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, 2002
                                                               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)

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

65 Lafayette Road, 3rd Floor, North Hampton, NH                03862
   (Address of principal executive offices)                 (Zip Code)

       Registrant's telephone number, including area code: (603) 964-8006

           Securities registered pursuant to section 12(b) of the Act:
     Title of each class              Name of each exchange on which registered
Common Stock, $.02 par value        American Stock Exchange and Pacific Exchange
Class B Redeemable Warrants                 American Stock Exchange

       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. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  Yes [X]    No [ ]

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 the last business day
of the registrant's most recently completed second fiscal quarter.

 Title of Class      Aggregate Market Value       As of Close of Business on
  Common Stock,           $177,974,776                 June 30, 2002
 $.02 par value

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,              17,456,367                March 7, 2003
$.02 par value

                       DOCUMENTS INCORPORATED BY REFERENCE
  Proxy Statement for the 2003 Annual Meeting of Stockholders - Incorporated by
                   Reference into Part III of this Form 10-K

<PAGE>

                                     PART I

ITEM 1.           BUSINESS
                  --------
OVERVIEW

         We are a specialty pharmaceutical company focused on research,
development and licensing/commercialization of advanced drug delivery
technologies and pharmaceutical products; and manufacturing and selling of
generic and branded pharmaceutical products. In our research and development
activities based in the U.S., we have U.S. and international patent and other
proprietary rights to technologies that enhance or facilitate the absorption of
drugs across membranes of the skin, mouth, nose, vagina and eye. We are
developing products incorporating these technologies and seek to form strategic
alliances with pharmaceutical and biotechnology companies to facilitate the
development and commercialization of our products. We currently have strategic
alliances regarding our drug delivery technologies with Pfizer Inc and Auxilium
Pharmaceuticals, Inc. and are in preliminary discussions with a number of other
pharmaceutical companies to form additional alliances.

         In our pharmaceutical product sales activities, we have a significant
commercial presence in Spain, where we manufacture and market more than 100
pharmaceutical products, representing various dosage strengths and product
formulations of more than 30 chemical entities. Our product line consists of
generic and branded products within four primary therapeutic areas:
cardiovascular, gastrointestinal, infectious and neurological diseases.
Additionally, we have a strategic alliance with Teva Pharmaceutical Industries
Ltd. granting us the right to register and market in Spain more than 75 of
Teva's pharmaceutical products through our sales force of approximately 150
full-time personnel located in major cities throughout Spain.


INDUSTRY OVERVIEW

Drug Delivery Industry

         Drug delivery companies develop technologies to improve the
administration of therapeutic compounds. These technologies are designed to
enhance safety, efficacy, ease-of-use and patient compliance with prescribed
therapy. Drug delivery technologies provide opportunities for pharmaceutical and
biotechnology companies to extend their drug franchises as well as develop new
and innovative products. The worldwide market for drug delivery systems was
estimated to be $35 billion in 2000 and is projected to increase to $75 billion
by 2005.

         The vast majority of the drugs currently on the market are taken orally
or are administered by injection. Oral drug delivery methods, while simple to
use, typically subject drugs to first-pass metabolism in the body, which results
in drug degradation in the stomach and further neutralization in the liver
before reaching the bloodstream. In order to achieve efficacy, higher drug
dosages are often used, with increased risks of side effects. The injection of
pharmaceuticals, while avoiding first-pass metabolism in the body, also has
major limitations, including pain, which can lead to decreased patient
acceptance and compliance with prescribed therapy. A decline in patient
compliance can increase the risk of medical complications and lead to higher
healthcare costs. Also, the costs of injectable drugs typically are higher as a
result of the additional costs associated with medical personnel to administer
the injections and the costs associated with the purchase and disposal of
syringes.


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<PAGE>

         Pharmaceutical and biotechnology companies look to drug delivery
enhancements as a way of gaining a competitive advantage. Alternative drug
delivery technologies, which avoid first-pass metabolism and are less invasive,
are often sought by pharmaceutical and biotechnology companies to extend the
period of market exclusivity for a branded drug and thus postpone competition
from generic drugs. In order to maintain the competitiveness of their
proprietary drug candidates, large pharmaceutical companies seek delivery
enhancements that will increase safety and efficacy, reduce side effects and
make administration more convenient. Further, drug delivery companies can apply
their technologies to off-patent products to formulate their own proprietary
products, which they often commercialize by seeking marketing collaborations
with larger pharmaceutical companies that have greater capabilities and
resources.

         Developing safer and more efficacious ways of delivering existing drugs
generally is less risky than attempting to discover new drugs, because of the
lower product development cost. On average, it takes 15 years for an
experimental new drug to progress from the laboratory to commercialization in
the U.S., with an average cost of approximately $500 million. Typically, only
one in 5,000 compounds entering preclinical testing advances into human testing
and only one in five tested in humans is approved. By contrast, drug delivery
companies typically target drugs that already have been approved, have a track
record of safety and efficacy and have established markets for which there is a
proven medical need. Consequently, clinical trials related to drug delivery
technologies applied to previously-approved pharmaceuticals need only show that
carrier technologies deliver the drug without harming the patient or changing
the clinical attributes of the drug.

Market Overview of Europe and Spain

         The European Union, with an increasingly affluent population of
approximately 375 million people, represents the second largest pharmaceutical
market in the world with approximately $75 billion in pharmaceutical sales in
2000, according to IMS Health. Healthcare expenditures in Western Europe, as in
the U.S., are growing at a rate faster than the overall economy and drug
expenditures as a percentage of total gross domestic product are lower than the
2.3% in the U.S., according to IMS Health.

         With Spain's entry into the European Union in 1986, the Spanish
pharmaceutical market has been evolving steadily into a market that is
increasingly similar to those of other countries in Western Europe and the U.S.
With a population of approximately 40 million, Spain was ranked in 1999 as the
seventh largest pharmaceutical market in the world. Pharmaceutical sales in
Spain reached approximately $6.6 billion in 1999 and are expected to grow to
more than $10 billion by 2005, according to IMS Health.

         Over the last decade, there has been significant evolution of patent
and similar protections of pharmaceutical products in Spain. Prior to 1992,
manufacturing processes for active pharmaceutical ingredients could be patented,
but active pharmaceutical ingredients could not be patented as products.
Commencing in late 1992 active ingredients may be patented with protection
running for 20 years from the date of application. This was followed by
legislation in December 1996 that created a legal class of generic
pharmaceuticals. Generic products are required to be therapeutically equivalent,
have a similar composition to that of the original branded product and
demonstrate their safety and efficacy. Safety and efficacy is presumed if the
original reference product has been commercialized in Spain for 10 years.
Generic products also must comply with product labeling requirements and be
priced at a discount, typically 20-30%, to the price of the original branded
product.

         Although comprising less than three percent of the Spanish
pharmaceutical market, generic pharmaceuticals are expected to significantly
increase their market penetration due to increases in drug


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<PAGE>

usage driven by an aging population and opportunities to launch new generic
products as patents expire for blockbuster drugs. Several initiatives are
underway by the Spanish government, including education, financial incentives to
prescribing physicians and public campaigns to stimulate the use of generic
pharmaceuticals in response to the rise in healthcare costs.


OUR STRATEGY

         Our primary objective is to be a leading specialty pharmaceutical
company focused on advanced drug delivery and formulation technologies to
improve the delivery of new and existing pharmaceuticals, while expanding our
generic and branded operations in Spain and Europe. Our strategy to accomplish
this objective includes the following:

Focus on marketing and commercializing our CPE-215(R)permeation enhancement
platform technology

         Our CPE-215 technology enhances the absorption of drugs across
membranes of the skin, mouth, nose, vagina and eye. Our CPE-215 technology can
be incorporated into a wide variety of pharmaceutical formats and products,
including those formulated as creams, ointments, gels, solutions, lotions,
sprays or patches. CPE-215 has a record of safety in humans as a food additive
and fragrance. In addition, preclinical testing to date on CPE-215 as a drug
delivery enhancement has further indicated its safety. We believe that this past
experience with CPE-215 may result in reduced preclinical development time
relating to its use in new formulations of previously approved compounds. We
market our CPE-215 technology to major pharmaceutical and biotechnology
companies whose products we believe would benefit from its permeation
enhancement properties.

         These benefits include:

         o    improving efficacy relative to oral administration, which subjects
              the drug to first-pass metabolism;

         o    extending the period of market exclusivity for a branded compound
              based on the grant of a patent that incorporates new drug delivery
              methods;

         o    allowing branded and generic drug companies to differentiate their
              products from those of competitors;

         o    improving utilization of costly and/or scarce drugs and active
              ingredients;

         o    expanding the market to patients less suitable for injection,
              especially children and the elderly; and

         o    improving patient convenience and compliance, and lowering costs
              relative to a doctor's office visit for an injection.

         We currently have a research licensing agreement with Pfizer and
royalty-based license agreements with Auxilium and are in preliminary
discussions with other pharmaceutical companies to commercialize our
technologies across a wide range of pharmaceutical applications.


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<PAGE>

Develop proprietary products based on our technologies

         We apply our drug delivery and oral drug formulation technologies to
improve the performance of existing pharmaceutical products with respect to
their method of delivery and effectiveness. We also may be able to reduce
manufacturing costs for certain products as a result of our proprietary
manufacturing process, which permits improved purity, stability and production
yields.

         In addition to marketing our CPE-215 technology to pharmaceutical
companies for application with their branded or generic products, we selectively
apply this technology to our own development of certain products. We target
compounds with established market demand or that face limited market acceptance
as a result of inferior drug delivery methods. As an illustration of this
strategy, we recently completed Phase I/II clinical trials for the treatment of
nail fungus infections and currently are engaged in negotiations to continue the
development of and to commercialize the product.

         Also, as part of this strategy, we have developed and filed a patent
for improved oral dosage forms of acetaminophen, and improved manufacturing of
omeprazole and lansoprazole. In the case of acetaminophen, we believe that we
have developed dosages that result in increased solubility in water for
administration to patients who have difficulty swallowing pills, faster relief
of pain and inflammation and better taste. With respect to omeprazole and
lansoprazole, we believe that we have created an improved method of manufacture,
requiring less time and producing higher purity amid better stability.

         Once we have brought our internally developed products to an advanced
stage of development, we intend to develop collaborative relationships that
leverage the clinical development and marketing and sales capabilities of our
strategic partners. We believe that this will allow us to license our products
on terms that are more favorable than those that would be possible earlier in
the development cycle. In Spain we may directly market these new products
through our existing sales force. We also seek to manufacture and supply our
pharmaceutical partners with the products they have licensed from us.

Increase our product sales through targeted promotion and expansion of our
product portfolio

         We plan to expand our portfolio of products in Spain through the
acquisition of currently marketed and late stage pharmaceutical products, as
well as through strategic alliances with other pharmaceutical and biotechnology
companies. We intend to directly promote and sell these products in Spain
through our own sales force of approximately 150 full-time personnel located in
major cities throughout Spain.

         We focus on obtaining the rights to pharmaceutical products that are
less actively promoted by larger pharmaceutical companies or are in a late stage
of development and have good potential for acceptance in our markets. We believe
that we have expertise in assessing potential market opportunities related to
particular pharmaceuticals and in negotiating and acquiring from pharmaceutical
companies the rights to market pharmaceuticals in Spain and other countries.
Products that already are selling in the U.S. or other major markets demonstrate
commercial viability and typically encounter fewer barriers to regulatory
approval for introduction into other countries. The acquisition and subsequent
manufacture of these products will permit our Spanish operations to more fully
utilize our existing manufacturing capacity and allow us to further leverage our
sales force by giving them more products to sell. We believe that we have
developed particular expertise in marketing pharmaceutical products to
physicians and pharmacies in Spain.

         In July 2000, we entered into a strategic alliance with Teva, a world
leader in generic pharmaceutical products, pursuant to which we were granted a
royalty-free non-exclusive license to register and sell more


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<PAGE>

than 75 finished pharmaceutical products representing more than 25 different
chemical entities. Under this license agreement, we will register each product
with Spain's Ministry of Health.

PRODUCTS IN DEVELOPMENT

         The following are products that we are currently developing. Before
they are commercialized, they must be approved by regulatory authorities, such
as the FDA or Spanish Ministry of Health, in each jurisdiction where they will
be marketed or sold. See "Regulation" section of Item 1. for a more detailed
discussion of the regulatory approval process.

<TABLE>
<CAPTION>
PRODUCT CANDIDATE                  TECHNOLOGY                      USED TO TREAT                        STATUS
-----------------                  ----------                      -------------                        ------

<S>                                <C>                             <C>                                  <C>
Topical testosterone gel           CPE-215                         Hypogonadism                         Product launched

Improved acetaminophen             Solubility Enhancement          Pain relief                          Bioequivalence

Antifungal nail lacquer            CPE-215                         Onychomycosis                        Phase I/II

Androgenic steroid therapy         Proprietary                     Chronic fatigue syndrome;            Pilot study
                                                                   Fibromyalgia                         completed

Intranasal insulin                 CPE-215                         Diabetes                             Preclinical

Intranasal pain management         CPE-215                         Pain relief                          Preclinical

Topical hormonal therapy           CPE-215                         Osteoporosis;                        Preclinical
                                                                   Erectile dysfunction
</TABLE>

Topical Testosterone Gel

         Testosterone replacement therapy is used to treat men whose bodies
produce insufficient amounts of testosterone (hypogonadism), which can be a
natural result of aging. Symptoms associated with low testosterone levels in men
include depression, decreased libido, erectile dysfunction, muscular atrophy,
loss of energy, mood alterations, increased body fat and reduced bone density.
Currently marketed hormone replacement therapies involve delivery of hormones by
injections, through transdermal patches and by gels. Injection therapy has major
limitations, including pain, which can lead to decreased patient acceptance and
compliance with prescribed therapy. Although patches have been able to alleviate
many of the gastrointestinal side effects associated with oral delivery of
hormones, patches, even in their smallest form, are often conspicuous and
typically result in skin irritation or inaccurate dosing should the patch fall
off. The transdermal delivery of hormones through gels, creams and lotions
provides commercially attractive and efficacious alternatives to current methods
of delivery. As more baby-boomers enter middle age and more attention is focused
on male hormonal deficiencies, the worldwide testosterone replacement market is
expected to reach $1 billion by 2005.

         In May 2000, we entered into a research services agreement with
Auxilium to develop and test various pharmaceutical compositions of topical
testosterone using our CPE-215 technology. A license of our technology to
Auxilium became effective in September 2000. All clinical trials performed by
Auxilium for approval in the U.S. have been completed and a New Drug Application
was approved by the FDA on October 31, 2002. Under the license, we granted to
Auxilium a sole and exclusive, royalty-based license


                                       5
<PAGE>

worldwide to develop, market and sell Testim(TM), a topical testosterone
product, using our CPE-215 technology, which was launched by Auxilium in
February 2003.

