposition
                 of  subsidiary,  which  totaled  $591,000,  including  realized
                 exchange loss of $386,000 due to  fluctuations  in the currency
                 exchange rates used to translate the foreign currency financial
                 statements and a loss of $205,000  recognized  upon the sale of
                 Chimos/LBF. The Registrant also recorded a provision for income
                 taxes during 1997 totaling $621,000.  During the fourth quarter
                 of 1997,  the  Registrant  received  proceeds of  approximately
                 $9,800,000 from the exercise of approximately 4,900,000 Class A
                 Warrants. 

             (3) Revenues in France declined  beginning in the second quarter of
                 1996, due to the March 31, 1996 expiration of the  distribution
                 agreement  for  the  product  Ceredase,   which  accounted  for
                 approximately  60% of the  Registrant's  revenues  in 1995  and
                 approximately  54% of its  revenues in the quarter  ended March
                 31, 1996.  Ceredase gross margins,  as a percent of sales, were
                 approximately  5% during the quarter ended March 31, 1996.  The
                 Registrant  completed  a  public  offering  in  February  1996,
                 whereby it issued  $6,900,000 of 12%  convertible  subordinated
                 debentures and warrants.  Consequently, the Registrant incurred
                 interest  expense  totaling  $1,227,000 in 1996. The Registrant
                 incurred an extraordinary charge of $446,000,  representing the
                 unamortized   discount  and  issuance  costs  at  the  date  of
                 repayment of Notes from its October  1995  private  placements.
                 Operating  expenses  for  the  year  ended  December  31,  1996
                 included approximately  $340,000,  representing a provision for
                 goodwill impairment related to Chimos/LBF.  

(4)              The  Registrant  sold  its  Spanish  marketing  rights  to  its
                 ciprofloxacin  antibiotic,  Belmacina(R),  in 1994 and included
                 the gain thereon  (approximately  $884,000)  in Other  (Income)
                 Expense in the year ended  December  31, 1994 and  recorded the
                 anticipated  gain on sale of the related  trademark of $380,000
                 as  deferred  revenue  as  of  December  31,  1994,  which  was
                 recognized  as  revenue in the year ended  December  31,  1995.
                 Other  (Income)  Expense for the year ended  December  31, 1995
                 also  included the  recognition  of income of $360,000 from the
                 commercialization   of  a   certain   drug   provided   by  the
                 Registrant's  former  Chairman  and  Chief  Executive  Officer,
                 $533,000 of expense  related to the  settlement  of  litigation
                 with the Registrant's former Chief Financial Officer and income
                 of  $375,000  due  to the  reversal  of an  over-accrual  for a
                 liability.

         Item 7.     Management's Discussion and Analysis of Financial
                     -------------------------------------------------
                         Condition and Results of Operations
                         -----------------------------------

         GENERAL

         The  Registrant is presently an  international  pharmaceutical  company
         with its primary focus on the

                                       16

<PAGE>

         manufacturing, marketing and distribution of pharmaceutical products in
         Spain  and the  improvement  of new  drugs  through  new drug  delivery
         technologies,  which it intends to  commercialize  in the United States
         and other major  markets.  Historically  most of its revenues have come
         from its operations in Europe.

         The  Registrant  incurred  a net  loss of  $2,876,000  on  revenues  of
         $15,243,000  for the year  ended  December  31,  1998.  The  Registrant
         intends to continue to focus its efforts on business  activities  which
         management  believes should result in operating  profits in the future,
         of which  there  can be no  assurance.  To  improve  its  results,  the
         Registrant's   management  will  focus  on  increasing   higher  margin
         pharmaceutical   product   sales,   controlling   expenses,   carefully
         allocating  resources  to  limited  product  development  projects  and
         potentially  acquiring  marketable products or profitable  companies in
         the United States or Europe that are compatible  with the  Registrant's
         strategy for growth.  (See  "--Liquidity and Capital  Resources").  For
         business segment information on the Registrant's operations outside the
         United  States,  see  Note  12  of  Notes  to  Consolidated   Financial
         Statements.

         RESULTS OF OPERATIONS

         Fiscal Year Ended  December 31, 1998 versus Fiscal Year Ended  December
         -----------------------------------------------------------------------
         31, 1997
         --------

         The  Registrant  reported  revenues  of  $15,243,000  and a net loss of
         $2,876,000  or $.35 per common  share for the year ended  December  31,
         1998 compared to revenues of  $14,902,000  and a net loss of $3,815,000
         or $.97 per common  share for the prior year.  Excluding  the effect of
         the  nonrecurring  charge of $1,176,000,  representing the write-off of
         previously  capitalized  acquisition  costs,  the Registrant's net loss
         would have been  $1,700,000 or $.21 per common share for the year ended
         December 31, 1998.

         The 2% increase in revenues is primarily the result of the Registrant's
         Spanish subsidiary,  Laboratorios Belmac S.A., reporting an increase in
         revenues of 23% in local  currency in the year ended  December 31, 1998
         compared to the prior year;  however,  fluctuations in foreign currency
         exchange rates reduced the increase to 21% or $2,657,000 when expressed
         in U.S.  dollars.  This was partially  offset by the effect of the June
         1997 divestiture of the  Registrant's  French  subsidiary,  Chimos/LBF,
         which generated approximately $2,029,000 during the year ended December
         31, 1997, compared to no revenue in 1998.

         Gross  margins for the year ended  December  31,  1998  improved to 57%
         compared  to gross  margins of 46% in the prior  year,  primarily  as a
         result of: (i)  improvement  in  Laboratorios  Belmac's  average  gross
         margin from 51% to 57% and (ii) the low gross margins  associated  with
         Chimos/LBF, which was divested in June 1997.

         Selling, general and administrative expenses increased by $1,259,000 or
         16% to  $9,078,000  for the year ended  December  31, 1998  compared to
         $7,819,000 for the prior year. A significant  portion of these expenses
         are  marketing  and  selling   costs,   which  are  necessary  for  the
         Registrant's  plans to increase sales and market share in Spain. To the
         extent  practical,  however,  the  Registrant  intends to continue  its
         efforts to control general and administrative expenses in its effort to
         reach and maintain


                                       17

<PAGE>

         profitability.

         Research  and  development  expenses  were  $153,000 for the year ended
         December 31, 1998 compared to $324,000 for the prior year.  The minimal
         expenditures  in research  and  development  reflect  the  Registrant's
         recent historical  de-emphasis of basic research and redirection of its
         resources to  developmental  expenses  necessary  for  expansion of its
         portfolio of marketed  products.  The Registrant intends to continue to
         carefully  manage its research and development  expenditures;  however,
         1999  expenditures  will be greater than in 1998 due to planned limited
         development   expenditures  related  to  recently  acquired  permeation
         enhancement technology.

         Included in operating  expenses for the year ended December 31, 1998 is
         a nonrecurring  charge of $1,176,000,  which  represents the previously
         capitalized  costs  specific to the abandoned  Schwarz Pharma and other
         related  acquisitions.  These costs were  written off during the second
         quarter of 1998 after negotiations ended during May of 1998.

         Interest  expense  totaled  $1,076,000  for the year ended December 31,
         1998 compared to  $1,086,000  for the prior year.  Interest  income was
         $499,000 for the year ended  December 31, 1998 compared to $123,000 for
         the prior year.  The increase  was with  respect to interest  earned on
         higher short-term  interest bearing investment balances during the year
         ended  December  31,  1998,  which  resulted  from the  proceeds of the
         exercise of approximately  4,900,000 Class A Warrants during the fourth
         quarter of 1997.

         As a  result  of the  June  1997  sale of  Chimos/LBF,  the  Registrant
         recorded a  provision  for loss on  disposition  of  subsidiary,  which
         totaled $591,000,  including realized exchange loss of $386,000,  and a
         loss of  $205,000  during  the six  months  ended  June 30,  1997.  The
         Registrant  recorded a provision for income taxes totaling $236,000 for
         the year ended December 31, 1998,  including  $516,000 of foreign taxes
         as a result of  taxable  income  earned in Spain,  which was  partially
         offset by a U.S. income tax refund in 1998 of $280,000,  which resulted
         from use of foreign tax credits.

         The  Registrant  reported a loss from  operations of $2,068,000 for the
         year ended  December 31, 1998 compared to $1,546,000 in the prior year,
         primarily   due  to  the  1998   nonrecurring   charge  of   $1,176,000
         representing the write-off of previously  capitalized costs specific to
         the abandoned Schwarz Pharma and other related acquisitions.  Excluding
         the  effect of the  nonrecurring  charge,  the  Registrant's  loss from
         operations  for the year  ended  December  31,  1998  would  have  been
         $892,000.  The  effect  of  combining  non-operating  items,  primarily
         interest  expense  of  $1,076,000,  interest  income  of  $499,000  and
         provision  for  income  taxes  of  $236,000  resulted  in a net loss of
         $2,876,000,  or $.35 per common  share for the year ended  December 31,
         1998,  compared  to the  net  loss in the  comparable  prior  year,  of
         $3,815,000,  or $.97  per  common  share.  Excluding  the  nonrecurring
         charge,  the net loss  would  have been  $1,700,000  or $.21 per common
         share for the year ended December 31, 1998.

         Fiscal Year Ended  December 31, 1997 versus Fiscal Year Ended  December
         31, 1996

         The  Registrant  reported  revenues  of  $14,902,000  and a net loss of
         $3,815,000  or $.97 per common 


                                       18
<PAGE>


         share for the year ended  December  31,  1997  compared  to revenues of
         $23,133,000  and a net loss of  $2,919,000 or $.92 per common share for
         the same period in the prior year.

         Sales and Cost of Sales.  The 36%  decrease in revenues  was  primarily
         attributable  to an 83%  decrease in sales by the  Registrant's  French
         subsidiary,  Chimos/LBF,  to $2,029,000.  The decrease in  Chimos/LBF's
         revenues was due to its  divestiture on June 26, 1997,  combined with a
         decrease  in its sales  prior to the  divestiture.  This  decrease  was
         partially  offset  by a 28%  increase  in  sales  (calculated  in local
         currency) by the Registrant's Spanish subsidiary,  Laboratorios Belmac.
         However,  fluctuation  in foreign  currency  exchange rates reduced the
         increase  in  sales  to  11%,  when  reported  in  U.S.   dollars,   to
         $12,491,000.  The Registrant's  revenues began to decline  beginning in
         the second quarter of 1996, due to the March 31, 1996 expiration of its
         distribution agreement for the product,  Ceredase,  which accounted for
         approximately  60% of its revenues in the year ended December 31, 1995.
         Ceredase gross margins,  as a percent of sales, were  approximately 5%.
         Gross margins for the year ended December 31, 1997 improved to 46% when
         compared  to gross  margins of 32% in the prior  year,  primarily  as a
         result of the  higher  proportion  of sales from  Laboratorios  Belmac,
         whose sales generated  significantly higher gross margins than those of
         Chimos/LBF,   as  well  as  the  loss  of  low-margin  Ceredase  sales.
         Chimos/LBF  generated  relatively low gross margins  (approximately 21%
         for the year ended December 31, 1997) compared to Laboratorios  Belmac,
         which experienced  substantially higher margins  (approximately 51% for
         the year ended December 31, 1997).

         Operating Expenses.  Selling,  general and administrative expenses were
         $7,819,000  for the year ended December 31, 1997 compared to $7,923,000
         for the same period in the prior year. Chimos/LBF's divestiture in June
         1997 resulted in lower selling,  general and administrative expenses in
         France;  however,  this  decrease  was  partially  offset by  increased
         selling  expenses  incurred  by the Spanish  subsidiary  to support the
         increase in sales volume  generated  during the year ended December 31,
         1997.

         Research  and  development  expenses  were  $324,000 for the year ended
         December 31, 1997 compared to $29,000 for the prior year.  The research
         and development  expenditures for the year ended December 31, 1997 were
         primarily related to bio-equivalency  studies,  which were necessary in
         order  to  obtain  approval  to  export  products  from  Spain to other
         countries.

         Depreciation and amortization expenses were $295,000 for the year ended
         December  31,  1997,  compared to  $502,000  for the same period of the
         prior year.  The decrease was primarily due to (i) the  divestiture  of
         Chimos/LBF;  and (ii) the disposal of certain  fixed assets during 1996
         as a result of the  Registrant's  move to smaller,  more cost effective
         office space.

         Other  Income/Expense.  Interest  expense was  $1,086,000  for the year
         ended  December 31, 1997 compared to $1,227,000  for the same period of
         the prior year. The decrease reflected primarily the effect of retiring
         high-yield  promissory  notes in February 1996, using proceeds from the
         Public  Offering,  thereby  lowering  the  effective  interest  rate on
         outstanding debt, offset by higher  outstanding  balances on short term
         borrowings,  which were used to finance working capital needs. Interest
         income was  $123,000 for the year ended  December 31, 1997  compared to
         $103,000 for the same period of the prior year. The slight increase was
         due to interest earned on higher short-term interest bearing investment
         balances in the current year,  which  resulted from the proceeds of the
         exercise of approximately  4,900,000 Class A Warrants during the fourth
         quarter of 1997.


                                       19
<PAGE>

         Other (income) expenses for the year ended December 31, 1997 included a
         provision  for  loss  on  disposition  of  subsidiary,   which  totaled
         $591,000,   including  realized  exchange  loss  of  $386,000,  due  to
         fluctuations  in the  currency  exchange  rates used to  translate  the
         foreign currency financial statements and a loss of $205,000 recognized
         upon the sale of  Chimos/LBF.  Other  (income)  expenses  in 1996  were
         primarily  comprised of the loss of  approximately  $71,000  recognized
         upon the disposition of certain  unnecessary fixed assets and leasehold
         improvements  associated with the  Registrant's  relocation to smaller,
         more cost effective, office space in April 1996.

         The Registrant  recorded a provision for income taxes totaling $621,000
         for the year ended  December  31,  1997.  The income  tax  expense  was
         $280,000  (domestic)  and $341,000  (foreign)  and  resulted  from U.S.
         alternative minimum taxes and certain nondeductible expenses in Spain.

         The  Registrant  reported  a loss from  operations  for the year  ended
         December 31, 1997 of $1,546,000  compared to a loss from  operations of
         $1,299,000  in the prior year,  which was the combined  result of lower
         sales,  partially  offset by higher gross  margins and lower  operating
         expenses.  The effect of combining  non-operating items,  primarily (i)
         interest expense of $1,086,000,  and (ii) the loss of $591,000 upon the
         disposition of the Registrant's French subsidiary, and (iii) income tax
         expense of $621,000,  resulted in a net loss of $3,815,000, or $.97 per
         common share for the year ended December 31, 1997.  Non-operating items
         in the  comparable  period of the prior  year  included  primarily  (i)
         interest  expense of $1,227,000,  and (ii) a loss  recognized  upon the
         extinguishment of debt of approximately $446,000,  which, when combined
         with the loss from operations, resulted in a net loss of $2,919,000, or
         $.92 per common share for the prior year.

         LIQUIDITY AND CAPITAL RESOURCES:

         Total  assets  decreased  from  $21,043,000  at  December  31,  1997 to
         $20,318,000  at December 31, 1998,  while Common  Stockholders'  Equity
         increased  from  $8,905,000  at  December  31,  1997 to  $8,992,000  at
         December 31, 1998. The increase in Common Stockholders' Equity reflects
         primarily  the loss  incurred  by the  Registrant  for the  year  ended
         December  31,  1998,  offset by the  effect of  conversion  of Series A
         Preferred Stock into shares of Common Stock, issuance of stock purchase
         warrants and by the positive impact of the Spanish peseta exchange rate
         on the foreign currency translation adjustment.

         The Registrant's working capital decreased from $10,758,000 at December
         31, 1997 to $6,835,000  at December 31, 1998,  primarily as a result of
         the loss from operations  incurred by the Registrant during the period,
         including a non-recurring charge of $1,176,000 related to the write off
         of  previously  capitalized  acquisition  costs and the use of cash for
         acquisition  of drug licenses in Spain and for  manufacturing  facility
         renovations.

                                       20

<PAGE>

         Cash and cash  equivalents  decreased from  $11,117,000 at December 31,
         1997 to $6,703,000 at December 31, 1998, primarily as a result of using
         cash for operating  activities  (including  costs  associated  with the
         abandoned  Schwarz  acquisition),  the  acquisition of drug licenses in
         Spain and renovation of the manufacturing  facility in Spain.  Included
         in cash and cash  equivalents  at December  31, 1998 are  approximately
         $6,242,000 of short-term investments considered to be cash equivalents.

         Accounts  receivable  increased from $2,428,000 at December 31, 1997 to
         $3,228,000  at December  31, 1998 as a result of the  increase in sales
         volume  and  fluctuation  in  foreign  currency   exchange  rates.  The
         Registrant has not experienced any material  delinquent  accounts.  The
         Registrant   completed  the  sale  of  Chimos/LBF,   for  approximately
         $3,650,000  on  June  26,  1997.  The  Registrant  has  since  received
         approximately  $3,300,000,  including approximately  $2,600,000 of cash
         and cash  equivalents  which  resided on  Chimos/LBF's  books  prior to
         disposition,   of  which  approximately  $500,000  was  used  to  repay
         indebtedness to the former subsidiary.  An escrow fund in the amount of
         approximately  $350,000,  representing  the balance due the Registrant,
         has been established for certain contingent obligations or liabilities.
         The  Registrant  has  established  a reserve in the amount of $100,000,
         which  it  has   determined   should  be  sufficient  to  address  such
         contingencies  or  liabilities.  In  the  opinion  of  management,  the
         resolution of the remaining  contingencies will have no material effect
         on the Registrant's  financial  position or results of operations.  The
         Registrant  recorded a loss of  $591,000  related to this  divestiture,
         including realized exchange loss of $386,000 due to fluctuations in the
         currency   exchange  rates  used  to  translate  the  foreign  currency
         financial  statements.  

         Inventories  increased to  $1,208,000  at December 31, 1998 compared to
         $714,000 at December  31,  1997,  primarily as a result of stocking the
         product,  Arzimol(TM) for  distribution in 1999.  Prepaid  expenses and
         other current  assets  increased from $750,000 at December 31, 1997, to
         $1,322,000  at December 31, 1998,  primarily as a result of issuance of
         stock purchase  warrants and prepayment of certain  operating  costs in
         Spain during the year ended December 31, 1998.

         The total of  accounts  payable  and accrued  expenses  increased  from
         $3,106,000  at December  31, 1997 to  $4,398,000  at December 31, 1998,
         primarily as a result of increased sales volume, fluctuation in foreign
         currency exchange rates and inventory purchases.  Short-term borrowings
         increased  from  $1,140,000  at  December  31,  1997 to  $1,223,000  at
         December 31, 1998, as a result of higher outstanding  balances on lines
         of credit used for operating purposes in Spain.

         Fixed  assets,  net increased  from  $2,918,000 at December 31, 1997 to
         $3,551,000  at December 31, 1998,  due  primarily  to  fluctuations  in
         foreign  currency   exchange  rates  and  renovations  at  the  Spanish
         manufacturing facility, offset by recurring depreciation charges.

         Drug  licenses  and  related  costs,  net  increased  from  $691,000 at
         December 31, 1997 to $2,433,000 at December 31, 1998,  primarily due to
         the  purchase  of drug  licenses in Spain and  fluctuations  in foreign
         currency exchange rates, offset by recurring amortization charges.

         Other non-current assets decreased from $2,425,000 at December 31, 1997
         to $1,873,000  at December 31, 1998,  primarily due to the write-off of
         previously  capitalized  acquisition  costs

                                       21
<PAGE>


         and recurring amortization charges.

         Long term debt  increased  from  $5,329,000  at  December  31,  1997 to
         $5,410,000 at December 31, 1998, due primarily to accretion recorded on
         the  Debentures  issued  in  the  Registrant's   February  1996  public
         offering.  Other  non-current  liabilities  increased  from $220,000 at
         December  31, 1997 to $290,000 at December  31,  1998,  primarily  as a
         result of recording an obligation to issue additional  shares of Common
         Stock to a consulting firm for services rendered during 1998.

         The holders of the Registrant's  Series A Preferred Stock converted all
         such holdings into shares of the  Registrant's  Common Stock during the
         year ended  December  31,  1998.  As a result,  the number of shares of
         Common Stock increased by approximately  15,000 and Common Stockholders
         Equity increased by approximately $2,439,000 in October 1998.

         Investing activities,  primarily the purchase of drug licenses in Spain
         and capital  improvements to the manufacturing  facility in Spain, used
         net  cash of  $2,118,000  during  the year  ended  December  31,  1998.
         Financing  activities,  for the year ended December 31, 1998,  provided
         net cash of $3,000 and  operating  activities,  after  adding  back the
         non-cash charges for abandoned acquisition, for the year ended December
         31, 1998 used net cash of $2,116,000.

         Seasonality.  In the past, the  Registrant  has  experienced a positive
         fluctuation  in the fourth quarter of 1998 due to  seasonality.  As the
         Registrant  markets  more  pharmaceutical   products  whose  sales  are
         seasonal, seasonality of sales may become more significant.

         Financings.  An aggregate of 6,900 Units (the  "Units")  were sold in a
         February 1996 Public  Offering.  Each Unit  consisted of a One Thousand
         Dollars ($1,000) Principal Amount 12% Convertible  Senior  Subordinated
         Debenture  due February 13, 2006 (the  "Debentures")  and 1,000 Class A
         Redeemable Warrants, each to purchase one share of Common Stock and one
         Class B Redeemable  Warrant.  Two Class B Redeemable Warrants entitle a
         holder to purchase one share of Common Stock.  The Debentures and Class
         A Redeemable Warrants initially traded only as a Unit but began trading
         separately  on May 29,  1996.  Interest  on the  Debentures  is payable
         quarterly.  The Debentures are  convertible  prior to maturity,  unless
         previously  redeemed,  at any time  commencing  February  14, 1997 (the
         "Anniversary  Date") into shares of Common Stock at a conversion  price
         per  share  of  $2.50.   Gross  and  net  proceeds   (after   deducting
         underwriting  commissions  and the other expenses of the offering) were
         approximately  $6,900,000 and  $5,700,000,  respectively,  a portion of
         which were used to retire $1,770,000 principal balance of debt incurred
         in previous private placements.

         Of the Unit purchase price of $1,000, for financial reporting purposes,
         the  consideration   allocated  to  the  Debenture  was  $722,  to  the
         conversion  discount feature of the Debenture was $224 and to the 1,000
         Class A Warrants was $54. None of the Unit purchase price was allocated
         to the Class B Warrants.  Such  allocation  was based upon the relative
         fair values of each security on the date of issuance.  Such  allocation
         resulted in  recording a discount on the  Debentures  of  approximately
         $1,900,000. The effective interest rate on the Debentures is 18.1%.


                                       22
<PAGE>


         In  order  to  generate  working  capital   necessary  to  sustain  the
         Registrant's   long  range   strategic   objectives,   the   Registrant
         temporarily  lowered  the  exercise  price on its  Class A and  Class B
         redeemable  warrants.  Effective September 16, 1997, the exercise price
         of the Class A warrants  was  lowered  by $1.00,  to $2.00  each.  This
         exercise period at the reduced price expired on December 5, 1997. After
         this date, the Class A warrants  reverted back to the original exercise
         price of  $3.00  per  share  until  their  expiration,  which  has been
         extended by 183 days to August 16, 1999.

         Holders of the Registrant's  Class A warrants  exercised  approximately
         70% of the  outstanding  Class  A  redeemable  warrants  (approximately
         4,900,000 Class A warrants),  which generated approximately  $9,800,000
         in proceeds  to the  Registrant.  The  exercise of the Class A warrants
         resulted in issuance of approximately  4,900,000 shares of common stock
         and approximately 4,900,000 Class B warrants.

         The exercise price of the Registrant's Class B redeemable  warrants was
         also  temporarily  lowered  by  $2.00,  to $3.00 as to each two Class B
         warrants  effective  September 16, 1997 through January 13, 1998. After
         January 13, 1998, the warrants  reverted back to the original  exercise
         price of $5.00 per share until their  expiration  on February 14, 2001.
         Holders of the  Registrant's  Class B warrants  exercised 5,000 Class B
         warrants in January  1998,  generating  proceeds to the  Registrant  of
         $7,500, which resulted in the issuance of 2,500 shares of Common Stock.

         Given  the  Registrant's   current  liquidity  and  cash  balances  and
         considering  its future  strategic  plans,  the Registrant  should have
         sufficient  liquidity  to fund  operations  into the year  2000,  which
         should be a  sufficient  time frame for the  Registrant  to advance its
         strategic objectives and generate revenues and cash flow to support the
         Registrant's  cash flow needs.  The Registrant,  however,  continues to
         explore alternative sources for financing its business  activities.  In
         appropriate  situations,  that will be  strategically  determined,  the
         Registrant may seek financial assistance from other sources,  including
         contribution  by others to joint  ventures and other  collaborative  or
         licensing arrangements for the development,  testing, manufacturing and
         marketing of products under  development and the sale of certain of the
         assets of, or its subsidiary.

         IMPACT OF THE YEAR 2000 ISSUE

         The Year 2000 Issue has arisen because many existing  computer programs
         use only the last two digits of any  particular  year,  rather than all
         four digits,  to identify that year.  These  computer  programs can not
         properly  distinguish between the years 1900 and 2000 or 1901 and 2001,
         for example. If not corrected, many computer applications could fail or
         create erroneous  results.  The Year 2000 Issue can affect  information
         technoogy ("IT") as well as non-IT sytems. In fact, many non-IT systems
         typically include imbedded technology such as  microcontrollers.  These
         types of  systems  are more  difficult  to assess  and  repair  than IT
         systems.  It may even be necessary to replace  non-IT  systems if they
         cannot be modified. The extent of the potential impact of the Year 2000
         Issue is not yet known, and if not timely  corrected,  could affect the
         global economy.

         The  Registrant  has  recognized  the need to ensure that its  business
         operations will not be adversely impacted by the Year 2000 Issue and is
         aware of the time  sensitive  nature of the problem.  As a result,  the
         Registrant  has assessed how it may be impacted by the Year 2000 Issue.
         Consequently, 


                                       23
<PAGE>
         the  Registrant  is in the  process of  modifying,  where  needed,  its
         computer applications to ensure that they will function properly beyond
         1999.

         The Registrant has replaced  certain systems and applications and is in
         the process of replacing  other systems  and/or  applications  with the
         assistance of external  consultants.  The Registrant believes that with
         modifications  to existing  software  and  conversions  to new software
         applications, which are Year 2000 Compliant, the Year 2000 Issue can be
         mitigated. However, if such modifications and conversions are not made,
         or are not completed timely,  the Year 2000 Issue could have a material
         adverse impact on the operations of the  Registrant.  For example,  not
         only is it  possible  that  management  may not  have  access  to vital
         information,  which  is  used  to make  management  decisions,  but the
         manufacturing process could even be interrupted,  due to unavailability
         of raw materials or inoperable equipment and/or systems.

         The  Registrant  has  polled  its  significant  suppliers  and  service
         providers  to  determine  the  extent  to which it is  vulnerable  to a
         failure of any such third party to adequately address its own Year 2000
         Issue. The  Registrant's  total Year 2000 project cost and estimates to
         complete  include  the  estimated  costs and time  associated  with the
         impact of a third  party's Year 2000 Issue,  and are based on presently
         available  information.  However,  there can be no  guarantee  that the
         systems of other companies on which the Registrant's  systems rely will
         be timely  converted,  or that a failure to convert by another company,
         or a conversion that is  incompatible  with the  Registrant's  systems,
         would  not  have a  material  adverse  effect  on the  Registrant.  The
         Registrant has determined it has no exposure to  contingencies  related
         to the Year 2000  Issue  for the  products  it has sold or  anticipates
         selling in the future.