Improved Acetaminophen

         We have developed and patented improved oral formulations of
acetaminophen, the active ingredient in such products as McNeil Consumer
Healthcare's Tylenol(R) line of products commonly used for controlling pain,
fever and inflammation. Our improved oral formulations of acetaminophen make it
highly dispersible, rapidly soluble in water, better tasting and faster in
reaching peak blood levels. These characteristics give our oral formulations
superior properties over other currently marketed products, which do not
dissolve easily in water and may cause bitter taste and flatulence. These
improvements are particularly useful for treating children, the elderly, and
those who have difficulty swallowing pills. Clinical studies in Europe
documenting the product's improved dissolution and absorption were completed in
2001. We have also completed bioequivalency studies, which compare the rate and
extent of absorption and levels of concentration in the blood stream of our
improved oral formulations needed to produce a therapeutic effect, with other
formulations of acetaminophen that previously have been approved by the FDA. We
are in preliminary discussions with potential collaborators to license and
market this product.

         We evaluated our powder sachets and tablets in comparison to a European
commercial market leader, Panadol(R) tablets, marketed by GlaxoSmithKline, and a
U.S. market leader, Tylenol caplets, marketed by McNeil Consumer Healthcare.
After a single oral dose of 1000 mg. in healthy volunteers, both our
formulations tested in this study, powder sachets and solid tablets, were
absorbed to maximum blood concentration significantly faster (approximately half
the time) than the other market leading tablets, Panadol and Tylenol. Another
study assessed the pharmacokinetic differences in the absorption rate of our new
tablet formulation compared to another popular European tablet: Termalgin(R),
marketed by Laboratorios Novartis Farmaceutica. This study demonstrated that our
product had a faster rate of absorption and higher maximum blood concentration
than Termalgin. The average time to reach the maximum blood concentration was 25
minutes for our tablets versus 45 minutes for Termalgin.

Antifungal Nail Lacquer

         We have developed a new topical nail lacquer for treating fingernail
and toenail fungal infections (onychomycosis). We believe that our product is an
improvement over oral therapies, which can cause liver damage, and other topical
treatments that typically have low levels of efficacy. We recently completed
Phase I/II clinical trials for the treatment of nail fungal infections at the
University of Alabama at Birmingham. Trials for treatment of infections in
fingernails have been completed and results have been reported. Trials in
toenails were recently completed and results are scheduled to be presented in
late March 2003. According to the National Onychomycosis Society, nail fungus
affects almost 30 million people, primarily between the ages of 40 and 65.
Patients electing to take oral therapy must undergo blood monitoring during the
course of treatment to monitor for liver damage. The cost of oral therapy is in
excess of $500 for a twelve-week treatment regimen, not including physician
costs or other periodic monitoring costs.

         The results of the fingernail onychomycosis pilot study shows
improvement in over 80% of patients who completed the study. The study,
utilizing a clotrimazole lacquer formulation containing CPE-215, revealed that
of 18 patients who completed the study, three months following treatment 16
showed improvement over their baseline condition, with five of those showing a
complete cure (three or


                                       6
<PAGE>

more millimeters of healthy nail growth and a negative culture for the fungus)
and an additional ten showing a mycological cure (less than three millimeters of
healthy nail growth and a negative culture for the fungus). Patients in the
study applied the lacquer on a daily basis for 24 weeks. Most patients reported
that they experienced cessation of their discomfort, more pliable nails and the
onset of clear nail growth.

Androgenic Steroid Therapy

         We are developing a topical therapy utilizing androgenic steroids,
which may incorporate our CPE-215 technology, for the treatment of chronic
fatigue syndrome and fibromyalgia. The manifestations of chronic fatigue
syndrome are continuous exhaustion, muscle pain, cognitive disorientation and
various other physical or psychological symptoms. Chronic fatigue syndrome has
not received a high degree of publicity since it is often improperly diagnosed
and lacks proven therapies. Chronic fatigue syndrome is recognized by the
National Institutes of Health, the FDA and the Social Security Administration as
a serious, disabling affliction. A study by DePaul University estimates that as
many as 800,000 people in the U.S. suffer from this condition and that it is
approximately three times more common in women than in men.

         According to the National Census Bureau and Dartmouth Medical School,
fibromyalgia afflicts six to eight million people. Fibromyalgia primarily
affects women between the ages of 40 and 60 with symptoms of muscle pain,
fatigue, chronic headache and sleeplessness and has been estimated to strike as
many as five percent of peri/postmenopausal women. A preliminary study conducted
by Dartmouth scientists indicates that fibromyalgia patients demonstrated
improved muscle function, higher energy levels and restorative sleep in response
to androgenic steroid therapy. We have licensed from Dartmouth College their
exclusive U.S. patent rights covering the novel use of androgenic steroid
therapy for treating chronic fatigue syndrome and fibromyalgia. In 2001, a pilot
study of this therapy was initiated in female volunteers at the Dartmouth
Medical Center.  This study was completed in 2002.

Intranasal Insulin

         We are developing intranasal formulations of insulin to treat patients
suffering from Type I and Type II diabetes. Based on preclinical studies at
various universities, we believe our intranasal insulin formulation can achieve
higher levels of bioavailability compared to other drug delivery systems
currently being developed and of which we are aware. Our product is designed to
deliver insulin through a small, discreet metered nasal spray that can be
carried in a patient's pocket. We currently are in preclinical development.

         Diabetes is a metabolic disorder affecting approximately 100 million
people worldwide that is projected to affect more than 300 million people
worldwide in the next 25 years. The market for insulin treatment of diabetes in
the United States is estimated at $1.25 billion annually and Frost & Sullivan
estimates that the worldwide market is approximately $3 billion. Diabetic
patients who must endure frequent injections prefer less invasive methods of
administering their medications. Alternative and more desirable methods of
delivery would not only improve their quality of life but also would contribute
to patient compliance with prescribed therapy.


                                       7
<PAGE>

Intranasal Pain Management

         Many people suffer from chronic moderate to severe pain that is related
to cancer, back problems and orthopedic injury. These people also may experience
intermittent flares of pain that can occur even though a person is taking
analgesic medications on a fixed schedule for pain control. A severe flare of
pain is called breakthrough pain because the pain breaks through the regular
pain medication. About one-half to two-thirds of patients with chronic
cancer-related pain also experience episodes of breakthrough cancer pain.
Generally, breakthrough pain occurs without prior onset symptoms and may last
anywhere from seconds to minutes or hours. The U.S. prescription market for the
treatment of moderate to severe pain, including breakthrough pain, is
approximately $2 billion annually.

         We are developing an intranasal pain product using our CPE-215
technology with a chemical agent that is widely used for the relief of acute and
chronic moderate to severe pain and that commonly is prescribed for pain
associated with cancer. Orally delivered pain products may not provide rapid
relief and typically demonstrate considerable patient-to-patient variability in
absorption. Injectable formulations of pain products provide rapid and effective
pain relief, but administration often requires professional assistance or
hospitalization. Our intranasal pain product is in preclinical development for
the treatment of chronic pain and acute episodes of chronic pain. We believe our
intranasal pain product would provide significant medical benefits over oral and
injectable formulations as it combines patient convenience and ease of use with
the rapid onset of pain relief and the same potency as injectable delivery
routes.

         We have signed a research agreement with Auxilium pursuant to which we
will develop and test the intranasal delivery of a pain management chemical
agent using our CPE-215 technology. As part of our strategic alliance with
Auxilium, upon Auxilium's acceptance of our preclinical studies, we will grant
to them a worldwide license to develop, market and sell the products using our
CPE-215 technology.

Topical Hormonal Therapy

         Osteoporosis is a disease characterized by low bone mass and structural
deterioration of bone tissue, leading to bone fragility and increased
susceptibility to fractures of the hip, spine and wrist. According to the
National Osteoporosis Foundation, two million American men have osteoporosis,
and another three million are at risk for this disease. We believe that our
topical hormonal therapies, incorporating our CPE-215 technology, have the
potential to effectively treat osteoporosis in men, without the gastrointestinal
side effects of the leading oral treatments.

         Erectile dysfunction is defined as the inability to achieve and/or
maintain an erection adequate for satisfactory sexual function. Approximately 30
million men in the U.S. and 150 million men worldwide suffer from erectile
dysfunction. The condition is correlated with increasing age, cardiovascular
disease, hypertension, diabetes, hyperlipidemia and smoking. The leading
treatments include oral preparations, which have been associated with a slow
onset of action and drug interactions, as well as injections, which can cause
pain when administered. We believe that our topical hormonal therapies,
incorporating our CPE-215 technology, have the potential to effectively treat
erectile dysfunction, without the side effects of the leading treatments.

         Our topical hormonal therapy incorporates the use of metabolic steroids
that regulate most of the hormonal action in adult males. Hormone replacement
therapies using these metabolic steroids, including testosterone and
dihydrotestosterone, may have significant benefits in treating a number of
medical afflictions in men, including osteoporosis and sexual dysfunction. We
have granted to Auxilium a


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<PAGE>

worldwide license to develop, market and sell a topical hormonal therapy
containing our CPE-215 technology.


STRATEGIC PARTNERS

Pfizer

         In October 2001, we entered into a research collaboration with Pfizer
in which we were granted a non-exclusive worldwide royalty-free license to use
Pfizer's compounds and technology to assess the performance of our CPE-215
technology with Pfizer's compounds. As part of the agreement, we granted to
Pfizer the non-exclusive right to test the ability of our CPE-215 technology to
enhance delivery of certain compounds proprietary to Pfizer. Pfizer is providing
the funding necessary to conduct these studies using our CPE-215 technology and
has agreed to provide additional funding for costs of further studies that are
approved by a joint working committee consisting of designees of Pfizer and us.
Pfizer has agreed to inform us if, following completion of the research, it is
interested in further development of the formulations. The term of the agreement
is the greater of one year or until work under the agreement has been completed.
Pfizer would have to enter into a separate license agreement with us with
respect to the manufacture, use, sale, offer for sale and import of the products
using our CPE-215 technology before it could begin to distribute, market and
sell these products.

Auxilium

         In May 2000, we entered into a research agreement with Auxilium to
develop and test the application of our CPE-215 technology with respect to the
transdermal delivery of testosterone. Auxilium is an emerging therapeutic
pharmaceutical company focused on diseases related to aging. In September 2000,
a license to Auxilium of our CPE-215 technology became effective for Testim, a
topical testosterone product. Phase III clinical trials were performed by
Auxilium for approval in the U.S. and a New Drug Application was approved by the
FDA on October 31, 2002. Testim was launched by Auxilium in February 2003. In
May 2001 we entered into research agreements with Auxilium to develop and test
our CPE-215 technology with respect to delivery of a pain management compound
and a topical hormonal therapy. In September 2002 a license to Auxilium of our
CPE-215 technology became effective for a topical hormone therapy product.
Preclinical studies currently are underway regarding the application of our
CPE-215 technology to a pain management compound.

         As part of our collaboration with Auxilium, we also entered into a
perpetual license agreement whereby we granted to Auxilium an exclusive
royalty-based worldwide license, to develop, market and sell topical
testosterone gel containing our CPE-215 technology. This license also provides
us with an opportunity to fulfill Auxilium's manufacturing requirements for the
sale of the products in the European market. In accordance with the terms of the
license agreement, we have received payments, based upon Auxilium's completion
of certain milestones, in the aggregate of $550,000. Terms of the license
agreement also entitle us to royalties based on net sales. A similar license
agreement became effective in September 2002 for a topical hormone product, also
specifying milestones in an aggregate of $550,000 plus royalties based on net
sales. Upon successful completion of preclinical studies for intranasal pain
management, a similar license would become effective.


                                       9
<PAGE>

Teva

         In July 2000, we entered into a strategic alliance with Teva, a world
leader in generic pharmaceutical products, in which we were granted a
royalty-free non-exclusive license to register and sell in Spain more than 75
finished pharmaceutical products representing more than 25 different chemical
entities. We are obligated under this license agreement to submit a registration
file for each product to the relevant regulatory authorities in Spain in order
to receive marketing authorizations in our name for that product. The marketing
authorizations provide us with the requisite approvals, licenses and permits
from the regulatory authorities to import, distribute, market and sell the
products in Spain. In connection with this strategic alliance, Teva also entered
into a supply agreement with us pursuant to which it would manufacture the
products and supply them to us for marketing and sale in Spain. Our obligation
to purchase the products from Teva is non-exclusive, allowing us to purchase any
of the products from sources other than Teva if we can show that Teva's prices
for the products exceed the current price from other qualified sources and if
Teva has not exercised its right to match the lower price. The license agreement
and the supply agreement have five year terms and both are renewed automatically
for one-year terms for each product.

         Under a rights agreement entered into with Teva in July 2000, we
granted Teva a right of first refusal to purchase Laboratorios Davur in the
event that we decide to sell Laboratorios Davur or Laboratorios Belmac. We also
granted Teva the right to bid for Laboratorios Belmac in the event we intend to
sell Laboratorios Belmac.


OUR PROPRIETARY DRUG TECHNOLOGIES

         We believe that there are numerous opportunities to enter into
additional collaborations with pharmaceutical and biotechnology companies and
expand our product lines using our proprietary drug technologies.

CPE-215 Permeation Enhancement Platform Technology

         Our permeation enhancement technology consists of a series of related
chemical compounds that enhance the absorption of a wide variety of products
across various biological membranes. Our primary compound and the foundation for
our drug delivery platform technology is CPE-215 (cyclopentadecanolide).
CPE-215, when combined with certain drugs, has been shown to significantly
enhance the amount and rate of absorption of those drugs through various
biological membranes. By controlling the amount of CPE-215 that is combined with
certain drugs, we have the ability to affect the quantity and rate at which the
drug is absorbed through biological membranes. We believe that our CPE-215
technology is superior to certain other non-injection and non-oral drug delivery
systems based on the following characteristics:

         o    broad applicability - works with a wide range of pharmaceutical
              compounds, including water and oil soluble and insoluble compounds
              as well as high and low molecular weight compounds, including
              peptides and proteins;

         o    format independence - can be formulated into creams, ointments,
              gels, solutions, lotions and patches;


                                       10
<PAGE>

         o    biological membrane independence - works across the biological
              membranes of the skin, mouth, nose and eye; and

         o    well tolerated - no reported cases of irritation or toxicity.

         CPE-215 has a long history of safe use in humans as a food additive and
fragrance. In addition, our preclinical testing to date on CPE-215 as a drug
delivery enhancement has further indicated its safety. We believe that this past
experience with CPE-215 may result in reduced preclinical development activities
required for new product formulations of previously approved pharmaceutical
compounds.

Solubility Enhancement Technology

         Our solubility enhancement technology involves patent pending chemical
and manufacturing procedures that enhance solubility without changing the
compound's therapeutic properties. Although this technology can be applied to
other chemical entities, to date we have incorporated this technology only in
acetaminophen compounds, which are known to have problems of insolubility and
undesirable taste. Based upon clinical studies completed in the year 2001, we
believe that our technology enables us to develop and deliver dosages of
acetaminophen that make it highly dispersible, rapidly soluble in water, better
tasting and faster in reaching peak blood levels to deliver pain relief. The use
of our technology to increase solubility lessens undesirable side effects, such
as flatulence and the bitter taste of pills, which commonly are associated with
acetaminophen and many other oral medications.

Improved Oral Formulation Technologies

         Our oral formulation technologies involve the application of a new
vacuum dry and desiccation manufacturing process as well as specialized
equipment, each of which plays a role in producing pharmaceutical products that
are more stable and pure, while reducing manufacturing time and costs. We have
developed this technology to create new methods for manufacturing products such
as omeprazole, lansoprazole and other similar products that are stability
sensitive to humidity and temperature. We filed four new patents in 2000 and
2001 relating to these processes and equipment. The patents claim as innovative
the manufacturing process that renders these products more stable, while
protecting active substances from gastric degradation utilizing microgranulation
and microencapsulation techniques. These patent pending technologies can
contribute to our ability to compete against other companies whose manufacturing
processes are more costly and time consuming.

Hydrogel Technology

         Our hydrogel technology involves a patented synthetic material, which
produces a water soluble drug release system capable of being formulated for
immediate onset or sustained release over a 24 hour period. The hydrogel
technology is capable of adhering to the mucous membranes of the vagina for
extended periods of time without typical discharge, improving the treatment of
conditions such as yeast and fungal infections or conditions requiring
moisturizers or antibiotics. We seek to license this technology to other
pharmaceutical companies for co-development and marketing of potential
applications of this technology.


                                       11
<PAGE>

PRODUCT SALES AND MARKETING IN SPAIN

         In Europe, primarily Spain, we manufacture and market more than 100
pharmaceutical products, representing various dosage strengths and product
formulations of more than 30 chemical entities. Our product lines consist of
generic and branded products within four primary therapeutic areas:
cardiovascular, gastrointestinal, infectious and neurological diseases. Our
generic and branded products are marketed to physicians and pharmacists by our
three separate sales and marketing organizations, Laboratorios Davur,
Laboratorios Belmac and Laboratorios Rimafar. To a lesser extent, we also market
over-the-counter products through Laboratorios Rimafar. There are approximately
90,000 physicians and 20,000 pharmacies in Spain. Revenues from products whose
active ingredient is omeprazole accounted for approximately 49% of our net sales
in 2002.

         We continuously review and modify our product portfolio. We add to our
portfolio to respond to increasing market demand for generic and branded
products in Spain and we divest from our portfolio products that we consider to
be redundant or that have become non-strategic. We export a small, but
increasing portion of the pharmaceuticals manufactured by Laboratorios Belmac
outside Spain through local distributors and brokers, particularly in Eastern
Europe, Northern Africa, Central and South America.

Generic Pharmaceuticals

         Our generic product line consists of 39 pharmaceutical products
representing various dosage strengths and product formulations of ten chemical
entities. We entered the generic pharmaceutical market in Spain in September
2000. Laboratorios Davur, our generic sales and marketing organization, markets
generic pharmaceutical products to physicians and pharmacists through a sales
force of approximately 60 full-time sales personnel located in major cities
throughout Spain. In 2002, generic pharmaceuticals accounted for approximately
42% of our total product sales. We also supplement our sales and marketing
efforts for generic products through advertising in trade publications.

         We believe we can grow by providing to our generic products sales force
a more extensive line of products to market to physician and pharmacy clients.
To strengthen our entry into the generic market, in July 2000, we entered into a
strategic alliance with Teva, one of the world's leaders in generic
pharmaceuticals. Under this alliance, we have licensed from Teva the right to
register and market in Spain more than 75 of Teva's pharmaceutical products,
representing more than 25 different chemical entities. Pursuant to the
arrangement, Teva will supply the pharmaceutical products to us and we will
register and, upon regulatory approval, market the products in Spain.

         The following are descriptions of our generic products that contribute
significantly to our sales and gross profits:

<TABLE>
<CAPTION>
OUR GENERIC
PRODUCT NAME                    ACTIVE INGREDIENT             SOLD BY OTHERS AS                USED TO TREAT
------------                    -----------------             -----------------                -------------

<S>                             <C>                           <C>                              <C>
Amoxicilina Davur               amoxicillin trihydrate        Amoxil(R)(GlaxoSmithKline)       infections

Ciprofloxacino Davur            ciprofloxacin hydrochloride   Cipro(R)(Bayer)                  microbial infections,
                                                                                               including anthrax

Enalapril Davur                 enalapril maleate             Vasotec(R)(Merck)                cardiovascular disease
                                                                                               and hypertension


                                       12
<PAGE>

Fluoxetina Davur                fluoxetine hydrochloride      Prozac(R)(Eli Lilly)             depression

Omeprazol Davur                 omeprazole                    Prilosec(R)(AstraZeneca)         gastroesophageal reflux
                                                                                               disease

Simvastatina Davur              simvastatin                   Zocor(R)(Merck)                  high cholesterol
</TABLE>


Branded Pharmaceuticals

         Our branded product line consists of 62 pharmaceutical products
representing various dosage strengths and product formulations of 22 chemical
entities. Sales of branded pharmaceuticals accounted for 77% of our product
sales in 2000, 47% in 2001 and 39% in 2002. We market our branded and, to a
lesser extent, certain of our generic and over-the-counter products through our
Laboratorios Belmac subsidiary, which has approximately 90 full-time sales
personnel located in major cities throughout Spain. We supplement our sales and
marketing efforts for branded products through advertising in trade
publications.

         The following are descriptions of the branded products that contribute
significantly to our sales and gross profits:

<TABLE>
<CAPTION>
OUR BRANDED
PRODUCT NAME                    ACTIVE INGREDIENT              SOLD BY OTHERS AS              USED TO TREAT
------------                    -----------------              -----------------              -------------

<S>                             <C>                            <C>                            <C>
Amoxicilina Belmac(R)           amoxicillin trihydrate         Amoxil(R)(GlaxoSmithKline)     infectionS

Belmazol(R)                     omeprazole                     Prilosec(R)(AstraZeneca)       gastroesophageal reflux
                                                                                              disease

Cimascal D Forte(R)             calcium carbonate and          Calcite-D(R)(Riva)             osteoporosis
                                vitamin D3

Codeisan(R)                     codeine                        Tricodein(R)(Solco)            cough and bronchitis

Belmalip(R)                     simvastatin                    Zocor(R)(Merck)                high cholesterol

Enalapril Belmac(R)             enalapril maleate              Vasotec(R)(Merck)              cardiovascular disease
                                                                                              and hypertension

Mio Relax(R)                    carisoprodol                   Soma(R)(MedPointe)             muscle spasms

Pentoxifilina(R)                pentoxifylline                 Trental(R)(Aventis)            peripheral vascular ischemia

Senioral(TM)                    oxymetazoline and              Denoral(R)(Aventis)            cold and sinus congestion
                                chlorpheniramine
</TABLE>


INTELLECTUAL PROPERTY

         We actively seek to protect our products and proprietary information by
means of U.S. and foreign patents, trademarks and contractual arrangements. Our
success will depend in part on our ability to obtain and enforce patents on our
products, processes and technologies to preserve our trade secrets and other


                                       13
<PAGE>

proprietary information and to avoid infringing on the patents or proprietary
rights of others. Our CPE-215 technology is covered by our U.S. patent and 11
foreign patents, including those in Japan, Korea and most major European
countries. We also have three U.S. and four foreign patents pending regarding
our CPE-215 technology. The patents for our CPE-215 technology expire in the
U.S. in 2008 and in foreign countries between 2006 and 2014. We have one
international patent application and one foreign patent application pending
regarding our antifungal nail lacquer product. We also have two issued U.S.
patents regarding our hydrogel technology that expire in 2008. In addition, we
have one U.S. patent pending for an insulin composition. We licensed from
Dartmouth College the exclusive rights to a patent covering the novel use of
androgen therapy for treating fibromyalgia and chronic fatigue syndrome. In 2000
and 2001, we filed four new patents in Europe for improved oral formulations of
pharmaceutical products, including omeprazole and lansoprazole.

         We own approximately 50 trademarks for pharmaceutical products in
Spain. In addition, we also rely on unpatented proprietary technologies in the
development and commercialization of our products. We also depend upon the
unpatentable skills, knowledge and experience of our scientific and technical
personnel, as well as those of our advisors, consultants and other contractors.
To help protect our proprietary know-how that is not patentable, and for
inventions for which patents may be difficult to enforce, we rely on trade
secret protection and confidentiality agreements to protect our interests. To
this end, we require employees, consultants and advisors to enter into
agreements that prohibit the disclosure of confidential information and, where
applicable, require disclosure and assignment to us of the ideas, developments,
discoveries and inventions that arise from their activities for us.
Additionally, these confidentiality agreements require that our employees,
consultants and advisors do not bring to us, or use without proper
authorization, any third party's proprietary technology.


RESEARCH AND DEVELOPMENT

         Our research and product development efforts take place primarily in
the United States and are focused on developing new product applications of our
drug delivery and drug formulation technologies. We currently have 12 scientists
and technicians working on research and product development. For the years ended
December 31, 2002, 2001 and 2000, our research and product development
expenditures were $2,960,000, $2,084,000 and $1,102,000, respectively.


MANUFACTURING

         Our 65,000 square-foot manufacturing facility is located in Zaragoza,
Spain. Our manufacturing facility complies with European Good Manufacturing
Practices and 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, quality assurance and formulation research laboratories.

         Since we currently utilize less than 100% of our existing capacity to
manufacture our own products, we have engaged in contract manufacturing of
pharmaceuticals owned by other companies such as Antibioticos Farma S.A.,
Laboratorios Cantabria S.A., and Shire Iberica S.A. We believe contract
manufacturing provides a stable, recurring source of cash flow, a means of
absorbing overhead costs, and experience in manufacturing a broad line of
formulations that is advantageous to us in pursuing and integrating acquired
products. Although the volume of our contract manufacturing continues to
increase,


                                       14
<PAGE>

contract manufacturing as a percentage of consolidated net product sales
declined from approximately 50% in 1994 to approximately 19% in 2002. We
attribute this decline to the growth in sales of our own branded and generic
pharmaceutical products over the period. We expect that contract manufacturing
activities as a percentage of our overall revenues will continue to decrease in
the future.

         We have fully integrated manufacturing support systems including
quality assurance, quality control, regulatory compliance and inventory control.
These support systems enable us to maintain high standards of quality for our
products and deliver reliable products and services to our customers on a timely
basis. We require a supply of quality raw materials and packaging materials to
manufacture and package drug products. Historically we have not had difficulty
obtaining raw materials and packaging materials from suppliers. Currently, we
rely on approximately 70 suppliers to deliver our required raw materials and
packaging materials. We have no reason to believe that we will be unable to
procure adequate supplies of raw materials and packaging materials on a timely
basis. Union Quimico Farmaceutica, S.A. is our sole supplier of omeprazole.
Revenues from products whose active ingredient is omeprazole accounted for
approximately 49% of our net sales in 2002. We believe that alternative sources
of omeprazole are available and we will obtain required governmental approval to
source from them, if necessary.


COMPETITION

         All of our current and future products face strong competition both
from new and existing drugs and drug delivery technologies. This competition
potentially includes national and multi-national pharmaceutical and healthcare
companies of all sizes. Many of these other pharmaceutical and healthcare
companies have far greater financial resources, technical staffs, research and
development, and manufacturing and marketing capabilities. We believe that
owning our own development, manufacturing and marketing facilities in Spain
allows us to effectively compete with other pharmaceutical companies in this
market. Our access to these resources enables us to reduce costs otherwise
associated with contracting for the development, manufacture or marketing of our
products by other companies. These reduced costs allow us to sell our products
at competitive prices while maintaining attractive margins.

         We compete with both large multinational companies and national Spanish
companies, which produce most of the same products that we manufacture. In
Spain, our principal competitors include companies such as Ratiopharm
International GmbH, Merck Sharp & Dohme de Espana, S.A. and Almirall Prodes
Farma.

CUSTOMERS

         In Spain, our sales representatives from Laboratorios Belmac,
Laboratorios Davur and Laboratorios Rimafar actively promote our products to
physicians and retail pharmacists. We sell our products directly to
pharmaceutical distributors and indirectly to customers who purchase our
products from distributors. The wholesale distributor network for pharmaceutical
products in Europe and more specifically in Spain, in recent years has been
subject to increasing consolidation, which has increased and we expect will
continue to increase our, and other industry participants', customer
concentration.

         In 2002, 2001 and 2000, Cofares was our only customer accounting for
more than ten percent of our consolidated net sales of approximately 14%, 15%
and 14%, respectively.


                                       15
<PAGE>

         In the United States, we have entered into research and license
agreements with pharmaceutical companies, whereby we perform research activities
and license product candidates in exchange for milestone payments and future
royalties from product sales.

REGULATION

         Numerous governmental authorities in the U.S. and other countries
extensively regulate the activities of pharmaceutical manufacturers. If we fail
to comply with the applicable requirements of governmental authorities, we may
be subject to administrative or judicial sanctions such as warning letters,
fines, injunctions, product seizures or recalls, total or partial suspension of
production, or refusal by governmental authorities to approve pending marketing
approval applications or supplements to approved applications, as well as
criminal prosecution.

United States

         Prior to marketing a pharmaceutical product in the U.S., the product
must be approved by the FDA. For new compounds, the regulatory approval process
begins with preclinical laboratory and animal testing. Upon completion, an
Investigational New Drug Application is submitted to the FDA, which must become
effective before human clinical trials may be commenced. Sometimes, to minimize
costs, we have chosen to conduct pilot studies. The data they produce can permit
us to move directly into Phase II or III studies with the FDA.

         Following completion of laboratory animal testing, human clinical
trials typically are conducted in three sequential phases that may overlap.

         o    Phase I - involves 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.

         o    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.

         o    Phase III - involves trials undertaken to evaluate clinical
              efficacy once a compound is found to be effective and to have an
              acceptable safety profile in Phase II evaluations, 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 trial results and may
discontinue the trials at any time if there are significant safety issues. The
results of preclinical and clinical trials are submitted to the FDA in the form
of a New Drug Application 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. Our products under
development and future products to be


                                       16
<PAGE>

developed must go through the approval process delineated above prior to gaining
approval by the FDA for commercialization.

         FDA approval is required for the marketing of generic equivalents or
new dosage forms of an existing drug. An Abbreviated New Drug Application is
required to be submitted to the FDA for approval. When processing an ANDA, the
FDA waives the requirement of conducting complete clinical studies, although it
normally requires bioavailability and/or bioequivalence studies. Bioavailability
indicates the rate and extent of absorption and levels of concentration of a
drug product in the blood stream. Bioequivalence compares the bioavailability of
one drug product with another, and when established, indicates that the rate of
absorption and levels of concentration of a generic drug in the body closely
approximate those of the previously approved drug. An ANDA may be submitted for
a drug on the basis that it is the equivalent to a previously approved drug.

         In addition to obtaining FDA approval for each product, each
manufacturer of drugs must be registered with the FDA. Domestic manufacturing
establishments are subject to biennial inspections by the FDA and must comply
with current Good Manufacturing Practices for drugs. To supply products for use
in the U.S., 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.