         The Registrant plans to complete the Year 2000 project by September 30,
         1999. The total remaining cost of the Year 2000 project is estimated at
         $50,000.   Of  the  total  project  cost,   approximately   $15,000  is
         attributable   to  the  purchase  of  new  software,   which  is  being
         capitalized. The remaining $35,000, which will be expensed as incurred,
         is not expected to have a material effect on the results of operations.
         To date, the Registrant has incurred and expensed approximately $25,000
         related to the  assessment  of, and  preliminary  efforts in connection
         with, its Year 2000 project and the development of a remediation plan.

         The costs of the Year 2000 project and the date on which the Registrant
         plans to complete the Year 2000 modifications are based on management's
         best estimates,  which were derived utilizing  numerous  assumptions of
         future  events   including  the  continued   availability   of  certain
         resources,  third party modification plans and other factors.  However,
         there can be no  guarantee  that these  estimates  will be achieved and
         actual  results  could differ  materially  from those  plans.  Specific
         factors that might cause such material differences include, but are not
         limited  to, the  availability  and cost of  personnel  trained in this
         area,  the ability to locate and correct all relevant  computer  codes,
         and similar uncertainties.  Because of the importance of addressing the
         Year 2000 Issue,  the  Registrant  is developing  contingency  plans to
         address any issues that may not be corrected by  implementation  of the
         Registrant's  Year 2000 project in a timely  manner.  Such  contingency
         plans may include considerations such as stock piling of raw matierals,
         production  of greater than normal  quantities of finished  goods,  and
         implementation of manual back-up systems where appropriate.

         DERIVATIVE INSTRUMENTS AND HEDGING

         Statement of Financial  Accounting  Standards No. 133  "Accounting  for
         Derivative  Instruments and Hedging Activities" (FAS 133) was issued in
         June  1998 and  establishes  accounting  and  reporting  standards  for
         derivative   instruments,   including  certain  derivative  instruments
         embedded in other contracts  (collectively  referred to as derivatives)
         and for hedging  activities.  It requires that an entity  recognize all
         derivatives  as either assets or  liabilities  in the balance sheet and
         measure these  instruments at fair value. The accounting for changes in
         the fair value of a derivative (that is, gains and losses) depends upon
         the intended use of the derivative and resulting designation if used as
         a hedge.  FAS 133 is effective for all fiscal  quarters of fiscal years
         beginning  after  June 15,  1999,  and is not  intended  to be  applied
         retroactively. Management does not believe that the adoption of FAS 133
         will  have  a  significant  impact  on  the  Registrant's  consolidated
         financial statements.

         CAUTIONARY  STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"  PROVISIONS OF
         THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

         The  statements  contained in or  incorporated  by reference  into this
         Annual  Report on Form  10-K  which are not  historical  facts  contain
         forward  looking  information  with  respect to plans,  projections  or
         future  performance of the Registrant,  the occurrence of which involve
         certain  risks and  uncertainties  that  could  cause the  Registrant's
         actual  results  to  differ  materially  from  those  expected  by  the
         Registrant,  including the history of operating losses;  uncertainty of
         future financial  results;  possible  negative cash flow from operating
         activities;   additional  financing   requirements;   no  assurance  of

                                       24
<PAGE>
         successful and timely  development  of new products;  risks inherent in
         pharmaceutical   development;   dependence  on  regulatory   approvals;
         uncertainty    of    pharmaceutical     pricing    or    profitability;
         unpredictability  of patent  protection;  rapid  technological  change;
         competition;  and  other  uncertainties  detailed  in the  Registrant's
         Registration  Statement on Form S-3 (SEC File No.  333-28593)  declared
         effective by the  Securities  and Exchange  Commission on June 10, 1997
         and any amendments thereto.


         Item 7A. Quantitative and Qualitative Disclosures About Market Risk
                  ----------------------------------------------------------

         Foreign Currency.

         A  substantial  amount of the  Registrant's  business is  conducted  in
         Europe and is  therefore  influenced  by the extent to which  there are
         fluctuations   in  the  dollar's   value  against   other   currencies,
         specifically  the euro and the  peseta.  On January  1, 1999,  the euro
         became the official  currency of 11 European  Union (EU) member  states
         with a fixed  conversion  rate against their national  currencies.  The
         value  of the  euro  against  the  dollar  and  all  other  currencies,
         including those of the four EU member states that are not participating
         in  the  eurozone,  will  fluctuate  according  to  market  conditions.
         Although  euro notes and coins will not appear  until  January 1, 2002,
         the new currency can be used by  consumers,  retailers,  companies  and
         public  administrations  from January 1, 1999,  in the form of "written
         money," i.e. by means of checks,  traveler's  checks,  bank  transfers,
         credit card transactions, etc. The permanent value of one euro is fixed
         at 166.39 pesetas.  The exchange rate at December 31, 1998 and 1997 was
         141.97 and 152.33 pesetas per U.S. dollar,  respectively.  The weighted
         average  exchange  rate for the years ended  December 31, 1998 and 1997
         was 149.40 and 146.47 pesetas per U.S. dollar, respectively. The effect
         of foreign  currency  fluctuations  on long  lived  assets for the year
         ended  December 31, 1998 was an increase of $253,000 and the cumulative
         historical  effect was a decrease of  $1,602,000,  as  reflected in the
         Registrant's  Consolidated  Balance  Sheets  in  the  "Liabilities  and
         Stockholders'  Equity"  section.  Although  exchange  rates  fluctuated
         significantly in recent years, the Registrant does not believe that the
         effect of foreign currency  fluctuation is material to the Registrant's
         results  of  operations  as  the  expenses   related  to  much  of  the
         Registrant's foreign currency revenues are in the same currency as such
         revenues. However, the carrying value of assets and reported values can
         be materially  impacted by foreign currency  translation.  Nonetheless,
         the  Registrant  does not plan to modify its  business  practices.  The
         Registrant has relied  primarily upon financing  activities to fund the
         operations of the  Registrant in the United  States.  In the event that
         the  Registrant  is required to fund United  States  operations or cash
         needs with funds generated in Spain,  currency rate fluctuations in the
         future could have a significant impact on the Registrant.  However,  at
         the present  time,  the  Registrant  does not  anticipate  altering its
         business  plans  and  practices  to  compensate  for  future   currency
         fluctuations.

         
                                       25

<PAGE>

         Item 8.     Financial Statements and Supplementary Data
                     -------------------------------------------

         See Item 14 of this Form 10-K.

         Item 9.     Changes in and Disagreements With Accountants 
                     ---------------------------------------------
                     on Accounting and Financial Disclosure
                     --------------------------------------

         Not applicable.




                                       26




<PAGE>


                                    Part III

         Item 10. Directors, Executive Officers, Promoters and Control Persons
                  ------------------------------------------------------------
                  of the Registrant
                  -----------------

         The following  information  is furnished  with respect to each director
         and executive officer of the Registrant.

                                      Position of                       Year    
                                      the                               First   
                                      Registrant            Class of    Became  
         Name                 Age     Presently Held        Director    Director
         ----                 ---     --------------        --------    --------

         James R. Murphy      49     Chairman, President,        III      1993
                                     Chief Executive Officer
                                      and Director

         Robert M. Stote      59     Senior Vice President,      III      1993
                                     Chief Science Officer
                                     and Director

         Michael D. Price     41     Vice President,             I        1995
                                     Chief Financial Officer,
                                     Treasurer,  Secretary and
                                     Director

         Robert J. Gyurik     52     Vice President of           II       1998
                                     Pharmaceutical
                                     Development and
                                     Director

         Charles L. Bolling   75     Director                    II       1991

         Michael McGovern     55     Director                    I        1997

         James R. Murphy  became  President and Chief  Operating  Officer of the
         Registrant  in  September  1994,  was  named  Chief  Executive  Officer
         effective  January 1995 and became  Chairman of the Board in June 1995.
         Prior to rejoining the Registrant,  Mr. Murphy served as Vice President
         of Business  Development  at MacroChem  Corporation,  a publicly  owned
         pharmaceutical  company,  from March 1993 through  September 1994. From
         September  1992 until March 1993,  Mr. Murphy served as a consultant in
         the  pharmaceutical  industry with his primary efforts  directed toward
         product  licensing.  Prior  thereto,  Mr.  Murphy  served as Director -
         Worldwide Business Development and Strategic Planning of the Registrant
         from December 1991 to September  1992. Mr. Murphy  previously  spent 14
         years in basic  pharmaceutical  research and product  development  with
         SmithKline  Corporation and in international  business development with
         contract research laboratories.  Mr. Murphy also serves on the Board of
         Directors  of  Biopharmaceutics,  Inc.  Mr.  Murphy  received a B.A. in
         Biology from  Millersville  University  and attended the  Massachusetts
         School of Law in 1993 and 1994. 

                                       27
<PAGE>


         Robert M. Stote,  M.D.  became Senior Vice  President and Chief Science
         Officer  of  the  Registrant  in  March  1992.  Prior  to  joining  the
         Registrant,  Dr. Stote was employed for 20 years by SmithKline  Beecham
         Corporation  serving as Senior Vice  President  and  Medical  Director,
         Worldwide    Medical    Affairs   from   1989   to   1992,   and   Vice
         President-Clinical  Pharmacology-Worldwide from 1987 to 1989. From 1984
         to 1987, Dr. Stote was Vice President-Phase I Clinical Research,  North
         America.  Dr. Stote was Chief of  Nephrology  at  Presbyterian  Medical
         Center of Philadelphia from 1972 to 1989 and was Clinical  Professor of
         Medicine at the  University  of  Pennsylvania.  Dr.  Stote  serves as a
         Director of Collaborative Clinical Research,  Inc. Dr. Stote received a
         B.S. in Pharmacy  from the Albany  College of  Pharmacy,  an M.D.  from
         Albany Medical College and is Board Certified in Internal  Medicine and
         Nephrology.  He was a Fellow in Nephrology and Internal Medicine at the
         Mayo  Clinic  and is  currently  a Fellow of the  American  College  of
         Physicians.

         Michael   D.   Price   became    Chief    Financial    Officer,    Vice
         President/Treasurer  and  Secretary of the  Registrant in October 1993,
         April  1993  and  November  1992,  respectively.   He  has  served  the
         Registrant in other  capacities  since March 1992. Prior to joining the
         Registrant,  he was employed as a financial and  management  consultant
         with Carr  Financial  Group in Tampa,  Florida from March 1990 to March
         1992. Prior thereto,  he was employed as Vice President of Finance with
         Premiere Group,  Inc., a real estate  developer in Tampa,  Florida from
         June 1988 to February 1990.  Prior  thereto,  Mr. Price was employed by
         Price Waterhouse in Tampa, Florida from January 1982 to June 1988 where
         his last  position  with that firm was as an Audit  Manager.  Mr. Price
         received a B.S.  in Business  Administration  with a  concentration  in
         Accounting  from Auburn  University  and an M.B.A.  from Florida  State
         University.  Mr. Price is a Certified Public Accountant in the State of
         Florida.

         Robert J. Gyurik became Vice President of Pharmaceutical Development of
         the Registrant in March 1999. Mr. Gyurik was Manager of Development and
         Quality Control at Macrochem Corporation,  a position he held from 1993
         to  February  1999.  From 1971 to 1993 Mr.  Gyurik  worked  in  various
         postions  at  SmithKline   Beecham   ranging  from   Associate   Senior
         Investigator in the  Nutrition/Production  Enhancer  Research Group and
         Pharmaceutical  Development  Group to  Senior  Medical  Chemist  in the
         Parasitology  Resarch  Group.  Prior  thereto,  Mr.  Gyurik  worked  at
         Schering as a Medicinal Chemist. Mr. Gyurik attended Rutgers University
         and received a B.A. in Biology and Chemistry from  Immaculata  College.
         Mr. Gyurik is a member of the American Chemical Society,  International
         Society for Chronobiology and the New York Academy of Sciences.

         Charles  L.  Bolling  served  from  1968 to 1973 as Vice  President  of
         Product  Management  and  Promotion  (U.S.),  from 1973 to 1977 as Vice
         President of Commercial  Development  and from 1977 to 1986 as Director
         of  Business   Development   (International)  at  SmithKline  &  French
         Laboratories. Mr. Bolling has been retired since 1986.

         Michael  McGovern  serves  as  President  of  McGovern  Enterprises,  a
         provider of  corporate  and  financial  consulting  services,  which he
         founded in 1975.  Mr.  McGovern is  Chairman of the Board of  Specialty
         Surgicenters,  Inc., and is a Director on the corporate boards of North
         Fulton  Bancshares,  Suburban Lodges of America Inc., Career Publishing
         Network,  L.L.C., Training Solutions Interactive Inc., and the Reynolds
         Development   Company.  Mr.  McGovern  received  a  B.S.  and  M.S.

                                       28
<PAGE>

         in accounting and his Juris Doctor from the University of Illinois. Mr.
         McGovern is a Certified Public Accountant and a member of the State Bar
         of Georgia and the American Bar Association.

         The Registrant's  Articles of  Incorporation  and By-Laws provide for a
         classified Board of Directors. The Board is divided into three classes,
         designated  Class I, Class II and Class III. The directors  included in
         Class III above  will hold  office  until the 1999  Annual  Meeting  of
         Stockholders.  The director  included in Class I above will hold office
         until the 2000 Annual Meeting of Stockholders.  The directors  included
         in Class II above will hold  office  until the 2001  Annual  Meeting of
         Stockholders.