Spain and Europe

         As a pharmaceutical manufacturer in Spain, which is a member of the
European Union, we are subject to the regulations enacted by the European Union.
Prior to Spain's entry into the European Union in 1986, the pharmaceutical
regulations in Spain were less stringent. Since that time, we, along with all
Spanish pharmaceutical companies, must obtain manufacturing, marketing and
pricing authorizations to commercialize pharmaceutical products in Spain.
Pharmaceutical manufacturers in Spain must obtain from the Spanish Ministry of
Health a general permit to operate a pharmaceutical business certifying that its
facilities comply with European Good Manufacturing Practices. For marketing
authorization of new products, the development process in Spain is comprised of
three clinical phases for branded drugs and bioequivalent studies for generic
drugs as in the U.S. to assure their safety and efficacy. A dossier must be
prepared on each pharmaceutical product and, upon approval of the product by the
Spanish Ministry of Health, it may be marketed in Spain. Finally, the Spanish
Ministry of Health sets maximum prices and reimbursement rates for our products.

Trends in Healthcare Regulation

         The cost of healthcare 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 healthcare
programs, including restrictions on amounts agencies will reimburse for the use
of products. Efforts to reduce healthcare costs are also being made in the
private sector. Healthcare providers have responded by instituting various cost
reduction and containment measures of their own. It is not possible to predict
the extent to which we or the healthcare industry in general might be affected
by these changes.


                                       17
<PAGE>

         Continuing reviews of the utilization, safety and efficacy of
healthcare products and their components are being conducted by industry,
government agencies and others. These 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. We maintain product liability insurance for
such potential claims; however, no such claims have ever been asserted against
us.

         Many countries, directly or indirectly through reimbursement
limitations, control the selling prices and reimbursement prices of certain
healthcare products. In addition, the prices for all prescription products in
Spain are determined by the Spanish Ministry of Health. In order to control
rising healthcare costs, substitution of generically equivalent products is
often encouraged. In certain circumstances, the local governments in Spain
require that prescriptions for generic medications be filled using one of the
three cheapest products on the market unless the prescription specifies a
particular manufacturer's product. In Western Europe, efforts are under way by
the European Union to harmonize technical standards for many products, including
drugs, to make more uniform the requirements for marketing approval from the
various regulatory agencies.

Other Regulations

         We believe that we comply with environmental laws that apply to us and
we do not anticipate that compliance will have a material effect on our
financial condition.

EMPLOYEES

         We employ approximately 287 people, 10 of whom are employed in the U.S.
and 277 in Spain, as of March 7, 2003. Approximately 88 of these employees
principally are engaged in manufacturing activities, 149 in sales and marketing,
12 in product development and 38 in management and administration. In general,
we consider our relations with our employees to be good.


INTERNET INFORMATION AND SEC DOCUMENTS

         Our internet site is located at www.bentleypharm.com. Copies of our
reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K may be accessed from our website, free of
charge, as soon as reasonably practicable after we electronically file such
reports with, or furnish such reports to, the Securities and Exchange
Commission.


RISK FACTORS

         You should carefully consider the following risk factors and warnings.
The risks described below are not the only risks we face. Additional risks that
we do not yet know of or that we currently think are immaterial may also impair
our business operations. If any of the events or circumstances described in the
following risks actually occurs, our business, financial condition, or results
of operations could be materially adversely affected. In such case, the trading
price of our common stock could decline and you may lose all of part of your
investment.


                                       18
<PAGE>

OUR GROWTH DEPENDS ON IDENTIFYING DRUGS SUITABLE FOR OUR DRUG DELIVERY
TECHNOLOGIES AND EXPANDING OUR GENERIC AND BRANDED DRUG OPERATIONS.

         Bentley's growth depends on the identification of pharmaceutical
products that are suitable for delivery using our technologies. Our principal
drug technology is our CPE-215 permeation enhancement platform technology. This
technology, like other drug delivery enhancement technologies, operates to
enhance the amount and rate of absorption of certain drugs across biological
membranes. This technology does not operate independently and must be coupled
with suitable pharmaceutical products in order to provide value. Consequently,
our growth will depend to a great extent on identifying and commercializing
these suitable drugs with respect to which we intend to expend significant
resources and efforts. Identifying suitable products is a lengthy and complex
process that may not succeed. Even if identified, products may not be available
to us or we may otherwise be unable to enter into licenses or other agreements
for their use. In our efforts to identify suitable products, we compete with
other pharmaceutical delivery companies with greater research and development,
financial, marketing and sales resources. If we do not effectively identify
drugs to be used with our technologies, improve the delivery of drugs with our
technologies and bring the improved drugs to commercial success, then we may not
be able to continue our growth and we will be adversely affected.

         We intend to expend significant resources and efforts toward
identifying and commercializing products and technologies to expand our generic
and branded drug operations in Spain. Although we already manufacture and market
generic and branded drugs in Spain, the growth of these operations in particular
and Bentley in general will depend to a great extent on identifying and
commercializing additional such drugs for which we have existing capacity and
infrastructure and, to a lesser extent, on increasing sales of existing
products. Identifying and pursuing these new opportunities involves significant
time and expense and we may not succeed. Even if identified, these products and
technologies may not be commercially successful. Once identified, products to be
manufactured and/or marketed by us under generic or branded names are subject to
successful negotiation of acceptable economic and legal terms, and successful
progress of the product through commercialization, as to which we cannot assure
you. In these efforts, we compete with other pharmaceutical companies having
generic and branded drug operations with greater financial, marketing and sales
resources. If we do not effectively identify generic and branded drug products
and technologies and bring them to commercial success, then we will not be able
to continue our growth and we will be adversely affected.

         The growth of our generic and branded operations may be adversely
impacted by claims by others that our products infringe on the proprietary
rights of their existing "brand-name" products. For example, in February 2002 we
were notified that a legal proceeding seeking an injunction had been commenced
in Madrid against us by Merck & Co. Inc. and its Spanish subsidiary alleging
that we violated their patents in our production of the product simvastatin.
Although the court in the same month dismissed the action, Merck brought the
same claims in another proceeding in January 2003. We cannot assure you that
similar actions will not be brought nor that they will not have an adverse
effect on us.

PRODUCTS USING OUR TECHNOLOGIES ARE IN VARIOUS STAGES OF DEVELOPMENT AND MAY NOT
ACHIEVE COMMERCIAL SUCCESS.

         Independently as well as in conjunction with strategic partners, we are
investigating the use of our technologies with respect to a variety of
pharmaceutical compounds and products that are in various stages of development.
We are unable to predict whether any of these products will receive regulatory
clearances or be successfully developed, manufactured or commercialized.
Further, due to the extended testing and


                                       19
<PAGE>

regulatory review process required before marketing clearance can be obtained,
the time periods before commercialization of any of these products are long and
uncertain. Risks during development include the possibility that:

         o    any or all of the proposed products will be found to be
              ineffective;

         o    the proposed products will have adverse side effects or will
              otherwise fail to receive necessary regulatory clearances;

         o    the proposed products may be effective but uneconomical to market;
              or

         o    other pharmaceutical companies may market equivalent or superior
              products.

WE WILL RELY ON STRATEGIC PARTNERS TO COMMERCIALIZE PRODUCTS THAT USE OUR DRUG
DELIVERY TECHNOLOGIES.

         In light of our resources and the significant time, expense, expertise
and infrastructure necessary to bring new drugs and formulations from inception
to market, we are particularly dependent on resources from third parties to
commercialize products incorporating our technologies. Our strategy involves
forming alliances with others to develop, manufacture, market and sell our
products in the United States and other countries. We continue to pursue
strategic partners for these purposes. We may not be successful in finding
strategic partners or in otherwise obtaining financing, in which case the
development of our products would be delayed or curtailed.

         We must enter into agreements with strategic partners to conduct
clinical trials, manufacturing, marketing and sales necessary to commercialize
product candidates. In addition, our ability to apply our drug delivery
technologies to any proprietary drugs will depend on our ability to establish
and maintain strategic partnerships or other collaborative arrangements with the
holders of proprietary rights to such drugs. Arrangements with strategic
partners may be established through a single comprehensive agreement or may
evolve over time through a series of discrete agreements, such as letters of
intent, research agreements and license agreements. We cannot assure you that we
will be able to establish such strategic partnerships or collaborative
arrangements on favorable terms or at all or that any agreement entered into
with a strategic partner will lead to further agreements or ultimately result in
commercialization of a product.

         In collaborative arrangements, we will depend on the efforts of our
strategic partners and will have limited participation in the development,
manufacture, marketing and commercialization of the products subject to the
collaboration. We cannot assure you that these strategic partnerships or
collaborative arrangements will be successful, nor can we assure you that
strategic partners or collaborators will not pursue alternative technologies or
develop alternative products on their own or with others, including our
competitors. We could have disputes with our existing or future strategic
partners or collaborators. Any such disagreements could lead to delays in the
research, development or commercialization of potential products or could result
in time-consuming and expensive litigation or arbitration.


                                       20
<PAGE>

A SIGNIFICANT PORTION OF OUR REVENUES ARE GENERATED BY THE SALE OF PRODUCTS THAT
ARE FORMULATED FROM ONE ACTIVE INGREDIENT.

         Revenues from products whose active ingredient is omeprazole accounted
for approximately 49% of our net sales in 2002. We currently purchase omeprazole
from a single supplier. If we lose and cannot effectively replace this supplier
or are otherwise unable to continue the sales of products that contain this
active ingredient, our revenues would decline significantly.

IF OUR CLINICAL TRIALS FAIL, WE WILL BE UNABLE TO MARKET PRODUCTS.

         Any human pharmaceutical product developed by us would require
clearance by the U.S. Food and Drug Administration for sales in the United
States, by Spain's Ministry of Health for sales in Spain and by comparable
regulatory agencies for sales in other countries. The process of conducting
clinical trials and obtaining FDA and other regulatory approvals is lengthy and
expensive and we cannot assure you of success. In order to obtain FDA approval
of any product candidates using our technologies, a New Drug Application must be
submitted to the FDA demonstrating that the product candidate, based on
preclinical research and animal studies as well as human clinical trials, is
safe for humans and effective for its intended use. Positive results from
preclinical studies and early clinical trials do not ensure positive results in
more advanced clinical trials designed to permit application for regulatory
approval. We may suffer significant setbacks in clinical trials, even in cases
where earlier clinical trials show promising results. Any of our product
candidates may produce undesirable side effects in humans that could cause us or
regulatory authorities to interrupt, delay or halt clinical trials of a product
candidate. We, the FDA or other regulatory authorities may suspend our clinical
trials at any time if we or they believe the trial participants face
unacceptable health risks or if they find deficiencies in any of our regulatory
submissions. Other factors that can cause delay or terminate our clinical trials
include:

         o    slow or insufficient patient enrollment;

         o    slow recruitment and completion of necessary institutional
              approvals at clinical sites;

         o    longer treatment time required to demonstrate efficacy;

         o    lack of sufficient supplies of the product candidate;

         o    adverse medical reactions or side effects in treated patients;

         o    lack of effectiveness of the product candidate being tested;

         o    regulatory requests for additional clinical trials; and

         o    instability of the pharmaceutical formulations.

OUR PATENT POSITIONS AND INTENDED PROPRIETARY OR SIMILAR PROTECTIONS ARE
UNCERTAIN.

         We have filed numerous patent applications and have been granted
licenses to, or have acquired, a number of patents. We cannot assure you,
however, that our pending applications will be issued as patents or that any of
our issued or licensed patents will afford adequate protection to us or our
licensees. We cannot


                                       21
<PAGE>

determine the ultimate scope and validity of patents that are now owned by or
may be granted to third parties, the extent to which we may wish or be required
to acquire rights under such patents or the cost or availability of such rights.

         Competitors may interfere with our patent process in a variety of ways.
Competitors may claim that they invented the claimed invention prior to us.
Competitors also may claim that we are infringing their patents, interfering
with or preventing the use of our technologies. Competitors also may contest our
patents by showing the patent examiner that the invention was not original, was
not novel or was obvious. In litigation, a competitor could claim that our
issued patents are not valid for a variety of other reasons as well. If a person
claims we infringe their technology, we could face a number of consequences,
including lawsuits, which take significant time and can be very expensive,
payment of substantial damages for infringement, prohibition from selling or
licensing the product unless the patent holder licenses the patent to us, or
reformulation, if possible, of the product so it does not infringe, which could
require substantial time and expense.

         As an example of the risk of infringement claims, in February 2002 we
were notified that a legal proceeding seeking an injunction had been commenced
in Madrid against us by Merck & Co. Inc. and its Spanish subsidiary alleging
that we violated their patents in our production of the product simvastatin.
Although the court in the same month dismissed the action, Merck brought the
same claims in another proceeding in January 2003. We cannot assure you that
similar such actions will not be brought nor that they will not have an adverse
effect on us.

         We also rely on trade secrets, unpatented proprietary technologies and
continuing technological innovations in the development and commercialization of
our products. We cannot assure you that others will not independently develop
the same or similar technologies or obtain access to our proprietary
technologies. It is unclear whether our trade secrets will be protected under
law. While we use reasonable efforts to protect our trade secrets, our employees
or consultants may unintentionally or willfully disclose our information to
competitors. Our employees and consultants with access to our proprietary
information have entered into or are subject to confidentiality arrangements
with us and have agreed to disclose and assign to us any ideas, developments,
discoveries and inventions that arise from their activities for us. We cannot
assure you, however, that others may not acquire or independently develop
similar technologies or, if effective patents in applicable countries are not
issued with respect to our products or technologies, that we will be able to
maintain information pertinent to such research as proprietary technologies or
trade secrets. Enforcing a claim that another person has illegally obtained and
is using our trade secrets, like patent litigation, is expensive and time
consuming, and the outcome is unpredictable. In addition, courts outside the
United States are sometimes less willing to protect trade secrets.

REGULATORY APPROVALS MUST BE OBTAINED AND MAINTAINED FOR PRODUCTS INCORPORATING
OUR TECHNOLOGIES AND, IF APPROVALS ARE DELAYED OR WITHDRAWN, WE WILL BE UNABLE
TO COMMERCIALIZE THESE PRODUCTS.

         Government regulations in the United States, Spain and other countries
have a significant impact on our business and affect the research and
development, manufacture and marketing of products incorporating our
technologies. In the United States, Spain and other countries, governmental
agencies have the authority to regulate the distribution, manufacture and sale
of drugs. Failure to comply with applicable regulatory approvals can, among
other things, result in fines, suspension or withdrawal of regulatory approvals,
product recalls, operating restrictions and criminal prosecution. In addition,
governmental regulations may be established that could prevent, delay, modify or
rescind regulatory approval of our products.


                                       22
<PAGE>

IF WE ARE UNABLE TO OBTAIN MARKETING APPROVALS TO SELL OUR PRODUCTS IN COUNTRIES
OTHER THAN SPAIN, WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL REVENUES FROM SALES IN
THOSE COUNTRIES.

         We cannot assure you that products that have obtained marketing
approval in Spain will be approved for marketing elsewhere. If we are unable to
obtain marketing approval for our products in countries other than Spain, we may
not be able to obtain additional revenues from sales in those countries. If we
are unable to obtain these marketing approvals, we would have to seek to enter
into collaborative arrangements to sell or license our products to strategic
partners that have marketing approval in those countries. We can not assure you
that we would find or enter into acceptable arrangements with such strategic
partners to market our products, nor can we assure you that any such
arrangements would be successful.

WE MUST COMPLY WITH GOOD MANUFACTURING PRACTICES IN THE PRODUCTION OF
PHARMACEUTICAL PRODUCTS.

         Any manufacturing facility for pharmaceutical products to be marketed
in the United States is subject to FDA inspection both before and after approval
of a New Drug Application to determine compliance with the FDA's Good
Manufacturing Practices requirements, as well as local, state and other federal
regulations. Manufacturing facilities for our compounds to be marketed in
European countries and elsewhere are also subject to European Union and/or other
applicable GMP regulations. Facilities used to produce our compounds may not
achieve or maintain compliance with GMP or other requirements. The GMP
regulations are complex and, if we fail to comply with them, it could lead to
rejection or delay of an NDA or comparable application. Any delay in approval of
an NDA or comparable application would delay product launch. Violation of GMP
requirements after approval of an NDA or comparable application, could result in
remedial action, penalties and delays in production.

WE OPERATE A SIGNIFICANT PORTION OF OUR BUSINESS IN, AND PLAN TO EXPAND FURTHER
INTO, MARKETS OUTSIDE THE UNITED STATES, WHICH SUBJECTS US TO ADDITIONAL
BUSINESS RISKS.

         In the year ended December 31, 2002, 99% of our revenues were derived
from sales made by our Spanish subsidiaries in Spain and a small portion of
those revenues (six percent) were derived from sales made by the subsidiaries to
customers in other foreign countries. We believe that a significant portion of
our revenues will continue to be derived from sales in foreign countries.
Conducting business internationally subjects us to a number of risks and
uncertainties, including:

         o    unexpected delays or changes in regulatory requirements;

         o    difficulties and costs related to complying with a wide variety of
              complex foreign laws and treaties;

         o    delays and expenses associated with tariffs and other trade
              barriers;

         o    restrictions on and impediments to repatriation of our funds and
              our customers' ability to make payments to us;

         o    political and economic instability;

         o    difficulties and costs associated with staffing and managing
              international operations and implementing, maintaining and
              improving financial controls;


                                       23
<PAGE>

         o    dependence upon independent sales representatives and other
              indirect resellers who may not be as effective and reliable as our
              employees;

         o    inadequate or uncertain protection of intellectual property in
              foreign countries;

         o    increased difficulty in collecting accounts receivable and longer
              accounts receivable cycles in certain foreign countries; and

         o    adverse tax consequences or overlapping tax structures.

CURRENCY FLUCTUATIONS AND THE TRANSITION TO THE EURO COULD HAVE A MATERIAL
ADVERSE IMPACT ON OUR BUSINESS.

         Our revenues may be impacted by fluctuations in local currencies due to
the fact that substantially all of our revenues currently are generated by sales
in Spain by our Spanish subsidiaries, Laboratorios Belmac S.A., Laboratorios
Davur S.L. and Laboratorios Rimafar S.L. Our Spanish subsidiaries reported an
increase in net sales of 42% in local currency for the year ended December 31,
2002 compared to the prior year; however, an increase in the value of the Euro,
in relation to the U.S. Dollar, had the effect of increasing revenues by
approximately $2,145,000 during the year ended December 31, 2002. We do not
currently engage in foreign exchange hedging transactions to manage our foreign
currency exposure. Our foreign operations expose us to a number of currency
related risks, including the following:

         o    fluctuations in currency exchange rates;

         o    limitations on the conversion of foreign currency;

         o    fluctuations of the carrying value of long lived assets; and

         o    limitations on the remittance of dividends by foreign
              subsidiaries.

IF WE CANNOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE AND MEET THE INTENSE
COMPETITION IN OUR INDUSTRY, WE MAY NOT SUCCEED.

         Our success depends, in part, on achieving and maintaining a
competitive position in the development of products and technologies in a
rapidly evolving industry. If we cannot maintain competitive products and
technologies, our current and potential strategic partners may choose to adopt
the drug delivery technologies of our competitors. We also compete generally
with other drug delivery, biotechnology and pharmaceutical companies engaged in
the development of alternative drug delivery technologies or new drug research
and testing. Many of these competitors have substantially greater financial,
technological, manufacturing, marketing, managerial and research and development
resources and experience than we do and represent significant competition for
us. Our competitors may succeed in developing competing technologies or
obtaining governmental approval for products before we achieve success, if at
all. The products of our competitors may gain market acceptance more rapidly
than our products. Developments by competitors may render our existing or
proposed products noncompetitive or obsolete.

         Our competitive positions in our generic and branded drug operations as
well as with our drug delivery enhancement technologies are uncertain and
subject to risks. In Spain, and in other countries, we


                                       24
<PAGE>

must demonstrate bioequivalence of our generic products, which may be challenged
by branded and other generic competitors as well as regulatory authorities. In
order to demonstrate bioequivalence of our generic products, we must show that
the rate and extent of absorption and levels of concentration in the bloodstream
of our generic products are not statistically different from other
pharmaceutical equivalents that have previously been approved by the regulatory
authorities of the respective country, when administered at the same dosage
level under similar clinical conditions.

         The competitive position of our drug delivery enhancement technologies
is subject to the possible development by others of superior technologies. Other
drug delivery technologies, including oral and injection methods, have wide
acceptance, notwithstanding certain drawbacks, and are the subject of
improvement efforts by other entities having greater resources. In addition, our
drug delivery technologies are limited by the number and commercial magnitude of
drugs with which they can successfully be combined.

WE MAY BE UNABLE TO MEET INCREASING EXPENSES AND DEMANDS ON OUR RESOURCES FROM
FUTURE GROWTH, IF ANY, OR TO EFFECTIVELY PURSUE ADDITIONAL BUSINESS
OPPORTUNITIES.

         Our revenues increased 48% and our research and development
expenditures increased 42% from the year ended December 31, 2001 to the year
ended December 31, 2002, challenging our management, administrative, financial,
marketing, operational and research and development resources. In addition, we
routinely consider acquisition and investment opportunities, although we have no
current agreements or commitments with respect to any acquisitions or
investments. Any future acquisitions or investments would further challenge our
resources. If we do not properly meet the increasing expenses and demands on our
resources from future growth, we will be adversely affected. To properly manage
our growth, we must, among other things, implement additional and improve
existing administrative, financial, marketing, operational and research and
development systems, procedures and controls on a timely basis. We may also need
to expand our staff in these and other areas. We may not be able to complete the
improvements to our systems, procedures and controls necessary to support our
future operations in a timely manner. We may not be able to hire, train,
integrate, retain, motivate and manage required personnel, successfully
integrate acquisitions or investments, nor successfully identify, manage and
pursue existing and potential market opportunities. If we fail to generate
additional revenue in excess of increased operating expenses in any fiscal
period, we may incur losses, or our losses may increase in that period.

PHARMACEUTICAL PRICING, CHANGES IN THIRD-PARTY REIMBURSEMENT AND GOVERNMENTAL
MANDATES ARE UNCERTAIN AND MAY ADVERSELY AFFECT US.

         Our revenues and profitability may be adversely affected by the
continuing efforts of governmental and third party payors to contain or reduce
the costs of healthcare. A substantial portion of our operations consists of
marketing and manufacturing, primarily in Spain, generic and branded
pharmaceutical products. The use of generic drugs is regulated in Spain, the
U.S. and many other countries, subject to many changing and competing public
policy considerations. In addition, in certain markets, such as Spain, pricing
or profitability of prescription pharmaceuticals is subject to government
control. In order to control rising healthcare costs, substitution of
generically equivalent products is often encouraged. In certain circumstances,
the local governments in Spain require that prescriptions for generic
medications be filled using one of the three cheapest products on the market
unless the prescription specifies a paticular manufacturers' product. Some
governmental agencies, including those in Spain, can, due to insufficient
supply, compel companies to continue to produce products that are not profitable
for the company. In the U.S., there have been, and we expect that there will
continue to be, a number of federal and state proposals to implement similar
government controls.


                                       25
<PAGE>

         Successful commercialization of many of our products, including those
using our permeation enhancement technologies as well as our generic and branded
products, may depend on the availability of reimbursement for the cost of such
products and related treatment from third-party healthcare payors, such as the
government, private insurance plans and managed care organizations. Third-party
payors are increasingly challenging the price of medical products and services.
Such reimbursement may not be available for any of our products at all or for
the duration of the recommended treatment with a drug, which could materially
adversely affect our ability to commercialize that drug. The increasing emphasis
on managed care in the U.S. continues to increase the pressure on pharmaceutical
pricing.

         We anticipate that there will continue to be a number of proposals in
the U.S. to implement government control over the pricing or profitability of
prescription pharmaceuticals, as is currently the case in many foreign markets.
The announcement or adoption of such proposals could adversely affect us.
Further, our ability to commercialize our products may be adversely affected to
the extent that such proposals materially adversely affect the business,
financial condition and profitability of companies that are prospective
strategic partners.

         The cost of healthcare in Spain, the U.S. and elsewhere continues to be
a subject of investigation and action by various governmental agencies. Certain
resulting legislative proposals may adversely affect us. For example,
governmental actions to reduce or eliminate reimbursement for drugs may directly
diminish our markets. In addition, legislative safety and efficacy measures may
be invoked that lengthen and increase the costs of drug approval processes.
Further, social, economic and other broad policy legislation may induce
unpredictable changes in the healthcare environment. As examples of pending
legislative proposals that may adversely affect us, groups in Spain have urged
the Spanish Parliament to consider proposals that would revise the
pharmaceutical laws in response to social policy. One would change the pricing
and availability of drugs in Spain and the other would conform Spanish drug
exportation to international standards for certain purposes. We cannot assure
you whether these proposals or others may be enacted in some form, if at all, or
the impact they may have if enacted.

OUR OPERATIONS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO RAISE OR OBTAIN
NEEDED FUNDING.

         We have used cash from outside financing to fund our operations.
Substantial time and financial and other resources will be required to complete
ongoing development and clinical testing of our products. Regulatory efforts and
collaborative arrangements also will be necessary for our products that are
currently under development and testing in order for them to be marketed.
Assuming we continue our operations as presently conducted, we believe that we
have sufficient working capital to meet our needs for at least the next
twenty-four months. However our revenues from operations and cash may not be
sufficient over the next several years for commercializing all of the products
we are currently developing. Consequently, we seek strategic partners for all
phases of development, marketing and commercialization of product candidates
employing our technologies. Further, we cannot assure you as to the sufficiency
of our resources or the time required to complete any ongoing development and
clinical testing, since the extent to which we conduct such testing is dependent
on resource allocation decisions that we make from time to time based on
numerous financial as well as operational conditions.

         In addition to development and other costs, we expect to incur capital
expenditures from time to time. These capital expenditures will be influenced by
our regulatory compliance efforts, our success, if any, at developing
collaborative arrangements with strategic partners, our needs for additional
facilities and capital equipment and the growth, if any, of our business in
general. We cannot assure you that we will receive additional funding on
favorable terms if at all, or that we will be successful in attracting strategic


                                       26
<PAGE>

partners. If we cannot raise funds or engage strategic partners on acceptable
terms when needed, we may not be able to continue our research and development
activities, develop or enhance our products and services, take advantage of
future opportunities, grow our business or respond to competitive pressures or
unanticipated requirements.

IF WE CANNOT ATTRACT AND RETAIN KEY PERSONNEL, WE MAY NOT BE ABLE TO EXECUTE OUR
BUSINESS PLAN AS ANTICIPATED.

         We have assigned many key responsibilities within our company to, and
are dependent on, a relatively small number of individuals. If we lose the
services of our Chief Executive Officer, Chief Science Officer or Vice President
of Pharmaceutical Development, our ability to execute our business plan in the
manner we currently anticipate would be adversely affected. The competition for
qualified personnel is intense and the loss of key personnel could adversely
affect our business. We maintain key person life insurance only for our Chief
Executive Officer. We have an employment agreement with each of our executive
officers.

WE MAY INCUR SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT
COMMERCIALIZATION OF OUR PRODUCTS IN RESPONSE TO PRODUCT LIABILITY CLAIMS.

         The testing and marketing of medical products entails an inherent risk
of product liability. We may be held liable to the extent that there are any
adverse reactions from the use of our products. Our products involve new methods
of delivery for drugs, some of which may require precautions to prevent
unintended use, especially since they are designed for patients' self-use rather
than being administered by medical professionals. The FDA may require us to
develop a comprehensive risk management program for our products. The failure of
these measures could result in harmful side effects or death. As a result,
consumers, regulatory agencies, pharmaceutical companies or others might make
claims against us. If we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities, lose market share or be
required to limit commercialization of our products.

         Our inability to obtain sufficient product liability insurance at an
acceptable cost to protect against potential product liability claims could
inhibit or prevent the commercialization of pharmaceutical products we develop
alone or with corporate collaborators. We maintain product liability insurance
in the amount of $3 million Euros (approximately $3.25 million U.S. Dollars) and
clinical trial insurance in connection with our clinical testing activities in
various amounts on a study-by-study basis. While management believes that this
insurance is reasonable, we cannot assure you that any of this coverage will be
adequate to protect us in the event of a claim. We, or any corporate
collaborators, may not be able to obtain or maintain insurance at a reasonable
cost, if at all. Even if our agreements with any future corporate collaborators
entitle us to indemnification against losses, such indemnification may not be
available or adequate if any claim arises.


                                       27
<PAGE>

YOUR PERCENTAGE OF OWNERSHIP AND VOTING POWER AND THE PRICE OF OUR COMMON STOCK
MAY DECREASE AS A RESULT OF EVENTS THAT INCREASE THE NUMBER OF OUR OUTSTANDING
SHARES.

         As of December 31, 2002, we had the following capital structure:

<TABLE>
<CAPTION>

<S>                                                                                                <C>
Common stock outstanding...................................................................        17,404,000
Common stock issuable upon:
  Exercise of Class B Warrants.............................................................         2,872,000
  Exercise of other warrants...............................................................           420,000
  Exercise of options which are outstanding................................................         3,459,000
  Exercise of options which have not been granted..........................................           309,000

Total common stock outstanding assuming exercise of all of the above.......................        24,464,000
</TABLE>

         As of December 31, 2002, we had outstanding options and warrants to
purchase approximately 6,751,000 shares of common stock at exercise prices
ranging from $1.50 to $22.50 (exercisable at a weighted average of $5.39 per
share), of which approximately 6,002,000 options and warrants were then
exercisable. Since December 31, 2002 we have granted options to purchase 250,000
shares of common stock, exercisable at a weighted average of $8.07 per share. In
addition, we may conduct future offerings of our common stock or other
securities with rights to convert the securities into shares of our common
stock. Exercise of our outstanding options and warrants into our common stock
may significantly and negatively affect the market price for our common stock as
well as decrease your percentage ownership and voting power.

OUR STOCK IS VOLATILE.

         The market prices for our securities and for securities of emerging
growth companies have historically been highly volatile. During the last two
years, the price of our common stock has ranged from a high of $12.08 to a low
of $4.40. Future announcements concerning us or our competitors may have a
significant impact on the market price of our common stock. Factors which may
affect our market price include:

         o    progress of our relationships with strategic partners;

         o    results of clinical studies and regulatory reviews;

         o    technological innovations by us or our competitors;

         o    market conditions in the pharmaceutical, drug delivery and
              biotechnology industries;

         o    competitive products;

         o    financings;

         o    sales or the possibility of sales of our common stock;

         o    our results of operations and financial condition;


                                       28
<PAGE>

         o    proprietary rights;

         o    public concern as to the safety or commercial value of our
              products; and

         o    general economic conditions.