         Section 16(a) Beneficial Ownership Reporting Compliance

         Section  16(a) of the  Securities  Exchange  Act of 1934,  as  amended,
         requires the  Registrant's  executive  officers and directors,  and any
         persons who own more than 10% of any class of the  Registrant's  equity
         securities, to file certain reports relating to their ownership of such
         securities  and  changes  in such  ownership  with the  Securities  and
         Exchange  Commission and the American Stock Exchange and to furnish the
         Registrant with copies of such reports.  To the Registrant's  knowledge
         during the year ended  December  31,  1998,  all Section  16(a)  filing
         requirements have been satisfied.

         Item 11. Executive Compensation
                  ----------------------

         The information called for by this item is incorporated by reference to
         the Registrant's definitive Proxy Statement for the 1999 Annual Meeting
         of Stockholders to be filed pursuant to Regulation 14A.

         Item 12. Security Ownership of Certain Beneficial Owners and Management
                  --------------------------------------------------------------

         The information called for by this item is incorporated by reference to
         the Registrant's definitive Proxy Statement for the 1999 Annual Meeting
         of Stockholders to be filed pursuant to Regulation 14A.

         Item 13. Certain Relationships and Related Transactions
                  ----------------------------------------------

         The information called for by this item is incorporated by reference to
         the Registrant's definitive Proxy Statement for the 1999 Annual Meeting
         of Stockholders to be filed pursuant to Regulation 14A.


                                       29
<PAGE>



                                     Part IV
<TABLE>
<CAPTION>

Item 14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K
              ----------------------------------------------------------------
                                                                                    Page Herein

<S>     <C>                                                                      <C>
(a)       The following documents are filed as a part of this report:

          (1)  Financial Statements:

          Independent Auditors' Report                                                 F-1

          Consolidated Balance Sheets as of December 31, 1998 and 1997                 F-2

          Consolidated Statements of Operations and of Comprehensive Loss 
          for the years ended December 31, 1998, 1997 and 1996                         F-3
                                                                                      
          Consolidated  Statements of Changes in Common  Stockholders' 
          Equity for the years ended  December 31, 1998, 1997 and 1996                 F-4

          Consolidated Statements of Cash Flows for the years ended
          December 31, 1998, 1997 and 1996                                             F-5 to F-6

          Notes to Consolidated Financial Statements                                   F-7 to F-27

          (2)  Financial Statement Schedule:

          Independent Auditors' Report on Financial Statement Schedule                 F-28

          Schedule II - Valuation and qualifying accounts and reserves                 F-29

          All other schedules have been omitted because they are inapplicable or
          are not  required,  or the  information  is included  elsewhere in the
          consolidated financial statements or notes thereto.

</TABLE>


                                       30
<PAGE>


                                  EXHIBIT INDEX


                  (3)      Exhibits filed as part of this report:
Exhibit
Number                                 Description
--------          --------------------------------------------------------------

3.1               Articles of  Incorporation  of the Registrant,  as amended and
                  restated.   (Reference   is  made  to   Exhibit   3.1  to  the
                  Registrant's  Amendment No. 1 on Form S-3 to its  Registration
                  Statement on Form S-1,  Commission  File No.  33-65125,  which
                  exhibit is incorporated herein by reference.)

3.2               Bylaws of the Registrant, as amended and restated.  (Reference
                  is made to  Exhibit  3.2 to the  Registrant's  Form 10-K dated
                  December 31, 1997, Commission File No. 1-10581,  which exhibit
                  is incorporated herein by reference.)

4.1               Registrant's  Amended and  Restated  1991 Stock  Option  Plan.
                  (Reference  is made to Exhibit  4.4 to the  Registrant's  Form
                  10-K dated  December 31, 1997,  Commission  File No.  1-10581,
                  which exhibit is incorporated herein by reference.)

4.2               Form  of  Non-qualified   Stock  Option  Agreement  under  the
                  Registrant's  1991 Stock  Option Plan.  (Reference  is made to
                  Exhibit  4.25 to the  Registrant's  Form 10-K  dated  June 30,
                  1992,   Commission   File  No.   1-10581,   which  exhibit  is
                  incorporated herein by reference.)

4.3               Form  of  Indenture   relating  to  the  Registrant's   $1,000
                  Principal   Amount   12%   Senior   Convertible   Subordinated
                  Debentures  due  February 13, 2006 (with the Form of Debenture
                  attached  thereto as Exhibit A.) (Reference is made to Exhibit
                  4.28 to the Registrant's  Registration  Statement on Form S-1,
                  Commission  File No.  33-65125,  which exhibit is incorporated
                  herein by reference.)

4.4               Form of Warrant Agreement, including form of Class A and Class
                  B  Warrant.   (Reference  is  made  to  Exhibit  4.29  to  the
                  Registrant's  Registration  Statement on Form S-1,  Commission
                  File No.  33-65125,  which exhibit is  incorporated  herein by
                  reference.)

4.5               Form of  Underwriter  Warrant.  (Reference  is made to Exhibit
                  4.30 to the Registrant's  Registration  Statement on Form S-1,
                  Commission  File No.  33-65125,  which exhibit is incorporated
                  herein by reference.)

4.6               Form of Unit  Certificate.  (Reference is made to Exhibit 4.31
                  to  the  Registrant's  Registration  Statement  on  Form  S-1,
                  Commission  File No.  33-65125,  which exhibit is incorporated
                  herein by reference.)


                                       31
<PAGE>

Exhibit
Number                               Description
--------          --------------------------------------------------------------

4.7               Agreement  between the Registrant and Marsing & Co. Ltd., A.S.
                  dated June 26, 1997.  (Reference is made to Exhibit 2.1 to the
                  Registrant's Form 8-K filed July 10, 1997, Commission File No.
                  1-10581, which exhibit is incorporated herein by reference.)

4.8               Subscription  Agreement  between the Registrant and Hsu, dated
                  February  11, 1999.  (Reference  is made to Exhibit 7.2 to the
                  Registrant's Form 8-K filed February 26, 1999, Commission File
                  No.  1-10581,   which  exhibit  is   incorporated   herein  by
                  reference.)

4.9               Registration  Rights Agreement between the Registrant and Hsu,
                  dated February 11, 1999.  (Reference is made to exhibit 7.3 to
                  the Registrant's Form 8-K filed February 26, 1999,  Commission
                  File No.
                  1-10581, which exhibit is incorporated herein by reference.)

4.10              Warrant issued by the Registrant for the benefit of Hsu, dated
                  February  11, 1999.  (Reference  is made to exhibit 7.4 to the
                  Registrant's Form 8-K filed February 26, 1999, Commission File
                  No.  1-10581,   which  exhibit  is   incorporated   herein  by
                  reference.)

4.11              Subscription  Agreement  between  the  Registrant  and  Conrex
                  Pharmaceutical  Corporation  ("Conrex"),  dated  February  11,
                  1999.  (Reference  is made to exhibit 7.5 to the  Registrant's
                  Form 8-K filed February 26, 1999, Commission File No. 1-10581,
                  which exhibit is incorporated herein by reference.)

4.12              Registration  Rights  Agreement  between  the  Registrant  and
                  Conrex, dated February 11, 1999. (Reference is made to exhibit
                  7.6 to the  Registrant's  Form 8-K filed  February  26,  1999,
                  Commission File No.
                  1-10581, which exhibit is incorporated herein by reference.)

10.1*             Employment  Agreement  dated as of July 1,  1998  between  the
                  Registrant and James R. Murphy.
---------------

*      Filed herewith

                                       32
<PAGE>

Exhibit
Number                                     Description
--------          --------------------------------------------------------------

10.2*             Employment  Agreement  dated as of August 31, 1998 between the
                  Registrant and Robert M. Stote, M.D.

10.3*             Employment  Agreement  dated as of July 1,  1998  between  the
                  Registrant and Michael D. Price.

10.4              Partnership  Agreement dated March 11, 1994 of  Belmac/Maximed
                  Partnership.  (Reference  is  made  to  Exhibit  10.1  to  the
                  Registrant's  Form 10-Q for the quarter  ended March 31, 1994,
                  Commission File No.
                  1-10581, which is incorporated herein by reference.)

10.5              Agreement between the Registrant and Yungtai Hsu ("Hsu") dated
                  February  1,  1999,   effective   as  of  December  31,  1998.
                  (Reference is made to Exhibit 7.1 to the Registrant's Form 8-K
                  filed February 26, 1999,  Commission File No.  1-10581,  which
                  exhibit is incorporated herein by reference.

21.1*             Subsidiaries of the Registrant.

23.1*             Consent of Deloitte & Touche LLP.

27.1*             Financial Data Schedule.
---------------
*                 Filed herewith.

                  b) Reports on Form 8-K filed during the fiscal quarter ended 
                     December 31, 1998:

                  None.

                  Subsequent  to December 31,  1998,  the  Registrant  filed the
                  following Report on Form 8-K:

                  Form 8-K dated  February  26,  1999  regarding  the  agreement
                  between the Registrant and Yungtai Hsu, whereby the Registrant
                  acquired rights to certain U.S. and international  patents and
                  related technology. (Items 2 and 7).


                                       33

<PAGE>


                                   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.

                                           BENTLEY PHARMACEUTICALS, INC.

                                           By:      /s/ James R. Murphy 
                                                    ----------------------------
                                                    James R. Murphy
                                                    Chairman, President and
                                                    Chief Executive Officer
                                                    Date:  March 26, 1999

         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 and in the capacities and on the dates indicated.

Signature                           Title                             Date
---------                           -----                             ----

/s/ James R. Murphy             Chairman, President,              March 26, 1999
--------------------------      Chief Executive Officer
James R. Murphy                 and Director (principal
                                executive officer)     
                                

/s/ Robert M. Stote             Senior Vice President,            March 26, 1999
---------------------------     Chief Science Officer and
Robert M. Stote, M.D.           Director                 
                                

/s/ Michael D. Price            Vice-President,                   March 26, 1999
---------------------------     Chief Financial Officer,         
Michael D. Price                Treasurer, Secretary and         
                                Director (principal              
                                financial and accounting officer)
                                                                 
                                
/s/Robert J. Gyurik             Vice President of                 March 26, 1999
---------------------------     Pharmaceutical Development
 Robert J. Gyurik               and Director


/s/Charles L. Bolling           Director                          March 26, 1999
---------------------------
Charles L. Bolling

/s/Michael McGovern             Director                          March 26, 1999
---------------------------
Michael McGovern



<PAGE>



INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Bentley Pharmaceuticals, Inc.
Tampa, Florida

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Bentley
Pharmaceuticals,  Inc. and subsidiaries  (the "Company") as of December 31, 1998
and  1997,  and  the  related  consolidated  statements  of  operations  and  of
comprehensive loss, changes  in common stockholders'  equity, and cash flows for
each  of  the  three  years  in  the  period  ended  December  31,  1998.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial  position of the Company at December 31, 1998
and 1997,  and the results of its  operations and its cash flows for each of the
three years in the period ended  December 31, 1998 in conformity  with generally
accepted accounting principles.


/s/ DELOITTE & TOUCHE LLP
-------------------------
DELOITTE & TOUCHE LLP

Tampa, FL
March 26, 1999


                                       F-1


<PAGE>

<TABLE>
<CAPTION>
                          BENTLEY PHARMACEUTICALS, INC.
                           CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)                                      December 31, 
                                                                      1998           1997
                                                                      ----           ----
ASSETS
<S>                                                                <C>          <C>    

Current assets:
 Cash and cash equivalents                                           $6,703       $11,117
 Receivables                                                          3,228         2,428
 Inventories                                                          1,208           714
 Prepaid expenses and other                                           1,322           750
                                                                     ------        ------
  Total current assets                                               12,461        15,009
                                                                     ------        ------
Fixed assets, net                                                     3,551         2,918
Drug licenses and related costs, net                                  2,433           691
Other non-current assets, net                                         1,873         2,425
                                                                    -------       -------
                                                                    $20,318       $21,043
                                                                    =======       =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
  Accounts payable                                                   $2,835         $1,493
  Accrued expenses                                                    1,563          1,613
  Short term borrowings                                               1,223          1,140
  Current portion of long term debt                                       5              5
                                                                          -              -
                                                                    -------        -------
    Total current liabilities                                         5,626          4,251
                                                                    -------        -------
Long term debt, net                                                   5,410          5,329
                                                                    -------        -------
Other non-current liabilities                                           290            220
                                                                    -------        -------

Commitments and contingencies

Redeemable preferred stock, $1.00 par value, 
   authorized 2,000 shares:
     Series A, issued and outstanding, zero and 60 shares                 -          2,338
                                                                    -------        -------

Common Stockholders' Equity:
   Common stock, $.02 par value, authorized 35,000 shares,
     issued and outstanding, 8,443 and 8,426 shares                     168            168
   Stock  purchase  warrants  (to purchase 5,928 and 5,697
   shares of common stock)                                              556            192
   Additional paid-in capital                                        83,728         81,382
   Accumulated deficit                                              (73,858)       (70,982)
   Cumulative foreign currency translation adjustment                (1,602)        (1,855)
                                                                   --------       --------
                                                                      8,992          8,905
                                                                   --------       --------
                                                                    $20,318        $21,043
                                                                   ========       ========


</TABLE>



           The accompanying Notes to Consolidated Financial Statements
               are an integral part of these financial statements.
                                       F-2
<PAGE>
<TABLE>
<CAPTION>
                           
                          BENTLEY PHARMACEUTICALS, INC.
         CONSOLIDATED STATEMENTS OF OPERATIONS AND OF COMPREHENSIVE LOSS
(In thousands, except per share data) 
                                                                          For the Year Ended
                                                                                December 31,                     
                                                         ----------------------------------------------
                                                                 1998           1997         1996
                                                                 ----           ----         ----

<S>                                                         <C>             <C>            <C>       
Sales                                                         $15,243         $14,902        $23,133   
Cost of sales                                                   6,601           8,010        15,638    
                                                              -------         -------        -------
Gross margin                                                    8,642           6,892          7,495
Operating expenses:
 Selling, general and administrative                            9,078           7,819          7,923   
 Research and development                                         153             324             29   
 Depreciation and amortization                                    303             295            502
 Non-recurring charge -  costs of abandoned acquisition         1,176               -              -
 Provision for goodwill impairment                                  -               -            340
                                                              -------         -------        -------
   Total operating expenses                                    10,710           8,438          8,794
                                                              -------         -------        -------
 Loss from operations                                          (2,068)         (1,546)        (1,299)
Other (income) expenses:                                                                               
  Interest expense                                              1,076           1,086          1,227
  Interest income                                                (499)           (123)          (103)                          
  Other (income) expense, net                                      (5)            685             50
                                                              -------          -------        -------
Loss before income taxes and extraordinary item                (2,640)         (3,194)        (2,473)
Provision for income taxes                                        236             621              -
                                                              -------         -------          ------
Loss before extraordinary item                                 (2,876)         (3,815)        (2,473)
Extraordinary item-extinguishment of debt                           -               -            446
                                                              -------         -------         -------
Net loss                                                       (2,876)         (3,815)        (2,919)
Other comprehensive (income) loss:
 Foreign currency translation (gains) losses                     (253)            388            487
                                                              -------         -------         -------
Comprehensive loss                                            ($2,623)        ($4,203)       ($3,406)
                                                              ========        ========       ========
Loss per common share before extraordinary    
item                                                           ($0.35)         ($0.97)         ($0.79)
Extraordinary item - extinguishment of debt                         -               -           (0.13)
                                                              -------         -------         -------
Basic net loss per common share                                 ($.35)         ($0.97)         ($0.92)
                                                              =======         =======         =======
Weighted average common shares outstanding                      8,431           4,072           3,334
                                                              =======         =======         =======


</TABLE>

          The accompanying Notes to Consolidated Financial Statements
               are an integral part of these financial statements.
                                                      

                                       F-3


<PAGE>

<TABLE>
<CAPTION>
           
                          BENTLEY PHARMACEUTICALS, INC.
        CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY

(In thousands, except per share data)

                                                     $.02 Par Value       Additional                    Other           
                                                     Common Stock          Paid-In      Accumulated     Equity
                                                 Shares          Amount    Capital      Deficit         Transactions   Total
                                                 ------          ------   ----------    -----------     ------------   -----
      

<S>                                           <C>            <C>       <C>           <C>             <C>          <C>   
 Balance at December 31, 1995                      3,330          $66      $70,047       ($64,248)       ($549)       $5,316
                                                                                     
 Public offering of units, net                         -            -        1,184              -         285          1,469     

 Common stock issued as compensation                  15            1           50              -           -             51     

 Accrual of dividends-preferred stock                  -            -         (135)             -           -           (135)      

 Foreign currency translation adjustment               -            -            -              -        (487)          (487)
                                                                                             

 Net loss                                              -            -            -         (2,919)          -         (2,919)
                                                   -----        -------      ------      --------        -----       -------

Balance at December 31, 1996                       3,345           67       71,146        (67,167)       (751)         3,295

 Exercise of Class A Redeemable Warrants           4,899           98        9,902            -          (202)         9,798

 Exercise of other stock options/warrants            172            3          570            -          (150)           423

 Exercise of underwriter warrants                      -            -           30            -              7            37

 Conversion of Debentures                              9            -           23            -              -            23

 Issuance of stock options/warrants                    -            -          (51)           -            102            51

 Common stock issued as compensation                   1            -            2            -              -             2

 Accrual of dividends-preferred stock                  -            -         (135)           -              -          (135)

 Stock subscription receivable cancellation            -            -         (105)           -            105             -

 Foreign currency translation adjustment               -            -            -            -           (774)         (774)

 Net loss                                              -            -            -       (3,815)              -        (3,815)
                                                   -----        ------        ----       ------           -----       -------    

Balance at December 31, 1997                       8,426          168       81,382      (70,982)        (1,663)         8,905


 Exercise of Class B Redeemable Warrants               2            -            8            -              -             8

 Issuance of warrants                                  -            -            -            -            364           364

 Conversion of redeemable preferred stock             15            -        2,439            -              -         2,439

 Accrual of dividends - preferred stock                -            -         (101)           -              -          (101)

 Foreign currency translation adjustment               -            -            -            -            253           253

 Net loss                                              -            -            -       (2,876)             -        (2,876)
                                                 -------      -------     --------      -------      ---------     ---------
Balance at December 31, 1998                       8,443         $168      $83,728     ($73,858)      ($1,046)        $8,992
                                                 =======      =======     ========     ========      ========      =========

</TABLE>


          The accompanying Notes to Consolidated Financial Statements
               are an integral part of these financial statements.
                                       F-4

<PAGE>

<TABLE>
<CAPTION>

                          BENTLEY PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                                        For the Year Ended
                                                                                           December 31,            

(In thousands)                                                                  1998              1997          1996
                                                                                ----              ----          ----  
<S>                                                                     <C>                 <C>         <C>    
Cash flows from operating activities:
 Loss before extraordinary item                                                ($2,876)       ($3,815)      ($2,473)
 Adjustments to reconcile loss before extraordinary item to
  net cash used in operating activities:                                                                
  Depreciation and amortization                                                    303            295           502
                                                                                                  
  Non-cash costs of abandoned acquisitions                                         158              -             -
  Loss on disposition of subsidiary                                                  -            591             -
  Extraordinary item-extinguishment of debt                                          -                        (446)
                                                                                                    -
  Provision for goodwill impairment                                                  -                          340
                                                                                                    -
  Loss on disposal of fixed assets                                                   -                           79
                                                                                                    -
  Other non-cash items                                                             501            267           468
                                                                                                  
(Increase) decrease in assets and increase (decrease) in liabilities:
   Receivables                                                                   (599)          (137)         2,991
                                                                                              
   Inventories                                                                   (412)          (229)            43
                                                                                               
   Prepaid expenses and other current assets                                     (544)          (340)          (272)
   Other assets                                                                   (72)          (649)           (93)
                                                                                                
   Accounts payable and accrued expenses                                           907           257           (716)
                                                                                                  
   Other liabilities                                                                70          (222)          (496)
                                                                                                
   Capitalized acquisition costs                                                   448             -              -
                                                                                ------        -------        ------
   Net cash used in operating activities                                        (2,116)       (3,982)          (73)
                                                                                ------        -------        ------
Cash flows from investing activities:                                                                   
 Acquisition of Spanish drug licenses                                           (1,559)          (40)            -
 Additions to fixed assets                                                        (559)         (108)         (170)
                                                                                                
 Net proceeds from disposition of subsidiary                                         -           378             -
 Proceeds from sale of investments                                                   -           166           161
                                                                                                  
 Purchase of investments                                                             -             -          (166)
                                                                              ---------        ------         -----
    Net cash (used in) provided by investing activities                        (2,118)           396          (175)
                                                                             ---------         ------         -----
                                                                                                  

</TABLE>

          The accompanying Notes to Consolidated Financial Statements
               are an integral part of these financial statements.
                                 
                                       F-5
<PAGE>
<TABLE>
<CAPTION>
 
                         BENTLEY PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Concluded)

(In thousands)                                                                     For the Year Ended
                                                                                     December  31,    
                                                                              -------------------------------        
                                                                              1998           1997      1996
                                                                              ----           ----      ----
                                                             
<S>                                                                       <C>          <C>         <C>   
Cash flows from financing activities:
Net increase (decrease) in short term borrowings                               $ -         $363        ($120)
Proceeds from exercise of Class A/B warrants, net                                8        9,798            -
Proceeds from exercise of other options/warrants, net                            -                         -
                                                                                            555
Proceeds from public offering of units                                           -            -        6,900
Offering costs                                                                                -       (1,275)
Repayments of long term debt                                                                  -       (1,770)
Payments on capital leases                                                     (5)          (5)          (28)
                                                                             ----        ----- -      ------

    Net cash provided by financing activities                                    3       10,711        3,707
                                                                             -----       ------       ------

Effect of exchange rate changes on cash                                      (183)        (433)        (154)
                                                                            -----        -----        -----
                                                                                                    
Net (decrease) increase in cash and cash equivalents                       (4,414)        6,692        3,305

Cash and cash equivalents at beginning of period                            11,117        4,425        1,120
                                                                            ------        -----        -----

Cash and cash equivalents at end of period                                  $6,703      $11,117       $4,425
                                                                            ======      =======       ======


Supplemental  Disclosures of Cash Flow  Information
The Company paid cash during the period for (in thousands):

 Interest                                                                     $972         $965        $907
                                                                            ======      =======       =====
 Taxes                                                                        $884          $12          -
                                                                            ======      =======       =====


Supplemental Disclosures of Non-Cash Financing Activities
The Company has issued Common Stock in exchange for services as
follows (in thousands):

 Shares issued                                                                   -            1          15
                                                                            ======      =======      ======
 Amount                                                                          -           $2         $51
                                                                            ======      =======      ======

</TABLE>

The Company issued  warrants during the year ended December 31, 1998 to purchase
     425,000  shares of Common Stock in exchange for services.  The Company also
     is  obligated to issue  66,000  shares of Common Stock to a Consultant  for
     services  performed  during  1997 and 1998.  The  holders of the  Company's
     Series  A  Preferred  Stock  converted  the  remaining   60,000  shares  of
     Redeemable Preferred Stock into approximately 15,000 shares of Common Stock
     during the year ended December 31, 1998.

The Company  acquired a drug license in Spain during the year ended December 31,
1996, assuming approximately $477,000 in liabilities therefore.

           The accompanying Notes to Consolidated Financial Statements
               are an integral part of these financial statements.

                                       F-6
<PAGE>

                               

                          BENTLEY PHARMACEUTICALS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1--HISTORY AND OPERATIONS

Bentley Pharmaceuticals, Inc. (the "Company") is an international pharmaceutical
and health care company engaged  primarily in the  manufacturing,  marketing and
distribution  of  pharmaceutical  products in Spain.  The Company  develops  and
registers late stage products,  and manufactures,  packages and distributes both
its own and other companies' pharmaceutical products.

The Company sold its French  subsidiary,  Chimos/LBF S.A. (referred to herein as
Chimos/LBF), in June 1997 for approximately $3,650,000. The Company's operations
in France consisted of the low margin  brokerage of fine chemicals,  sourcing of
raw  materials  and  pharmaceutical   intermediaries  and  the  distribution  of
biotechnology or orphan drugs. (See Note 13).

The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of  liabilities in the normal course of business.  As shown in the  consolidated
financial  statements,  the Company has  incurred net losses as well as negative
operating cash flows for all periods presented.

The  Company's  previously  announced   negotiations  whereby  the  Company  was
considering the purchase of domestic and international  rights to a portfolio of
branded drugs and a  manufacturing  facility  located in Mequon,  Wisconsin from
Schwarz Pharma and whereby  Schwarz  Pharma was to acquire  control of Bentley's
Spanish  subsidiary,  Laboratorios  Belmac,  came to an end in May 1998  without
consummation of an agreement. Consequently, the Company recorded a charge during
the quarter ended June 30, 1998 for all previously capitalized costs specific to
this and other related abandoned acquisitions totaling approximately $1,176,000,
including $158,000 of non-cash items.

In order to fund operations,  the Company  primarily has issued Common Stock and
other  securities.  In February 1996, the Company completed a public offering of
its securities,  which  generated net proceeds of  approximately  $5,700,000,  a
portion  of which  was  used to  retire  $1,770,000  principal  balance  of debt
incurred in previous private placements (see Notes 8 and 15). The balance of the
net  proceeds  were  used  for  working  capital  needs,  limited  research  and
development  activities,  and search for possible  acquisitions of complementary
products,  technologies  and/or  businesses.  During the year ended December 31,
1997,  the Company  temporarily  lowered the  exercise  price on its Class A and
Class  B  redeemable  warrants.  Approximately  70% of the  outstanding  Class A
warrants  (approximately  4,900,000 Class A warrants) were exercised during this
period, which generated approximately $9,800,000 in 

                                      F-7

<PAGE>

proceeds  to the  Company.  The  exercise  of the Class A warrants  resulted  in
issuance of approximately 4,900,000 shares of common stock and 4,900,000 Class B
warrants.  The  exercise  price  of the  Company's  Class B  warrants  was  also
temporarily  lowered;  however,  no Class B warrants were exercised during 1997.
The  proceeds  from the Class A warrant  exercises  are being  used for  working
capital  needs.  Given the  Company's  current  liquidity and  significant  cash
balances and considering its future strategic plans, management believes that it
now has  sufficient  resources  to fund  operations  and further  its  strategic
objectives.