         These uncertainties have adversely affected and may continue to
adversely affect the market price of our common stock. Furthermore, the stock
market has experienced significant price and volume fluctuation unrelated to the
operating performance of particular companies. These market fluctuations may
also adversely affect the market price of our common stock.

DELAWARE LAW AND PROVISIONS IN OUR CERTIFICATE OF INCORPORATION, BYLAWS AND
STOCKHOLDER RIGHTS PLAN MAY PREVENT OR DISCOURAGE THIRD PARTIES OR STOCKHOLDERS
FROM ATTEMPTING TO REPLACE THE MANAGEMENT OF BENTLEY.

         As a Delaware company, we are subject to Section 203 of the Delaware
General Corporation Law, as amended, which is a statutory provision intended to
discourage certain takeover attempts that are not approved by the board of
directors. Section 203 prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder
subject to certain exceptions.

         Our certificate of incorporation and bylaws include provisions that
also may have the effect of discouraging, delaying or preventing a change in
control or an unsolicited acquisition proposal that a stockholder might consider
favorable. Our board of directors is divided into three classes with staggered
three-year terms, which makes it more difficult for an acquiror to change the
overall composition of the board in a short period of time. The positive vote of
at least two-thirds is required to approve a merger, a sale or lease of all or
most of our assets, certain other business combinations or dissolution or
liquidation, and an affirmative vote of two-thirds is required to amend any
provision in our certificate of incorporation relating to our directors and
officers or to amend any provision in our certificate of incorporation.
Additionally, our certificate of incorporation authorizes our board of directors
to issue preferred stock in one or more series with the rights, obligations and
preferences of each series to be determined by our board without stockholder
approval. Our staggered board, the super-majority voting provisions and the
potential issuance of preferred stock may have the effect of delaying or
preventing or discouraging third parties or stockholders from attempting to
replace our management.

         To the same potential effect, we have a stockholder rights plan
designed to prevent a potential acquirer from gaining control of us and to
protect us from coercive takeover attempts. The rights will become exercisable
only if any person or group of affiliated persons beneficially acquires 15% or
more of our common stock. Under certain circumstances, each holder of a right
(other than the person or group who acquired 15% or more of our common stock) is
entitled to purchase a defined number of shares of our common stock at 50% of
its market price at the time that the right becomes exercisable.


                                       29
<PAGE>

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

         This Annual Report on Form 10-K contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.

         Words such as expects, anticipates, intends, believes, will and similar
words are used to identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements, including, but not limited to, the statements in the Risk Factors
and other sections in this Annual Report on Form 10-K, are not based on
historical facts, but rather reflect our current expectations concerning future
results and events. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, such statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be different from any future results,
performance and achievements expressed or implied by these statements, including
the risks outlined in the Risk Factors section and elsewhere in this Annual
Report on Form 10-K. You are cautioned not to place undue reliance on these
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as the result of new information,
future events or otherwise.


ITEM 2.           PROPERTIES
                  ----------


         We purchased a 15,700 square foot commercial building situated on
approximately 14 acres of land in Exeter, New Hampshire in January 2003. We plan
to move our corporate headquarters and research and development laboratory into
this facility in April 2003. We are located approximately 45 minutes north of
Boston, Massachusetts.

         We also lease a 3,200 square foot facility in North Hampton, New
Hampshire. The lease for this facility expires in March 2004.

         We own a 65,000 square foot facility in Zaragoza, Spain, which
accommodates our manufacturing plant, warehouse, research and development
laboratory and office space. The facility is located in an industrial park and
is situated on sufficient acreage to accommodate future expansion.

         We lease a 10,700 square foot facility in San Sebastian de los Reyes,
Spain, an area northwest of Madrid, which houses the administrative offices for
our Spanish and European operations. The lease for this facility expires in
2006.


                                       30
<PAGE>

ITEM 3.           LEGAL PROCEEDINGS
                  -----------------

         On February 4, 2002, we were notified that a legal proceeding had been
commenced against us by Merck & Co. Inc. and its Spanish subsidiary, Merck Sharp
& Dohme de Espana, S.A., alleging that we violate their patents in our
production of the product simvastatin and requesting an injunction ordering us
not to manufacture or market the product. The case was brought against our
Spanish subsidiaries in the 39th First Instance Court of the City of Madrid.
After a hearing on February 18, 2002, the court refused to grant the requested
injunction and dismissed the case on February 25, 2002, awarding us court and
legal fees. Merck has appealed the award of fees. Merck re-instituted its claim
against us in another proceeding brought in the 19th First Instance Court of the
City of Madrid, which we received on January 23, 2003. This case also alleges
violation of Merck's patents in the production of the product simvastatin,
requests an order that we cease manufacturing the product and demands damages
during the period of manufacture. We intend to vigorously oppose this claim as
we believe it is without merit. Simvastatin was launched in January 2002 and
sales of this product totaled approximately $1,300,000 during the year ended
December 31, 2002.

         We are a party to various other legal actions that arose in the
ordinary course of business. We do not expect that resolution of these matters
will have, individually or in the aggregate, a material adverse effect on our
financial position, results of operations or cash flows.


ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
                  ---------------------------------------------------

         Not applicable.


                                       31
<PAGE>

                                     PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
           ---------------------------------------------------------------------

         The following table sets forth, for the periods indicated, the range of
quarterly high and low sales prices for our common stock as reported on the
American Stock Exchange under the symbol "BNT." Our common stock began trading
on the American Stock Exchange on July 31, 1990 and on the Pacific Exchange on
March 27, 1996.

                                                           HIGH       LOW
                                                           ----       ---

FISCAL 2001
  First Quarter....................................      $ 7.50     $4.40
  Second Quarter...................................        6.35      4.40
  Third Quarter....................................        7.25      5.50
  Fourth Quarter...................................       10.50      6.25

FISCAL 2002
  First Quarter....................................       11.57      7.60
  Second Quarter...................................       12.08      9.95
  Third Quarter....................................       11.60      8.35
  Fourth Quarter...................................       10.00      6.40

FISCAL 2003
  First Quarter (through March 7, 2003)............        9.70      7.85

         As of March 7, 2003 there were 1,125 holders of record of our common
stock, which does not reflect stockholders whose shares are held in street name.

DIVIDENDS

         We have never paid cash dividends on our common stock. We intend to
retain future earnings in order to finance the growth and development of our
business.


                                       32
<PAGE>

ITEM 6.           SELECTED FINANCIAL DATA
                  -----------------------

         The following sets forth the selected consolidated statement of
operations data for each of the five years in the period ended December 31, 2002
and consolidated balance sheet data as of December 31, 2001 and 2002, all of
which are derived from our audited consolidated financial statements and related
notes. The following selected financial data for each of the three years in the
period ended December 31, 2002 and as of December 31, 2001 and 2002 should be
read together with our consolidated financial statements and related notes
appearing elsewhere in Item 15 of this Annual Report on Form 10-K and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Our independent auditors have audited our consolidated financial
statements for each of the five years in the period ended December 31, 2002. The
consolidated statement of operations for each of the two years in the period
ended December 31, 1999 are derived from our audited consolidated financial
statements and related notes not included in Item 15 of this Annual Report on
Form 10-K.

CONSOLIDATED STATEMENT OF OPERATIONS DATA

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                       -----------------------
                                                                       1998         1999         2000          2001         2002
                                                                       ----         ----         ----          ----         ----
                                                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                                                   <C>          <C>           <C>           <C>          <C>
Total revenues....................................................    $15,243      $20,249       $18,617      $26,411      $39,136
Cost of sales.....................................................      6,601        8,445         7,189       11,462       16,477
                                                                      -------      -------       -------      -------      -------
Gross profit......................................................      8,642       11,804        11,428       14,949       22,659
Operating expenses................................................     10,710       11,226        11,942       16,137       19,277
Gain on sale of drug licenses.....................................          -            -             -        5,050          650
Provision for foreign income taxes................................        236          781           222        2,452        2,534
Net income (loss).................................................    $(2,876)     $(1,090)      $  (745)     $ 1,361      $ 1,636
                                                                      =======      =======       =======      =======      =======
Net income (loss) per common share - basic........................    $  (.35)     $  (.12)      $  (.06)     $   .10      $   .10
                                                                      =======      =======       =======      =======      =======
Net income (loss) per common share - diluted......................    $  (.35)     $  (.12)      $  (.06)     $   .08      $   .08
                                                                      =======      =======       =======      =======      =======
Weighted average common shares outstanding - basic................      8,431        9,147        12,981       14,196       16,569
                                                                      =======      =======       =======      =======      =======
Weighted average common shares outstanding - diluted..............      8,431        9,147        12,981       16,147       19,798
                                                                      =======      =======       =======      =======      =======
</TABLE>


CONSOLIDATED BALANCE SHEET DATA

                                                              DECEMBER 31,
                                                              ------------
                                                           2001           2002
                                                           ----           ----
                                                             (IN THOUSANDS)

Working capital....................................        $6,276       $30,703
Non-current assets.................................        16,280        20,720
Total assets.......................................        32,119        64,692
Non-current liabilities............................         2,132         2,672
Redeemable preferred stock.........................             -             -
Stockholders' equity...............................        20,424        48,751


                                       33
<PAGE>

ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  -----------------------------------------------------------
                  AND RESULTS OF OPERATIONS
                  -------------------------

GENERAL

         We are a specialty pharmaceutical company operating in two business
segments: research, development and licensing/commercialization of advanced
drug delivery technologies and pharmaceutical products; and manufacturing and
selling of generic and branded pharmaceutical products. A substantial part of
our operations is in Spain, where we manufacture and market generic and branded
pharmaceutical products and from which market we derive the majority of our
sales.

         Our primary objective is to be a leading specialty pharmaceutical
company focused on advanced drug delivery and formulation technologies that
improve the effectiveness of existing and new pharmaceuticals. We have patents
and proprietary technologies that enhance or facilitate the absorption of drugs
across membranes of the skin, mouth, nose, vagina and eye. We are developing
products incorporating these technologies and seek to form strategic alliances
with major pharmaceutical and biotechnology companies to facilitate the
development and commercialization of our products. We currently have strategic
alliances with Pfizer and Auxilium and are in preliminary discussions with a
number of other pharmaceutical companies to form additional alliances.

         We entered into a research services agreement with Auxilium, an
emerging therapeutic pharmaceutical company focused on diseases related to aging
to develop and test various pharmaceutical compositions of a topical
testosterone using our CPE-215 permeation enhancement technology. We have
licensed our drug delivery technology to Auxilium for use in the development and
commercialization of Testim, a topical testosterone product. Clinical trials
performed by Auxilium for the approval of this product in the U.S. have been
completed, a New Drug Application was approved by the FDA on October 31, 2002
and Testim was launched by Auxilium in February 2003.

         We entered into a research collaboration with Pfizer in which we were
granted a non-exclusive worldwide royalty-free license to use Pfizer's compounds
and technology to assess the performance of our CPE-215 technology with Pfizer's
compounds. As part of the agreement, we granted to Pfizer the non-exclusive
right to test the ability of our CPE-215 technology to enhance delivery of
certain compounds proprietary to Pfizer.

         We entered into a strategic alliance with Teva in July 2000 whereby we,
through our Spanish subsidiaries, received the right to register and sell in
Spain more than 75 of Teva's products. The products are comprised of both
branded and generic forms. Sales from the products are expected to begin
gradually, but will progress over the next two to three years. An investment in
additional sales representatives has been and will continue to be required,
along with an increase in regulatory activities, both of which may create a
short-term decrease in our earnings. Through our subsidiary, Laboratorios Davur
S.L., we also submitted registrations to the Spanish Ministry of Health for
generic versions of various products in response to growing interest in generic
drug products in Spain. We believe that gross margins may be lower on sales of
these products.

         We manufacture generic and branded pharmaceutical products in our
Zaragoza, Spain facility and sell and market these products to physicians and
pharmacists throughout Spain. In addition to manufacturing our own products, we
utilize our excess capacity by acting as a contract manufacturer for other
pharmaceutical companies.


                                       34
<PAGE>

         We have not realized domestic taxable income to date. At December 31,
2002, net operating losses available to offset future domestic taxable income
for federal income tax purposes were approximately $38,366,000 million. Our U.S.
federal net operating loss carryforwards, if not utilized, expire at various
dates from 2007 to 2023. We have recorded a valuation allowance against our
entire future tax benefit arising from our domestic net operating losses. The
future utilization of our net operating loss carryforwards may be limited
pursuant to U.S. tax regulations.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2001

         Net Product Sales. Net product sales increased by 47% from $26,411,000
in 2001 to $38,718,000 in 2002. The $12,307,000 increase was primarily the
result of our continuing efforts to increase sales in the generic drug market in
Spain. We anticipated the opportunities in the emerging generic drug market in
Spain and began taking measures over four years ago to enter the Spanish generic
drug market. We began to register, manufacture and market generic pharmaceutical
products in Spain and began aligning our business model to be competitive in
this arena, including hiring and training a new generic products sales force,
submission of generic-equivalent products to the Spanish Ministry of Health for
approval and a marketing campaign designed to position ourselves as a leader in
the Spanish generic drug market. We experienced an increase in net sales of 42%
in local currency in Spain in 2002 compared to the prior year. An increase in
the weighted average value of the Euro, in relation to the U.S. Dollar, over the
past 12 months, had the effect of increasing revenues by approximately
$2,145,000 during the year ended December 31, 2002.

         Prices for prescription pharmaceuticals have been established in Spain
by the Ministry of Health. In order to control rising healthcare costs,
substitution of generically equivalent products is often encouraged. In certain
circumstances, the local governments in Spain require that prescriptions for
generic medications be filled using one of the three cheapest products on the
market unless the prescription specifies a particular manufacturer's product.
These policies may have the effect of eroding gross margins, as sales of higher
priced branded products may be replaced with sales of lower priced generic
products. We are striving to maintain product sales and gross margins by
concentrating our efforts on increasing sales volume, being competitive in the
generic drug market, developing new products and increasing exports outside
Spain.

         Licensing and Collaboration Revenues. Licensing and collaboration
revenues totaled $418,000 in 2002. We entered into a research collaboration
whereby our collaborator agreed to fund a research and development program to
combine Bentley's patented CPE-215 drug delivery technologies with certain
proprietary compounds. Our collaborator advanced to us $250,000 during the
fourth quarter of 2001, which we recorded as deferred income as of December 31,
2001, and we recognized it as revenue as the related costs were incurred. We
also recognized revenues totaling $150,000 during the year ended December 31,
2002, related to product licensing activities, which we have included in the
Consolidated Statement of Operations as licensing and collaboration revenue.