The  strategic  focus of the Company has shifted in response to the evolution of
the global  health care  environment.  The Company has moved from a research and
development-oriented  pharmaceutical company, which required developing products
from the chemistry laboratory through marketing, to a company seeking to acquire
late-stage  development  compounds  that  can be  marketed  within  one  year or
currently  marketed  products.  As a result of this transition,  the Company has
decreased its research and development  expenses  dramatically over the past few
years as well as  implemented  cost-cutting  measures  throughout the Company's'
operations.   However,   with  the  February  1999   acquisition  of  permeation
enhancement technology,  limited development expenditures will be required prior
to entering into formal  collaboration  with other  companies (see Note 16). The
Company  emphasizes  product  distribution  in Spain,  strategic  alliances  and
product  acquisitions,  which  management  of the Company  expects will move the
Company closer to profitability in the near future.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation and foreign currency translation

The consolidated  financial  statements  include the accounts of the Company and
its  wholly-owned   subsidiaries:   Laboratorios  Belmac  S.A.  and,  until  its
divestiture in June 1997,  Chimos/LBF S.A.; Bentley  Healthcare  Corporation and
its wholly-owned  subsidiary,  Belmac Hygiene,  Inc.; Belmac Health Corporation;
Belmac Holdings, Inc. and its wholly-owned subsidiary, Belmac A.I., Inc.; B.O.G.
International  Finance,  Inc.; Bentley Pharma, Inc.; Pharma de Espana, Inc.; and
Belmac Jamaica,  Ltd. Belmac Hygiene, Inc. entered into a 50/50 partnership with
Maximed Corporation of New York in March 1994. Belmac Hygiene's participation in
the  partnership  is  accounted  for using the equity  method.  All  significant
intercompany  balances  have been  eliminated  in  consolidation.  The financial
position and results of  operations of the Company's  foreign  subsidiaries  are
measured using local currency as the functional currency. Assets and liabilities
of each foreign  subsidiary  are translated at the rate of exchange in effect at
the end of the period.  Revenues  and  expenses  are  translated  at the average
exchange rate for the period.  Foreign currency translation gains and losses not
impacting  cash flows are credited to or charged  against  Common  Stockholders'
Equity.  Foreign  currency  translation  gains  and  losses  arising  from  cash
transactions are credited to or charged against current earnings.

Cash and cash equivalents

The Company considers all highly liquid investments with original  maturities of
three months or 

                                      F-8
<PAGE>

less when  purchased to be cash  equivalents  for  purposes of the  Consolidated
Balance Sheets and the Consolidated Statements of Cash Flows. 

Inventories

Inventories are stated at the lower of cost or market,  cost being determined on
the first-in, first-out ("FIFO") method.

Fixed assets

Fixed  assets  are  stated  at  cost.   Depreciation   is  computed   using  the
straight-line method over the following estimated economic lives of the assets:

                                                               Years
                                                               ----- 
Buildings                                                         30
Equipment                                                      5 - 7
Furniture and fixtures                                         5 - 7
Other                                                              5

Leasehold  improvements are depreciated  over the life of the respective  lease.
Expenditures  for  replacements  and  improvements  that  significantly  add  to
productive capacity or extend the useful life of an asset are capitalized, while
expenditures  for  maintenance  and repairs are charged  against  operations  as
incurred. When assets are sold or retired, the cost of the asset and the related
accumulated  depreciation  are removed from the accounts and any gain or loss is
recognized currently.

Drug licenses and related costs

Drug licenses and related costs incurred in connection with acquiring  licenses,
patents,  and other  proprietary  rights  related to the Company's  commercially
developed products are capitalized.  Capitalized drug licenses and related costs
are being amortized on a  straight-line  basis over fifteen years from the dates
of acquisition. Costs of acquiring pharmaceuticals requiring further development
are expensed as  purchased  research and  development.  Carrying  values of such
assets are reviewed  annually by the Company and are adjusted for any diminution
in value.

Investment in partnership

Belmac Hygiene,  Inc., a wholly owned subsidiary of the Company,  entered into a
50/50 partnership in March 1994 with Maximed Corporation  ("Maximed") to develop
and market feminine health care products. Maximed contributed the hydrogel-based
technology and the Company, through its subsidiary, is responsible for providing
financing and funding of the  partnership's  activities.  The  investment in the
partnership is accounted for using the equity method. (See Note 13.)

Research and development

                                      F-9
<PAGE>


Research and development costs are expensed when incurred.

Use of estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimated.

Original issue discount/Debt issuance costs

Original issue discount related to the issuance of debt is amortized to interest
expense using the effective  interest method over the lives of the related debt.
The costs  related to the  issuance of debt are  capitalized  and  amortized  to
interest  expense  using the  effective  interest  method  over the lives of the
related debt.

Amortization of goodwill

Costs of  investments in purchased  companies in excess of the  underlying  fair
value of net identifiable assets at date of acquisition are recorded as goodwill
and included in other non-current  assets which are amortized over fifteen years
on a straight-line  basis.  Carrying values of such assets are reviewed annually
by the Company and are adjusted for any diminution in value.

During the year ended  December 31, 1996, as a result of estimating the expected
net  proceeds  from  the then  pending  proposed  sale of  Chimos,  the  Company
reviewed,  for  impairment,  the  recoverable  value of the  carrying  amount of
long-lived  assets and  intangibles.  Based upon this review,  the Company fully
reserved  the  remaining  unamortized  goodwill of  approximately  $340,000,  at
December 31, 1996. Goodwill amortization  expense,  excluding the 1996 provision
for impairment,  for the year ended December 31, 1996 was $38,000.  There was no
goodwill  amortization  for the years ended  December 31, 1998 or 1997 (see Note
13).

Fair value of financial instruments

Statement of Financial  Accounting  Standards  No. 107  "Disclosures  about Fair
Value of Financial  Instruments" (FAS 107) requires  disclosure of the estimated
fair values of certain financial  instruments.  The estimated fair value amounts
have been determined  using available  market  information or other  appropriate
valuation  methodologies  that  require  considerable  judgment in  interpreting
market data and  developing  estimates.  Accordingly,  the  estimates  presented
herein are not  necessarily  indicative  of the amounts  that the Company  could
realize in a current market exchange.  The use of different  market  assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts. Long-term debt is estimated to have a fair

                                      F-10
<PAGE>

value of  approximately  $7,406,000  as of December  31, 1998 (based upon market
price on December 31, 1998). The carrying amounts of other financial instruments
approximate their estimated fair values.  The fair value  information  presented
herein is based on information  available to management as of December 31, 1998.
Although management is not aware of any factors that would significantly  affect
the estimated  fair value  amounts,  such amounts have not been  comprehensively
revalued  for  purposes  of these  financial  statements  since  that  date and,
therefore the current estimates of fair value may differ  significantly from the
amounts presented herein.

Stock-based compensation plans

The Company  applies APB 25 and related  Interpretations  in accounting  for its
stock-based  compensation  plans.  Accordingly,  no  compensation  cost has been
recognized for its stock-based compensation plans.

Revenue recognition

Sales of products are recognized by the Company when the products are shipped to
customers. The Company allows sales returns in certain situations,  but does not
reserve for returns and allowances based upon the Company's favorable historical
experience.

Income taxes

The  Company  applies  Statement  of  Financial  Accounting  Standards  No.  109
"Accounting  for Income Taxes" (FAS 109) which mandates the liability  method in
accounting for the effects of income taxes for financial reporting purposes.

Basic net loss per common share

Basic net loss per common  share is presented in  accordance  with  Statement of
Financial  Accounting Standards No. 128, "Earnings per Share" (FAS 128). FAS 128
provides for new accounting  principles  used in the calculation of earnings per
share and became effective for financial  statements for both interim and annual
periods ended after  December 15, 1997. The Company has  recalculated  the basic
net loss per common share for all periods presented to give effect to FAS 128.

Basic  net loss per  common  share is based on the  weighted  average  number of
shares of common stock  outstanding  during the period.  Diluted loss per common
share is not presented as it is antidilutive.  Stock options, stock warrants and
convertible  debentures  are the only  securities  issued  which would have been
included in the diluted loss per share calculation.

Comprehensive income

                                      F-11
<PAGE>


Statement of Financial  Accounting  Standards No. 130  "Reporting  Comprehensive
Income" (FAS 130) requires businesses to disclose  comprehensive  income and its
components in their financial  statements.  FAS 130 became  effective for fiscal
years beginning  after December 15, 1997, and is applicable to interim  periods.
The difference between net loss as reported and comprehensive loss is the effect
of foreign currency  translation (gains) losses totaling  ($253,000),  $388,000
and $487,000 for years ended December 31,1998, 1997 and 1996, respectively.

Segments of an enterprise and related information

Statement of Financial  Accounting Standards No. 131 "Disclosures About Segments
of an Enterprise and Related  Information" (FAS 131) was issued in June 1997 and
redefines  how  operating  segments are  determined  and requires  disclosure of
certain  financial  and  descriptive  information  about a  Company's  operating
segments. The Company operated in two business segments until the divestiture of
its French  subsidiary  in June 1997.  The Company now  operates in one business
segment. FAS 131 was adopted by the Company on January 1, 1998 (see Note 12).

Derivative instruments and hedging

Statement of Financial  Accounting  Standards No. 133 "Accounting for Derivative
Instruments  and  Hedging  Activities"  (FAS  133) was  issued  in June 1998 and
establishes  accounting  and  reporting  standards for  derivative  instruments,
including   certain   derivative   instruments   embedded  in  other   contracts
(collectively  referred  to as  derivatives)  and  for  hedging  activities.  It
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities  in the balance sheet and measure these  instruments  at fair value.
The  accounting  for changes in the fair value of a  derivative ( that is, gains
and  losses)  depends  upon  the  intended  use of a  derivative  and  resulting
desigantion if used as a hedge.  FAS 133 is effective for all fiscal quarters of
fiscal years  beginning  after June 15, 1999,  and is not intended to be applied
retroactively.  Management  does not believe  that the  adoption of FAS 133 will
have a significant impact on the Company's consolidated financial statements.

Reclassifications

Certain  prior year amounts have been  reclassified  to conform with the current
year's  presentation  format.  Such  reclassifications  are not  material to the
consolidated financial statements.

NOTE 3--RECEIVABLES

Receivables consist of the following (In Thousands):

                                              December 31,  
                                         1998            1997
                                         ----            ----

Trade receivables                      $2,972          $2,129

Other                                     273             358
                                          ---             ---

                                        3,245           2,487

Less-allowance for doubtful account       (17)            (59)
                                       ------          ------

                                       $3,228          $2,428
                                       ======          ======

                                      F-12
<PAGE>


                                                                 
NOTE 4--INVENTORIES

Inventories consist of the following (In Thousands):

                                                              December 31, 
                                                         1998            1997
                                                         -----           ----
Raw materials                                            $505             $338
Finished goods                                            703              376
                                                          ----             ---  
                                                        $1,208            $714
                                                        ======            ====

NOTE 5--FIXED ASSETS

Fixed assets consist of the following (In Thousands):

                                                              December 31, 
                                                         1998            1997
                                                         -----           ----

Land                                                    $1,040            $967
Buildings                                                2,782           2,329
Equipment                                                  754             430
Furniture and fixtures                                     539             435
Leasehold improvements                                       -              92
Equipment under capital lease                               27              27
                                                            --              --
                                                         5,142           4,280
Less-accumulated depreciation                           (1,591)         (1,362)
                                                       -------         -------
                                                        $3,551          $2,918
                                                        ======          ======

Depreciation  expense was  $165,000,  $185,000  and $345,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.

                                      F-13

<PAGE>

NOTE 6--DRUG LICENSES AND RELATED COSTS, NET

Drug licenses and related costs consist of the following (In Thousands):

                                                        December 31, 
                                                      1998        1997
                                                      ----        ----

Drug licenses and related costs                      $3,144      $1,219
Less-accumulated amortization                          (711)       (528)
                                                      ------      -----
                                                      $2,433       $691
                                                      =======     ======

The Company purchased the product Senioral from Sanofi-Winthrop  during the year
ended December 31, 1998 for approximately $1,400,000.  Senioral is a combination
product useful in the treatment of congestive  symptoms of the upper respiratory
tract.  The  Company's  Spanish  subsidiary,  Laboratorios  Belmac S. A. started
marketing Senioral in October 1998.

Amortization  expense  for drug  licenses  and related  costs was  approximately
$138,000,  $110,000 and $119,000 for the years ended December 31, 1998, 1997 and
1996, respectively.

NOTE 7--ACCRUED EXPENSES

Accrued expenses consist of the following (In Thousands):

                                                  December 31,
                                               1998        1997
                                               ----        ----
Accrued expenses                               $877        $814

Income taxes payable                            242         608

Accrued payroll                                 444         191
                                                ---         ---
                                             $1,563      $1,613
                                             ======      ======

                                      F-14


<PAGE>


NOTE 8--DEBT

Short term borrowings consist of the following (In Thousands):

                                                                 December 31, 
                                                                  1998  1997
                                                                 ----   ----

Trade  receivables  discounted  (with a  Spanish  financial 
institution),  with recourse, effective interest rate on the
note is 5.9% and 6.5%, respectively.                             $633   $1,036

Revolving  lines  of  credit  (with  Spanish  financial 
institutions), average interest rate is 5.6% and 7.5%, 
respectively.                                                               
                                                                  590      104
                                                                  ---      ---
     Total short term borrowings                               $1,223   $1,140
                                                               ======   ======

The weighted  average stated interest rate on short term borrowings  outstanding
at December 31, 1998 and 1997 was 5.7% and 6.6%, respectively.

The Company has $3,839,000 of available  revolving  lines of credit with Spanish
financial  institutions.  At December 31, 1998,  advances  outstanding under the
lines of credit were approximately  $590,000. The weighted average interest rate
at December 31, 1998 was 5.6% and interest is payable quarterly.

Long-term debt consists of the following (In Thousands):

                                                                December 31, 
                                                               1998     1997
                                                               ----      ---
Debentures,  maturing  February  13,  2006,  stated rate of
 interest 12% (net of $1,584 and $1,670 discount,
 respectively)
                                                               $5,403  $5,317
Capitalized lease obligations, relating to various 
 equipment used by the Company                                     12      17
                                                                   --      --
                                                                5,415   5,334
Less current portion                                              (5)      (5)
                                                                  ---     ---
     Total long term debt                                      $5,410  $5,329
                                                               ======  ======


In February 1996,  the Company  completed a Public  Offering of its  securities,
whereby  an  aggregate  of 6,900  Units were sold at a price of $1,000 per Unit.
Each Unit  consisted  of One  


                                      F-15
<PAGE>

Thousand Dollars ($1,000) Principal Amount 12% Convertible  Senior  Subordinated
Debenture due February 13, 2006 and 1,000 Class A Redeemable  Warrants,  each to
purchase one share of Common Stock and one Class B Redeemable Warrant. Two Class
B Redeemable  Warrants  entitle a holder to purchase one share of Common  Stock.
Interest on the Debentures is payable  quarterly.  Gross and net proceeds (after
deducting underwriting commissions and the other expenses of the offering), were
approximately $6,900,000 and $5,700,000, respectively.  Approximately $1,770,000
of the net proceeds were used to retire the  principal  balance of debt incurred
in 1995  private  placements  (See Note 14).  The  balance of the net  proceeds,
approximately  $4,000,000,  was used for working capital needs, limited research
and   development   activities,   and  search  for  possible   acquisitions   of
complementary products, technologies and/or businesses.