         Gross Profit. Gross profit increased by 52% from $14,949,000 in 2001 to
$22,659,000 in 2002. The $7,710,000 increase was the direct result of the growth
in our net product sales from 2001 to 2002. Our gross margins on net product
sales in 2002 increased slightly to 57.4% compared to 56.6% in the prior year as
result of economies of scale (allocation of fixed costs over a larger number of
units, reducing the per-unit cost), partially offset by lower margins of generic
products, which typically have lower prices. We


                                       35
<PAGE>

experienced an increase in gross profit of 42% in local currency in 2002
compared to the prior year. An increase in the weighted average value of the
Euro, in relation to the U.S. Dollar over the past 12 months, had the effect of
increasing gross profit by approximately $1,218,000 during the year ended
December 31, 2002. Sales of generic products accounted for approximately 42% of
our net product sales during the year ended December 31, 2002, compared to 30%
in the prior year. Although we expect to continue to benefit from economies of
scale in the future as we grow, gross margins may decrease as sales of generic
products, with lower margins, become more significant in the future.
Additionally, the Ministry of Health in Spain levies a tax on pharmaceutical
companies for the purpose of funding rising healthcare costs in Spain. In 2002,
this tax had the effect of reducing gross profit by approximately $551,000 and
gross margins by approximately 1 percentage point.

         Selling and Marketing Expenses. Selling and marketing expenses
increased by 15% from $9,057,000 in 2001 to $10,400,000 in 2002. The $1,343,000
increase was instrumental in achieving a 47% increase in net product sales
during the period, as a result of our successful sales and marketing programs.
The increase in the weighted average value of the Euro, in relation to the U.S.
Dollar, over the past 12 months had the effect of increasing selling and
marketing expenses by $537,000 in 2002. Selling and marketing expenses as a
percentage of net product sales decreased to 27% in 2002 compared to 34% of
sales in 2001.

         General and Administrative Expenses. General and administrative
expenses increased by 20% from $4,085,000 in 2001 to $4,902,000 in 2002. The
$817,000 increase was the result of increased general and administrative
activities required to support our revenue growth in 2002. General and
administrative expenses as a percent of total revenues decreased to only 12.5%
in 2002, compared to 15.5% of revenues in 2001. General and administrative
expenses would have been approximately $162,000 lower in 2002, absent the
increase in the weighted average value of the Euro, in relation to the U.S.
Dollar, over the past 12 months. We expect that our future expenditures for
general and administrative expenses will continue to increase as we grow.
Although we cannot reasonably estimate the costs associated with implementation
of the internal controls provisions of the Sarbanes-Oxley Act of 2002, we do
expect to incur costs not previously experienced; however, we do not believe
that these costs will be material to our financial position, results of
operations or cash flows.

         Research and Development Expenses. Research and development expenses
increased by 42% from $2,084,000 in 2001 to $2,960,000 in 2002. The $876,000
increase was the result of an increase in our costs associated with our research
and development collaboration as well as our Phase I/II Clinical Studies
(treatment of nail fungal infections), pre-clinical programs underway in
collaboration with universities and with product formulation and testing efforts
being performed in the laboratory in our U.S. headquarters and at our facility
in Zaragoza, Spain. We are using our U.S. laboratory to develop potential
product applications using our drug delivery technologies. The expenditures in
research and development reflect our focus on projects that are necessary for
expansion of our portfolio of marketed products and clinical trials involving
our drug delivery technologies. We expect that our future expenditures for
research and development activities will continue to increase as a result of
programs that are necessary to advance new applications of our technologies.

         Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased by 11% from $911,000 in 2001 to $1,015,000 in 2002. The
$104,000 increase in 2002 was primarily the result of higher depreciation
charges with respect to recent asset additions and the effect of fluctuations in
foreign currency exchange rates. Depreciation and amortization charges are
expected to be higher in 2003 as a result of these additions.


                                       36
<PAGE>

         Interest Income. Interest income increased by 66% from $168,000 in 2001
to $279,000 in 2002. The $111,000 increase was the result of higher short-term
interest bearing investment balances, partially offset by lower interest rates
on the existing investment balances during 2002 compared to 2001.

         Interest Expense. Interest expense decreased by 14% from $244,000 in
2001 to $209,000 in 2002. The $35,000 decrease was the result of lower interest
rates on lines of credit used for operating purposes and lines of credit and
borrowings used to finance capital equipment and improvements in Spain.

         Provision for Income Taxes. We generated additional U.S. federal net
operating loss carry-forwards in 2002. However, since we are not assured of
future profitable domestic operations, we have recorded a valuation allowance
for any future tax benefit of such losses in the U.S. Therefore, no benefit has
been recognized with respect to U.S. losses reported in 2002. We recorded a
provision for foreign income taxes totaling $2,534,000 (37% of Spanish pre-tax
income) for the year ended December 31, 2002 compared to a provision for foreign
income taxes of $2,452,000 in the prior year. The provision for income taxes for
2002 included approximately $2,304,000 as a result of reporting taxable income
from operations in Spain and approximately $230,000 as a result of capital gains
taxes arising from the sale of Biolid(R), Lactoliofil(R) and other drug
licenses, whereas the provision for income taxes in the prior year included
approximately $607,000 as a result of reporting taxable income from operations
in Spain and approximately $1,845,000 as a result of capital gains taxes arising
from the sale of drug licenses. The provision for foreign income taxes would
have been approximately $110,000 lower than reported, absent the increase in the
weighted average value of the Euro, in relation to the U.S. Dollar, over the
past 12 months.

         Net Income. Including the $650,000 pre-tax gain on sale of the
Biolid, Lactoliofil and other drug licenses, we reported income from
operations of $4,032,000 for 2002 compared to income from operations of
$3,862,000 (including $4,977,000 of pre-tax gain on sale of the Controlvas(R)
drug license) in the prior year. Excluding the $650,000 pre-tax gain from the
sale of drug licenses, income from operations for the year ended December 31,
2002 totaled $3,382,000 compared to a loss of $1,188,000 in the prior year. The
combination of income from operations of $4,032,000 and the non-operating items,
primarily the provision for foreign income taxes of $2,534,000, resulted in net
income of $1,636,000, or $.10 per basic common share ($.08 per diluted common
share) on 16,569,000 weighted average basic common shares outstanding
(19,798,000 weighted average diluted common shares outstanding) for 2002,
compared to net income in the prior year of $1,361,000, or $.10 per basic common
share ($.08 per diluted common share) on 14,196,000 weighted average basic
common shares outstanding (16,147,000 weighted average diluted common shares
outstanding).

FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2000

         Net Product Sales. Net product sales increased by 42.9% from
$18,487,000 in 2000 to $26,411,000 in 2001. The $7,794,000 increase was
primarily the result of our continuing efforts in the generic drug market in
Spain. We anticipated the opportunities in the emerging generic drug market in
Spain and began taking measures over three years ago to enter the Spanish
generic drug market. We began to register, market and distribute generic
pharmaceutical products in Spain and began aligning our business model to be
competitive in this arena, including hiring and training a new generic products
sales force, submission of generic products to the Spanish Ministry of Health
for approval and a marketing campaign designed to position ourselves as a leader
in the Spanish generic drug market. Although in Spain we reported an increase in
net sales of 50% in local currency in 2001, compared to the prior year, a three
percent decline in the value of the Spanish Peseta and related Euro negatively
impacted revenues by approximately $579,000. Sales of the product Controlvas(R),
which accounted for approximately $2,208,000 of net sales in 2000, declined to


                                       37
<PAGE>

approximately $60,000 in 2001 as a result of our divestiture of the related drug
license during the first quarter of 2001, which resulted in a pre-tax gain of
approximately $4,977,000. Net sales in 2001 included sales of the product
Arzimol(TM) totaling approximately $600,000, which will not continue in 2002 due
to termination of our joint marketing agreement with Bristol-Myers Squibb for
this product.

         Gross Profit. Gross profit increased by 30.8% from $11,428,000 in 2000
to $14,949,000 in 2001. The $3,521,000 increase was the direct result of the
growth in our net sales from 2000 to 2001. However, our gross margins for 2001
decreased to 57% compared to gross margins of 61% in the prior year, primarily
as a result of the mix of products sold, including the effects of the addition
of our new generic product line and disposition of the Controlvas drug
license, as well as higher depreciation charges resulting from the recent
renovations and improvements at our manufacturing facility. Net sales of
Controlvas products contributed approximately $1,493,000 to gross profit
during 2000; however, the divestiture of the Controlvas drug license during
the first quarter of 2001 reduced the gross profit contribution from sales of
these products to approximately $41,000, in 2001. Approximately 30% of our net
sales during the year ended December 31, 2001 were generic product sales, which
typically have lower sales prices and gross margins than branded products. In
comparison, we sold no generic drug products during the first three quarters of
the prior year. As generic product sales become more significant in the future,
gross margins may continue to decrease. Additionally, the Ministry of Health in
Spain levies on pharmaceutical companies a tax for the purposes of funding
rising healthcare costs in Spain. In 2001, this tax had the effect of reducing
gross profit by $228,000, or one percentage point.

         Selling and Marketing Expenses. Selling and marketing expenses
increased by 39.5% from $6,494,000 in 2000 to $9,057,000 in 2001. The $2,563,000
increase in 2001 was the result of our introduction and support of the launches
of new generic drug products. Selling and marketing expenses as a percent of
sales, however, declined slightly to 34.3% in 2001 compared to 34.9% in 2000.
The three percent decline in the value of the Spanish Peseta and related Euro,
in relation to the U.S. Dollar, during the year, had the effect of reducing
selling and marketing expenses by $221,000 in 2001.

         General and Administrative Expenses. General and administrative
expenses increased by 8.5% from $3,766,000 in 2000 to $4,085,000 in 2001. The
$319,000 increase in 2001 was the result of increased general and administrative
activities required to support our revenue growth in 2001. General and
administrative expenses as a percent of revenues declined to 15.5% of net sales
in 2001 compared to 20.2% of revenues in 2000. The three percent decline in the
value of the Spanish Peseta and related Euro, in relation to the U.S. Dollar,
during the period, had the effect of reducing general and administrative
expenses by $58,000 in 2001.

         Research and Development Expenses. Research and development expenses
increased by 89.1% from $1,102,000 in 2000 to $2,084,000 in 2001. The $982,000
increase in 2001 was the result of an increase in our costs associated with
Phase I Clinical Studies (treatment of nail fungal infections), preclinical
programs underway in collaboration with universities and with product
formulation and testing efforts being performed in the laboratory in our U.S.
headquarters and at our facility in Zaragoza, Spain. We are using our U.S.
laboratory to develop potential product applications using our drug delivery
technologies. The expenditures in research and development, which totaled
$732,000 in the fourth quarter, reflect our focus on projects that are necessary
for expansion of our portfolio of marketed products and clinical trials
involving our technologies.


                                       38
<PAGE>

         Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased by 57.1% from $580,000 in 2000 to $911,000 in 2001. The
$331,000 increase in 2001 was the result of increased amortization charges
related to our recent acquisition of drug licenses and technologies, including
Codeisan(R), (approximately $289,000) and to a lesser extent, higher
depreciation charges with respect to recent asset additions (approximately
$107,000), partially offset by the effect of fluctuations in foreign currency
exchange rates (approximately $13,000).

         Interest Income. Interest income decreased by 51.6% from $347,000 in
2000 to $168,000 in 2001. The $179,000 decrease was the result of lower
short-term interest bearing investment balances and lower interest rates on the
existing investment balances during 2001 compared to 2000.

         Interest Expense. Interest expense decreased by 44.4% from $439,000 in
2000 to $244,000 in 2001. The $195,000 decrease was the result of the conversion
of all outstanding debentures into shares of our common stock in the second
quarter of 2000. Interest expense incurred during 2001 resulted primarily from
the outstanding balances on lines of credit used for operating purposes and
lines of credit and borrowings used to finance the purchase of the product
Codeisan and capital equipment and improvements in Spain.

         Provision for Income Taxes. We generated additional U.S. federal net
operating loss carryforwards in 2001. However, since we are not assured of
future profitable domestic operations, we have recorded a valuation allowance
for any future benefit of such losses. We recorded a provision for foreign
income taxes totaling $2,452,000 for 2001 as a result of reporting taxable
income in Spain (approximately $607,000) and capital gains tax (approximately
$1,845,000) primarily arising from the sale of Controlvas, compared to the
provision for foreign income taxes of $222,000 in the prior year as a result of
taxable income earned in Spain. The provision for foreign income taxes would
have been $159,000 higher than reported, absent the three percent decline in the
value of the Spanish Peseta and related Euro in relation to the U.S. Dollar
during the year.

         Net Income. We sold the trademarks, registration rights and dossiers
for our branded pharmaceutical products, Controlvas and Amantadine, for
approximately $5,148,000 and $114,000, respectively, during 2001, generating
pre-tax gains of approximately $4,977,000 and $73,000, respectively. Including
the $5,050,000 pre-tax gains on sale of these drug licenses, we reported income
from operations of $3,862,000 for 2001 compared to a loss from operations of
$514,000 in the prior year. Excluding the $5,050,000 pre-tax gain from the sale
of the Controlvas and Amantadine drug licenses, the loss from operations
for the year ended December 31, 2001 totaled $1,188,000. The combination of
income from operations of $3,862,000 and the non-operating items, primarily the
provision for income taxes of $2,452,000, resulted in net income of $1,361,000,
or $.10 per basic common share ($.08 per diluted common share) on 14,196,000
weighted average basic common shares outstanding (16,147,000 weighted average
diluted common shares outstanding) for 2001, compared to a net loss in the prior
year of $745,000, or $.06 per basic and diluted common share on 12,981,000
weighted average common shares outstanding.


                                       39
<PAGE>

SELECTED QUARTERLY FINANCIAL DATA

         The following table sets forth certain operating data for our last
eight quarters. We have derived this data from our unaudited quarterly financial
statements.

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED (UNAUDITED)
                                                 FISCAL 2001                                        FISCAL 2002
                                                 -----------                                        -----------
                                 3/31/01(1)     6/30/01     9/30/01      12/31/01  3/31/02(2)  6/30/02(2)   9/30/02(2)    12/31/02
                                 ----------     -------     -------      --------  ----------  ----------   ----------    --------
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                 <C>         <C>         <C>           <C>         <C>         <C>          <C>         <C>
Total revenues................      $5,814      $6,125      $6,316        $8,156      $9,174      $9,867       $8,571      $11,524
Gross profit..................       3,365       3,438       3,608         4,538       5,398       5,618        4,992        6,651
Income (loss) from operations.       4,612        (468)        120          (402)        755       1,395          692        1,190
Net income (loss).............       2,642        (569)       (149)         (563)        135         519          291          691
Net income (loss) per common
  share:
  Basic.......................      $  .19      $ (.04)     $ (.01)       $ (.04)     $  .01      $  .03       $  .01      $   .04
  Diluted.....................      $  .17      $ (.04)     $ (.01)       $ (.04)     $  .01      $  .03       $  .02      $   .03
</TABLE>

___________

(1)      Includes pre-tax gain of approximately $4,977,000 related to the sale
         of the Controlvas drug license.

(2)      Certain prior period amounts previously reported as cost of sales have
         been reclassified as a reduction of revenues to conform with the
         current period's presentation format. Such reclassifications are not
         considered material to the consolidated financial statements.