On May 29, 1996, the  Debentures  and Class A Redeemable  Warrants began trading
separately.  The  characteristics  of the  Debentures  and  Class  A  Redeemable
Warrants  are  consistent  with their  description  as a component  of the Units
except that the  expiration  date of the Class A Warrants  has been  extended to
August 16, 1999.

Of the Unit purchase  price of $1,000,  for financial  reporting  purposes,  the
consideration  allocated to the Debenture was $722, to the  conversion  discount
feature of the  Debenture  was $224 and to the 1,000  Class A Warrants  was $54.
None of the Unit  purchase  price was  allocated  to the Class B Warrants.  Such
allocation  was based upon the relative fair values of each security on the date
of issuance.  Such allocation resulted in recording a discount on the Debentures
of approximately  $1,900,000.  The original issue discount and the costs related
to the issuance of the Debentures are being amortized to interest  expense using
the  effective  interest  method over the lives of the related  Debentures.  The
effective interest rate on the Debentures is 18.1%.

The Debentures are convertible prior to maturity, unless previously redeemed, at
any time into shares of Common Stock at a conversion price per share of $2.50.

NOTE 9--REDEEMABLE PREFERRED STOCK

During  1991,  the  Company  issued  290,000  shares  of $1 par  value  Series A
Convertible  Exchangeable  Preferred Stock (the "Series A Preferred  Stock") and
340,000 shares of $1 par value Series B Convertible Exchangeable Preferred Stock
(the "Series B Preferred  Stock") at $25 per share. The issuance of these shares
provided aggregate  proceeds to the Company of $15,750,000.  Since the Preferred
Stock met the  definition of  Mandatorily  Redeemable  Preferred  Stock,  it was
excluded  from the  Common  Stockholders'  Equity  section  of the  Consolidated
Balance  Sheets.  As of December  31, 1998 all 290,000 of the Series A Preferred
Stock had been  converted  into  66,700  shares of Common  Stock and all 340,000
shares of the Series B Preferred  Stock had been converted into 56,100 shares of
Common Stock.


                                      F-16
<PAGE>



The Series A Preferred Stock was recorded at redemption value,  which was $25.00
per share  plus  cumulative  dividends  of 9% per  annum.  The  following  table
summarizes activity of the Series A Preferred Stock (In Thousands):

                                                              Series A 
                                                              --------

                                                          Shares     Amount
                                                          ------     ------

Balance at December 31, 1996                                  60    $2,203
     Accrual of 9% dividends                                   -       135
                                                            ----    ------
Balance at December 31, 1997                                  60     2,338
     Accrual of 9% dividends                                   -       101
     Conversion                                             (60)    (2,439)
                                                            ----   -------
Balance at December 31, 1998                                   -   $     -
                                                            ====   =======

NOTE 10--COMMON STOCKHOLDERS' EQUITY

At December 31, 1998 the Company had the  following  Common  Stock  reserved for
issuances under various plans and agreements (In Thousands):


                                                       Common Shares
                                                       =============

For exercise of stock purchase warrants                     7,213
For conversion of debentures                                2,979
For exercise of stock options                               2,091
For other                                                      66
                                                         --------
                                                           12,349
                                                         ========

The Company has never paid any dividends on its Common Stock. The current policy
of the Board of Directors is to retain  earnings to finance the operation of the
Company's business.  Accordingly,  it is anticipated that no cash dividends will
be paid to the holders of the Common Stock in the foreseeable future.

Stock purchase warrants

At December  31,  1998,  stock  purchase  warrants to purchase an  aggregate  of
5,928,000  shares of Common Stock were  outstanding,  which were  exercisable at
prices ranging from $2.50 to $20.00 per share, of which 775,000 warrants have an
exercise price of $2.50 per share,  2,571,000 warrants have an exercise price of
$3.00 per share and warrants to purchase 2,447,000 shares

                                      F-17
<PAGE>

have an exercise price of $5.00 per share.  The warrants expire through December
2004.

During the year ended  December 31,  1998,  the Company  issued  stock  purchase
warrants to purchase an  aggregate  of 425,000  shares of the  Company's  Common
Stock at $2.50 per share.  During the year ended  December 31, 1997, the Company
issued stock purchase  warrants to purchase an aggregate of 2,574,000  shares of
the Company's Common Stock (including Class B warrants to purchase approximately
2,450,000  shares,  which  became  outstanding  upon  exercise  of the  Class  A
warrants),  all of which were granted at exercise  prices which were equal to or
greater  than the market  price of the  Company's  Common  Stock on the dates of
grant.  During the year ended December 31, 1997, the Company temporarily lowered
the exercise price on its Class A and Class B redeemable warrants. Approximately
70% of all  outstanding  Class A redeemable  warrants  (approximately  4,900,000
Class  A  warrants)   were   exercised   during  this  period  which   generated
approximately $9,800,000 in proceeds to the Company. The exercise of the Class A
warrants resulted in issuance of approximately 4,900,000 shares of Common Stock.
The exercise  price of the  Registrant's  Class B  redeemable  warrants was also
temporarily  lowered and 5,000 Class B warrants were  exercised in January 1998,
resulting in the issuance of 2,500 shares of Common Stock.

Additionally,  162,000 stock purchase warrants were converted into shares of the
Company's Common Stock,  yielding net proceeds of $405,000 to the Company during
1997. Also during 1997, 110  underwriters'  warrants were  exercised,  providing
proceeds of  $132,000  to the  Company,  which  resulted in the  issuance of 110
$1,000 face value 12%  Debentures  due  February  13,  2006 and 110,000  Class A
warrants.  Such  warrants  were  exercised  during 1997 and are  included in the
4,900,000  discussed above. The proceeds were allocated  between the Debentures,
the Class A warrants and the conversion feature of the Debentures based upon the
relative  fair  values of each on the date of  issuance.  During  the year ended
December 31, 1996, no stock purchase  warrants were converted into shares of the
Company's Common Stock.

In addition, the Company has granted warrants outside of the Plans in connection
with private  placements  of its  securities  and as  consideration  for various
services.  These  warrants  have been granted for terms not  exceeding ten years
from the date of grant.  The table below  summarizes  warrant  activity  for the
years ended December 31, 1996, 1997 and 1998.


                                      F-18
<PAGE>

(In thousands except per share data)

                                            Number of              Price
                                          Common Shares         Per Share 

Outstanding at December 31, 1995                  547

 Granted                                        7,845            $2.50-$3.00

 Canceled                                        (88)          $5.00-$120.00
                                                 ----

Outstanding at December 31, 1996                8,304

 Granted                                        2,574            $2.50-$5.00

 Exercised                                    (5,061)            $2.00-$2.50

 Canceled                                       (120)          $2.50-$116.25
                                                -----

Outstanding at December 31, 1997                5,697

 Granted                                          425                  $2.50

 Exercised                                        (2)                  $3.00

 Canceled                                       (192)           $2.50-$24.60
                                                -----

 Outstanding at December 31, 1998               5,928
                                                =====

Common stock transactions

During the year ended December 31, 1998, the Company issued approximately 15,500
shares  of  Common  Stock as a result  of the  conversion  of  60,000  shares of
Redeemable  Preferred  Stock and issued 2,500 shares of Common Stock as a result
of the exercise of 5,000 Class B warrants.

During the year ended  December  31,  1997,  the  Company  awarded 600 shares of
Common  Stock to outside  Directors  as  compensation.  The Company  also issued
approximately  4,900,000  shares 

                                      F-19

<PAGE>

of Common Stock as a result of the exercise of  approximately  4,900,000 Class A
warrants.  Also,  172,000 shares of Common Stock were issued in connection  with
the  exercise of other stock  options/warrants  and 9,000 shares of Common Stock
were issued as the result of conversion of 23 of the Company's $1,000 face value
12% Debentures due February 13, 2006.


During the year ended  December 31, 1996,  the Company  issued  14,000 shares of
Common  Stock as payment for  consulting  services  and awarded  1,000 shares of
Common Stock to outside Directors as compensation.

Stock option plans

The Company has in effect Stock Option  Plans (the  "Plans"),  pursuant to which
directors,  officers,  and employees of the Company who contribute materially to
the  success of the Company  are  eligible to receive  grants of options for the
Company's  Common Stock.  An aggregate of 2,091,000  shares of Common Stock have
been reserved for issuance  under the Plans,  of which  323,000 are  outstanding
under the 1991 and 1994 Plans and 1,500,000 are outstanding  under the Executive
Plan as of December 31, 1998. Options may be granted for terms not exceeding ten
years  from the date of grant  except  for stock  options  which are  granted to
persons owning more than 10% of the total  combined  voting power of all classes
of stock of the Company. For these individuals, options may be granted for terms
not exceeding five years from the date of grant. Options may not be granted at a
price which is less than 100% of the fair  market  value on the date the options
are  granted  (110% in the case of  persons  owning  more  than 10% of the total
combined voting power of the Company).  During the year ended December 31, 1997,
9,000 stock options were  converted  into shares of the Company's  Common Stock.
Holders of stock options  exercised no options  during the years ended  December
31, 1996.

Had the  compensation  cost for the Company's Plans been determined based on the
fair value at the grant dates for awards  under the Plans,  consistent  with the
method of FAS 123, the Company's net loss and basic net loss per common share on
a pro forma basis would have been (In Thousands, except per share data):

                                                     For the Year Ended
                                                          December 31,  
                                             --------------------------------  

                                             1998        1997          1996
                                             ----        ----          ----

Net loss                                  $(3,067)     $(3,938)      $(6,354)

Basic net loss per common share            $(0.38)      $(1.00)       $(1.95)

The  preceding  pro  forma  results  were  calculated  using  the  Black-Scholes
option-pricing  model.  
                                      F-20

<PAGE>

The following  assumptions were used for the years ended December 31, 1998, 1997
and 1996, respectively: (1) risk-free interest rates of 5.4%, 6.2% and 6.5%; (2)
dividend  yields of 0.0%;  (3) expected  lives of 10, 9.7 and 10 years;  and (4)
volatility  of  85.3%,  73.1%  and  88.1%.  Results  may vary  depending  on the
assumptions  applied within the model. The effects of application of FAS 123 are
not likely to be  representative of the effects on net income or loss for future
years because  options vest over several years and generally  additional  awards
are made each year.

In addition,  the Company has granted options outside of the Plans in connection
with private  placements  of its  securities  and as  consideration  for various
services. These options have been granted for terms not exceeding ten years from
the date of grant.  The table below  summarizes  activity in the Company's Plans
for the years ended December 31, 1996, 1997 and 1998.

(In thousands except per share data)
                                            Number of          Weighted Average
                                          Common Shares          Exercise Price
                                          -------------        ----------------

Outstanding at December 31, 1995                 213                     $33.04

 Granted                                       1,525                      $3.74

 Canceled                                        (20)                    $83.71
                                                 ----

Outstanding at December 31, 1996               1,718                      $6.39

 Granted                                          53                      $2.93

 Exercised                                        (9)                     $2.31

 Canceled                                        (21)                    $47.68
                                                 ----

Outstanding at December 31, 1997                1,741                     $5.81

 Granted                                          98                      $2.25

 Canceled                                        (16)                     $3.20
                                                 ----

 Outstanding at December 31, 1998               1,823                     $5.64
                                                =====


                                      F-21
<PAGE>

Options and warrants  outstanding include 5,928,000  warrants,  all of which are
exercisable,  and 1,823,000 options, of which 720,000 are vested and exercisable
at December 31, 1998.

NOTE 11--PROVISION FOR INCOME TAXES

The Company has recognized a deferred tax asset of approximately  $29,400,000 as
of December 31, 1998,  primarily  related to net operating loss and capital loss
carryforwards,  and basis  differences  in the stock of its foreign  subsidiary;
however,  the Company has  established a valuation  allowance  equal to the full
amount of the deferred tax asset, as future operating profits cannot be assured.


At  December  31,  1998,   the  Company  has  net  operating  loss  (the  "NOL")
carryforwards  of  approximately  $29,000,000  available  to offset  future U.S.
taxable income. The Company calculates that its use of the NOL generated through
December  31,  1997 may be limited to  approximately  $1,000,000  each year as a
result of stock,  option and warrant issuances  resulting in an ownership change
of more than 50% of the Company's  outstanding  equity. The NOL of approximately
$3,200,000  generated  during the  current tax year ended  December  31, 1998 is
available to offset future  taxable  income  without  limitation.  Additionally,
approximately $1,800,000 of the NOL generated in 1995 available to offset future
U.S. taxable income will be limited to approximately  $300,000 per year over the
next six  years due to the  change  in tax year end  during  1995.  The  Company
utilized approximately $14,000,000 of NOLs to offset taxable income during 1997.
If not offset against future taxable income,  the NOL carryforwards  will expire
in tax years 2007 through 2013.

Total  income tax expense  (benefit)  was  ($280,000)  (domestic)  and  $516,000
(foreign) for the year ended  December 31, 1998.  These amounts  differ from the
amounts  computed by applying the U.S.  federal income tax rate of 34% to pretax
loss as a result of the  increase  in the  valuation  allowance  established  to
offset domestic deferred tax assets and the Company's tax position in Spain. The
Company  incurred  income  tax  expense  of  $280,000  (domestic)  and  $341,000
(foreign) for the year ended  December 31, 1997.  These amounts  differ from the
amounts  computed by applying the U.S.  federal income tax rate of 34% to pretax
loss as a result of U.S.  alternative  minimum  taxes and certain  nondeductible
expenses in Spain. The Company incurred no income tax expense for the year ended
December 31, 1996.

 NOTE 12-BUSINESS SEGMENT INFORMATION

The  Company  is  an  international   pharmaceutical   company  engaged  in  the
development,   manufacturing,   marketing  and  distribution  of  pharmaceutical
products.   The  Company's  Spanish   subsidiary,   Laboratorios   Belmac  S.A.,
manufactures,  markets and distributes these pharmaceutical products from Spain.
During the year  ended  December  31,  1997,  the  Company  divested  its French
subsidiary,   Chimos/LBF,  which  was  primarily  involved  in  the  import  and
distribution of specialty  pharmaceutical  products in France.  In the U.S., the
Company's activities consist primarily of corporate  management,  administration
and limited  product


                                      F-22
<PAGE>

development.  The Company manages its operating segments separately because they
either provide different products/services or require different strategies.

Laboratorios  Belmac  derives its revenues from the sales of its own products as
well as from products under contract for others, within four primary therapeutic
categories of  cardiovascular,  gastrointestinal,  neurological  and  infectious
diseases.  Until its  divestiture  in June 1997,  the  operations  of Chimos/LBF
consisted   of  revenues   from  the  import  and   distribution   of  specialty
pharmaceutical  products to  hospitals  and others in France as well as sales of
"orphan drugs" (drugs used for the treatment of rare  diseases).  Until December
1998, the Company's operations in the United States included sales of disposable
linen  products.  The Company  discontinued  such activities in December 1998 in
order  to  focus  on  acquisition  and  development  of  permeation  enhancement
technology and potential  product  applications,  in addition to other corporate
office functions, including management, administration and raising of capital.

Set forth in the tables below is certain  financial  information with respect to
the Company's operating segments for the years ended December 31, 1998, 1997 and
1996. The operating segments use the same accounting policies as those described
in the summary of  significant  accounting  policies in Note 2.  Chimos/LBF  was
divested  by the  Company in June 1997 and the  following  information  for 1997
reflects its operating results through this date.

                                                    (In Thousands)
                                           Year  Ended December 31, 1998   
                                     -------------------------------------------
                                                       Corporate/
                                                       Consolidation/
                                      Spain    France  Elimination  Consolidated
Revenues                               $15,148    $-        $95        $15,243 
Interest income                              -     -        499            499 
Interest expense                           105     -        971          1,076 
Depreciation and amortization expense      250     -         53            303 
Non-recurring charge                         -     -      1,176          1,176 
Net income (loss) before income taxes    1,410     -    (4,050)        (2,640) 
Income tax expense (benefit)               516     -      (280)            236 
Net income (loss)                          894     -    (3,770)        (2,876) 
Fixed assets                             3,515     -         36          3,551 
Drug licenses                            2,433     -          -          2,433 
Total assets                            11,777     -      8,541         20,318 
Total liabilities                        7,809     -      3,517         11,326 
Expenditures for drug licenses             141     -      1,418          1,559 
Expenditures for fixed assets              548     -         11            559 

                                                                               
                                                                       


                                      F-23
<PAGE>



                                                    (In Thousands)
                                             Year Ended December 31, 1997   
                                     -------------------------------------------
                                                       Corporate/
                                                       Consolidation/
                                     Spain     France  Elimination  Consolidated
                                     ------    ------  -----------  ------------
Revenues                              $12,491   $2,029       $382       $14,902
Interest income                             -        -        123           123
Interest expense                          131       13        942         1,086
Depreciation and amortization expense     215       28         52           295
Other expenses                              -        -        685           685
Net income (loss) before income taxes     623      (20)    (3,797)       (3,194)
Income tax expense                        341        -        280           621
Net income (loss)                         282      (20)    (4,077)       (3,815)
Fixed assets                            2,839        -         79         2,918
Drug licenses                             691        -          -           691
Total assets                            6,949        -     14,094        21,043
Total liabilities                       3,203        -      6,597         9,800
Expenditures for drug licenses             40        -          -            40
Expenditures for fixed assets              91        -         17           108




                                                   (In Thousands)               
                                            Year Ended December 31, 1996        
                                    ------------------------------------------- 
                                                      Corporate/                
                                                      Consolidation/            
                                    Spain     France  Elimination  Consolidated 
                                    ------    ------  -----------  ------------ 

Revenues                          $11,299    $11,625      209       23,133
Interest income                         -          -      103          103
Interest expense                      147         23    1,057        1,227
Depreciation and amortization 
  expense                             329        101       72          502 
Provision for goodwill impairment       -        340        -          340
Net income (loss) before income taxes 722        178   (3,373)      (2,473)
Extraordinary item                      -          -      446          446
Net income (loss)                     722        178   (3,819)      (2,919)
Fixed assets                        3,341         85      118        3,544
Drug licenses                       1,475          -        -        1,475
Total assets                        7,887      5,322    3,349       16,588
Total liabilities                   3,395      1,077    6,588       11,060
Expenditures for fixed assets           -          -      170          170

                                      F-24

<PAGE>

Interest  income and interest  expense are based upon the actual results of each
operating segment's assets and borrowings. The consolidation/elimination  column
includes  the  elimination  of all  inter-segment  amounts as well as  corporate
segment amounts. The principal component of the inter-segment amounts related to
inter-segment advances.

Revenues from a single customer did exceed 10% of  consolidated  revenues during
each of the years ended December 31, 1998 and 1996;  however,  revenues  derived
from any one customer did not exceed 10% of consolidated revenues during 1997.

NOTE 13--COMMITMENTS AND CONTINGENCIES

The Company completed the sale of Chimos/LBF,  for  approximately  $3,650,000 in
June 1997. The Company has since received  approximately  $3,300,000,  including
approximately  $2,600,000 of cash and cash  equivalents  on  Chimos/LBF's  books
prior to its  disposition,  of which  approximately  $500,000  was used to repay
indebtedness  to  the  former  subsidiary.  An  escrow  fund  in the  amount  of
approximately  $350,000,  representing  the  balance due the  Company,  has been
established for certain contingent  obligations or liabilities.  The Company has
established a reserve in the amount of $100,000,  which it has determined should
be sufficient to address such  contingencies and liabilities.  In the opinion of
management,  the resolution of the remaining contingencies will have no material
effect on the Company's financial position or results of operations.

In March  1994 a  wholly-owned  subsidiary  of the  Company,  Belmac  Healthcare
Corporation,  formed a partnership through its wholly-owned  subsidiary,  Belmac
Hygiene, Inc., with a wholly-owned  subsidiary of Maximed Corporation,  which is
headquartered in New York, and planned to market,  through this  partnership,  a
range  of  hydrogel   based   feminine   health  care   products,   including  a
contraceptive,  an antiseptic, an anti-fungal and an antibacterial.  In December
1994, the Company commenced litigation against its partner claiming interference
in the management of the partnership and misrepresentation under the partnership
agreement.  The Company was awarded a judgment in the amount of $7.68 million in
1998,  which  was  affirmed  by the  U.S.  Court  of  Appeals.  In  addition  to
establishing  a receivable on its books,  the Company has  established a reserve
equal to the receivable. The Company is seeking an assignment of the patents and
related  know-how from the partnership and its partner as partial  settlement of
the judgment.


                                      F-25

<PAGE>

The partnership is not actively  engaged in the development of any products.  In
the  opinion  of  management,  the  carrying  value  of  its  investment  in the
partnership,  accounted for using the equity method,  of $553,000 as of December
31, 1998 and 1997, is not impaired and no reserve is considered necessary.

The Company was awarded a judgment in the amount of $2.1 million relating to the
Company's claims of civil theft and breach of employment agreement filed against
its former President and Chief Executive  Officer,  Michael M. Harshbarger.  The
judgement  included treble damages totaling  $418,000 related to its civil theft
claim and $1,712,000  related to its breach of employment  agreement  claim.  In
addition to establishing a receivable on its books,  the Company has established
a reserve equal to the receivable.

The Company is obligated to pay certain royalty payments upon  commercialization
of products using technologies  acquired in a transaction,  which it consummated
subsequent to December 31, 1998. (See Note 16).

The Company leases certain of its assets under noncancellable  operating leases.
Total charges to operations under operating leases were approximately  $487,000,
$350,000  and $448,000  for the years ended  December  31, 1998,  1997 and 1996,
respectively.  Future  minimum  lease  payments  under  operating  leases are as
follows:

                                    (In Thousands)
                               Year Ending December 31,
                              -------------------------
                              1999                  $519
                              2000                   501
                              2001                   522
                              2002                   544
                              2003 and thereafter    567


NOTE 14--NON-RECURRING CHARGE

During 1998, the Company  negotiated to acquire a manufacturing  facility in the
United  States and a portfolio  of products  from  Schwarz  Pharma.  The Company
decided  to  abandon  this  effort in May 1998  and,  consequently,  recorded  a
non-recurring charge of $1,176,000 (including $158,000 of non-cash items) in the
second quarter of 1998,  representing  previously  capitalized  costs related to
this and other proposed acquisitions.  Of this amount,  $448,000 was paid during
the year ended December 31, 1997.

NOTE 15--EXTRAORDINARY ITEM (FISCAL YEAR 1996)

The Company recorded an extraordinary  charge, net of income tax effect of zero,
of $446,000,  or $.13 per common share, in February 1996 upon the extinguishment
of  debt  that  it  had  incurred  

                                      F-26

<PAGE>

in its October 1995 private placements,  representing  unamortized  discount and
issuance costs at the date of repayment (see Note 8).

NOTE 16--SUBSEQUENT EVENTS

On  February  11,  1999,  the  Company  acquired  rights  to  certain  U.S.  and
international  patents and related technology (the "Assets") covering methods to
enhance the absorption of drugs delivered to biological  tissues.  Consideration
for the Assets was paid to Yungtai  Hsu,  an  individual,  in the form of a cash
payment  of  approximately  $1.1  million,  225,800  shares of Common  Stock and
ten-year  warrants to purchase  450,000  shares of common  stock.  In  addition,
359,282   shares  of  Common  Stock  were  conveyed  to  Conrex   Pharmaceutical
Corporation.   The  total  of  all   consideration   paid  for  the  Assets  was
approximately $2.25 million. Furthermore,  terms of this transaction provide for
certain  royalty   payments  upon   commercialization   of  products  using  the
technologies.



                                      F-27
<PAGE>


INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders of
Bentley Pharmaceuticals, Inc.
Tampa, Florida

We   have   audited   the   consolidated   financial   statements   of   Bentley
Pharmaceuticals,  Inc., and subsidiaries (the "Company") as of December 31, 1998
and 1997, and for each of the three years in the period ended December 31, 1998,
and have issued our report  thereon  dated  March 26,  1999;  such  consolidated
financial  statements and report are included elsewhere in this Annual Report on
Form 10-K.  Our audits also  included the  financial  statement  schedule of the
Company   listed  in  Item  14.  This  financial   statement   schedule  is  the
responsibility of the Company's management.  Our responsibility is to express an
opinion based on our audits. In our opinion,  such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole,  presents fairly in all material  respects the information set forth
therein.



/s/ DELOITTE & TOUCHE LLP

DELOITTE & TOUCHE LLP

Tampa, Florida
March 26, 1999


                                      F-28
<PAGE>
<TABLE>
<CAPTION>

                          BENTLEY PHARMACEUTICALS, INC.

                                   Schedule II

                 Valuation and qualifying accounts and reserves

 Column A                              Column B                Column  C              Column D          Column E   
 --------                              --------                ---------              --------          ---------
                                                               Additions                
                                                               ---------

                                        Balance at     Charged to       Charged to
                                       beginning of     costs and     other accounts-    Deductions-    Balance at
            Description                   period        expenses       describe (a)       describe     end of period
            -----------                ------------    -----------    ---------------    -----------   --------------    
<S>                                <C>              <C>               <C>            <C>             <C>   
Drug licenses and related costs:

For the year ended December 31, 1998     $528,000         $138,000          $45,000                      $711,000

For the year ended December 31, 1997      497,000          110,000          (79,000)                      528,000

For the year ended December 31, 1996      406,000          119,000          (28,000)                      497,000



Goodwill:

For the year ended December 31, 1998            -                                                              -

For the year ended December 31, 1997      564,000                                                       
                                                                                        $564,000(b)             -

For the year ended December 31, 1996      186,000          378,000(c)                                       564,000
                                       


Reserve for inventory obsolescence:

For the year ended December 31, 1998      125,000                            7,000       24,000(d)         108,000
                                                                                        
                                                                          
For the year ended December 31, 1997      827,000                          (24,000)     678,000(e)         125,000
                                                                                       

For the year ended December 31, 1996      819,000          136,000                      128,000(f)         827,000
</TABLE>

------------------------
(a)Effect of exchange rate fluctuations.

(b) Represents goodwill related to the Registrant's French subsidiary, which was
divested in June 1997.

(c) Includes  approximately  $340,000 of  unamoritized  goodwill  related to the
Registrant's French subsidiary that management of the Registrant  determined may
not be realizable via the sale of its French  subsidiary (which sale occurred in
June 1997).

(d) Represents disposition of inventory which has been fully reserved.

(e) Includes a disposition  of inventory of  approximately  $547,000,  which has
been fully  reserved  and  approximately  $131,000  related to the  Registrant's
French subsidiary, which was divested in June 1997.

(f) Represents disposition of inventory, which has been fully reserved.


                                      F-29