LIQUIDITY AND CAPITAL RESOURCES

         Total assets increased from $32,119,000 at December 31, 2001 to
$64,692,000 at December 31, 2002, while stockholders' equity increased from
$20,424,000 at December 31, 2001 to $48,751,000 at December 31, 2002. The
increase in stockholders' equity reflects primarily the net proceeds of
$22,108,000 from the April 2002 common stock offering, the exercise of stock
options and warrants totaling $1,375,000, the positive impact of the fluctuation
of the Euro/US dollar exchange rate which totaled $3,054,000 and net income of
$1,636,000.

         Working capital increased from $6,276,000 at December 31, 2001 to
$30,703,000 at December 31, 2002, primarily as a result of proceeds from the
April 2002 common stock offering and exercises of stock options and warrants,
partially offset by additions to fixed assets.

         Cash, cash equivalents and marketable securities increased from
$5,736,000 at December 31, 2001 to $26,977,000 at December 31, 2002, primarily
as a result of net proceeds received from the April 2002 common stock offering,
the net proceeds of which totaled $22,108,000, proceeds received from exercises
of stock options and warrants totaling $1,375,000 and cash provided by operating
activities of $1,049,000, partially offset by net repayment of borrowings of
$198,000 and additions to fixed assets totaling


                                       40
<PAGE>

$3,432,000. Also included in cash and cash equivalents at December 31, 2002 are
approximately $23,360,000 of short-term liquid investments considered to be cash
equivalents.

         Receivables increased from $6,937,000 at December 31, 2001 to
$10,874,000 at December 31, 2002 as a direct result of the increase in net
product sales. Receivables increased by approximately $2,302,000 in local
currency, but fluctuations in foreign currency exchange rates increased
receivables reported in U.S. dollars by approximately $1,635,000. We have not
experienced any material delinquencies on our receivables that have had a
material effect on our financial position, results of operations or cash flows.
Inventories increased from $2,563,000 at December 31, 2001 to $5,133,000 at
December 31, 2002 primarily as a result of raw materials purchases and strategic
increases in finished goods inventories in anticipation of continuing demand for
our generic products. Inventories increased by approximately $1,796,000 in local
currency, but fluctuations in foreign currency exchange rates increased
inventories reported in U.S. dollars by approximately $774,000.

         The combined total of accounts payable and accrued expenses increased
from $7,310,000 at December 31, 2001 to $11,265,000 at December 31, 2002,
primarily due to accruals for taxes payable (approximately $1,342,000), as well
as for inventory purchases (approximately $1,463,000), additions to drug
licenses (approximately $166,000) and additions to fixed assets of $245,000, as
well as the effect of fluctuations in foreign currency exchange rates
(approximately $1,751,000), partially offset by a decrease in the reserves for
potential sales returns (approximately $53,000).

         Short-term borrowings and current portion of long-term debt decreased
from $1,757,000 at December 31, 2001 to $1,725,000 at December 31, 2002, as a
result of net repayment of short-term borrowings, partially offset by the effect
of fluctuations in foreign currency exchange rates. The weighted average
interest rate on our short-term borrowings and current portion of long-term debt
is 5.0%.

         Long-term debt, which totaled $142,000 at December 31, 2001, increased
to $345,000 during the year ended December 31, 2002 as a result of long-term
equipment financing. The weighted average interest rate (including imputed
interest) on our long-term debt is 5.2%.

         In addition to our short-term borrowings and long-term debt, we have
fixed contractual obligations under various lease agreements. Our contractual
obligations were comprised of the following as of December 31, 2002:
<TABLE>
<CAPTION>
                                                                                                  PAYMENTS DUE BY PERIOD
                                                                                                  ----------------------
                                                                                              LESS
                                                                                             THAN 1        1-3       4-6     7-10
CONTRACTUAL OBLIGATIONS                                                            TOTAL      YEAR       YEARS     YEARS    YEARS
-----------------------                                                            -----     ------      -----     -----    -----
                                                                                                (IN THOUSANDS)

<S>                                                                              <C>        <C>        <C>        <C>       <C>
Short-term borrowings..........................................................  $ 1,598    $ 1,598    $    -     $    -    $   -
Long-term debt, including imputed interest of $105.............................      568        127       153        162      126
Operating leases...............................................................    2,453        808     1,640          5        -

Total contractual cash obligations.............................................  $ 4,619    $ 2,533    $ 1,793    $  167    $ 126
                                                                                 =======    =======    =======    ======    =====
</TABLE>



         Operating activities for the year ended December 31, 2002 provided net
cash of $1,049,000. Investing activities, primarily additions to machinery and
equipment and capital improvements made to the manufacturing facility in Spain
used net cash of $3,696,000 during the year ended December 31, 2002.


                                       41
<PAGE>

Financing activities, consisting primarily of net proceeds received from the
April 2002 offering of common stock (approximately $22,108,000) and the proceeds
received from the exercise of stock options and warrants (approximately
$1,375,000), partially offset by net repayments of borrowings (approximately
$198,000) provided net cash of $23,285,000 during the year ended December 31,
2002.

         As discussed in Item 1., we also entered into a perpetual license
agreement whereby we granted to Auxilium an exclusive royalty-based worldwide
license, to develop, market and sell a topical testosterone gel containing our
CPE-215 technology. In accordance with the terms of the license agreement, we
have received payments, based upon Auxilium's completion of certain milestones,
in the aggregate of $550,000. Terms of the license agreement also entitle us to
royalties based on net sales. Auxilium launched the product, named Testim, in
February 2003 and we expect to receive royalty payments beginning in 2003. We
are unable to estimate the amount or timing of these royalty payments at this
time.

         We plan to continue making improvements to our manufacturing facility
during 2003 that include the acquisition of additional manufacturing equipment,
in order to accommodate our expected growth. We have budgeted approximately
$2,340,000 for these capital expenditures related to these improvements and
additions during 2003. Additionally, as discussed in Item 2., we purchased a
15,700 square foot commercial building situated on approximately 14 acres of
land in Exeter, New Hampshire in January 2003. We plan to move our corporate
headquarters and research and development laboratory into this facility in April
2003. We paid approximately $1,776,000 cash for the property and expect to spend
approximately $450,000 in order to expand our research and development facility
and add necessary research equipment.

         Seasonality, Effect of Inflation and Liquidity. In the past, we have
experienced lower sales in the third calendar quarter and higher sales in the
fourth calendar quarter due to seasonality. As we market more pharmaceutical
products whose sales are seasonal, seasonality of sales may become more
significant. Neither inflation nor changing prices has materially impacted our
revenues or income from operations for the periods presented. We expect to have
sufficient liquidity to fund operations for at least the next twenty-four
months. We continue to explore alternative sources for financing our business
activities, including the possibility of public and/or private offerings of our
securities. In appropriate situations, that will be strategically determined, we
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.

CRITICAL ACCOUNTING POLICIES

         Our significant accounting policies are more fully described in Note 2
to our consolidated financial statements. However, certain of our accounting
policies are particularly important to the portrayal of our financial position
and results of operations and require the application of significant judgment by
our management; as a result they are subject to an inherent degree of
uncertainty. In applying those policies, our management uses its judgment to
determine the appropriate assumptions to be used in the determination of certain
estimates. Those estimates are based on our historical experience, terms of
existing contracts, our observance of trends in the industry, information
provided by our customers and information available from other outside sources,
as appropriate. Our significant accounting policies include:

         o    Inventories. Inventories are stated at the lower of cost or
              market, cost being determined on the first-in, first-out method.
              Reserves for slow moving and obsolete inventories are provided
              based


                                       42
<PAGE>

              on historical experience and current product demand. We evaluate
              the adequacy of these reserves quarterly.

         o    Revenue recognition and accounts receivable. Revenue on product
              sales is recognized when persuasive evidence of an arrangement
              exists, the price is fixed and final, delivery has occurred and
              there is a reasonable assurance of collection of the sales
              proceeds. We generally obtain purchase authorizations from our
              customers for a specified amount of product at a specified price
              and consider delivery to have occurred when the customer takes
              possession of the products. We provide our customers with a
              limited right of return. Revenue is recognized upon delivery of
              products and a reserve for sales returns is recorded. We have
              demonstrated the ability to make reasonable and reliable estimates
              of product returns in accordance with SFAS No. 48 and of
              allowances for doubtful accounts based on significant historical
              experience. Revenue from service sales is recognized when the
              service procedures have been completed or applicable milestones
              have been achieved. Revenue from research and development
              contracts is recognized over applicable contractual periods or as
              defined milestones are attained, as specified by each contract and
              as costs related to the contracts are incurred.

         o    Foreign currency translation. The financial position and results
              of operations of our 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 are credited to or charged
              against other comprehensive income (loss). Foreign currency
              translation gains and losses arising from cash transactions are
              credited to or charged against current earnings.

         o    Drug licenses and related costs. Drug licenses and related costs
              incurred in connection with acquiring licenses, patents and other
              proprietary rights related to our commercially developed products
              are capitalized. Capitalized drug licenses and related costs are
              being amortized on a straight-line basis for periods not exceeding
              15 years from the dates of acquisition. Carrying of such assets
              are reviewed quarterly by comparing the carrying amounts to their
              estimated undiscounted cash flows and adjustments are made for any
              diminution in value.

NEW ACCOUNTING STANDARDS

         In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 supersedes APB Opinion No. 16, Business Combinations, and
SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased
Enterprises, and requires that all business combinations be accounted for by a
single method - the purchase method. SFAS No. 141 also provides guidance on the
recognition of intangible assets identified in a business combination and
requires enhanced financial statement disclosures. SFAS No. 142 adopts a more
aggregate view of goodwill and bases the accounting for goodwill on the units of
the combined entity into which an acquired entity is integrated. In addition,
SFAS No. 142 concludes that goodwill and intangible assets that have indefinite
useful lives will not be amortized, but rather will be tested at least annually
for impairment. Intangible assets that have finite lives will continue to be
amortized over their useful lives. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. The adoption of SFAS No. 142 was
required for fiscal years beginning after December 15, 2001, except for the
nonamortization and amortization provisions which are required for goodwill and
intangible assets


                                       43
<PAGE>

acquired after June 30, 2001. The adoption of SFAS No. 141 and SFAS No. 142 did
not have a material impact on our financial position, results of operations or
cash flows.

         In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 supersedes previous guidelines for financial accounting and reporting
for the impairment or disposal of long-lived assets and for segments of a
business to be disposed of. The adoption of SFAS No. 144, on January 1, 2002,
did not have a material impact on our financial position, results of operations
or cash flows.

         In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. SFAS No. 148
also amends the disclosure requirements of SFAS No. 123 to require more
disclosure in the summary of significant accounting policies, the effects of an
entity's accounting policy with respect to stock-based employee compensation on
reported net income and earnings per share in annual and interim financial
statements. The disclosure provision is required for all companies with
stock-based employee compensation, regardless of whether the company utilizes
the fair value method of accounting described in SFAS No. 123 or the intrinsic
value method described in APB Opinion No. 25, Accounting For Stock Issued to
Employees. SFAS No. 148's amendment of the transition and annual disclosure
provisions of SFAS No. 123 are effective for fiscal years ending after December
15, 2002. The disclosure provisions for interim financial statements are
effective for interim periods beginning after December 15, 2002. We currently
account for stock-based compensation utilizing the intrinsic value method of
accounting for stock-based employee compensation described by APB Opinion No.
25.

         In December 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45").
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. We have adopted the disclosure
requirements of FIN 45 as of December 31, 2002 and determined that no additional
disclosures were required. In addition, we are required to adopt the initial
recognition and measurement of the fair value of the obligation undertaken in
issuing the guarantee on a prospective basis to guarantees issued or modified
after December 31, 2002. We do not believe FIN 45 will have a material effect on
our financial position, results of operations or cash flows.

         In November 2002, the Emerging Issues Task Force ("EITF") issued EITF
Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.
EITF Issue No. 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities.
EITF Issue No. 00-21 establishes three principles: revenue arrangements with
multiple deliverables should be divided into separate units of accounting,
arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values, and revenue recognition criteria
should be considered separately for separate units of accounting. EITF Issue No.
00-21 is effective for all revenue arrangements entered into in fiscal periods
beginning after June 15, 2003, with early adoption permitted. We do not believe
EITF Issue No. 00-21 will have a material effect on our financial position,
results of operations or cash flows.

         In November 2001, the EITF reached a consensus on EITF Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products, which is a codification of EITF Issues No. 00-14, 00-22
and 00-25. This issue presumes that consideration from a vendor to a customer or
reseller of the vendor's products to be a reduction of the selling prices of the


                                       44
<PAGE>

vendor's products and, therefore, should be characterized as a reduction of
revenues under certain circumstances. Revenue reduction is required unless
consideration relates to a separate identifiable benefit and the benefit's fair
value can be established. EITF Issue No. 01-09 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
The adoption of EITF Issue No. 01-09 did not have a material effect on our
financial position, results of operations or cash flows.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
         ----------------------------------------------------------

         Foreign Currency. A substantial amount of our business is conducted in
Europe and is therefore influenced to the extent to which there are fluctuations
in the U.S. Dollar's value against other currencies, specifically the Euro. The
exchange rate at December 31, 2002 and 2001 was .95 Euros and 1.12 Euros per
U.S. Dollar, respectively. The weighted average exchange rate for the years
ended December 31, 2002, 2001 and 2000 was 1.06 Euros, 1.12 Euros and 1.09 Euros
per U.S. Dollar, respectively. The effect of foreign currency fluctuations on
long lived assets for the year ended December 31, 2002 was an increase of
$3,054,000 and the cumulative historical effect was a decrease of $416,000, as
reflected in our Consolidated Balance Sheets as accumulated other comprehensive
loss. Although exchange rates fluctuated significantly in recent years, we do
not believe that the effect of foreign currency fluctuation is material to our
results of operations as the expenses related to much of our 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, as can the translated amounts of revenues and expenses.
Nonetheless, we do not plan to modify our business practices.

         We have relied primarily upon financing activities to fund our
operations in the U.S. In the event that we are required to fund U.S. operations
or cash needs with funds generated in Spain, currency rate fluctuations in the
future could have a significant impact on us. However, at the present time, we
do not anticipate altering our business plans and practices to compensate for
future currency fluctuations.

         Interest Rates. The weighted average interest rate on our short-term
borrowings and current portion of long-term debt is 5.0% and the balance
outstanding is $1,725,000 as of December 31, 2002. A portion of our long-term
borrowings is non-interest bearing and the balance outstanding on these
borrowings at December 31, 2002 is $378,000 including imputed interest (ranging
from 4.8% to 6.0%) of $105,000. The balance of our long-term borrowings of
$63,000 bears interest at the rate of 2.9%. Consequently, the weighted average
interest rate on our long-term borrowings is 5.2%. The effect of an increase in
the interest rate of one percentage point (one hundred basis points) to 6.0% on
short-term borrowings and to 6.2% on long-term borrowings would have the effect
of increasing interest expense by approximately $22,000 annually.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
         -------------------------------------------

         See Item 15 of this Form 10-K.


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

         Not applicable.


                                       45
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
         --------------------------------------------------

<TABLE>
<CAPTION>
NAME                             AGE       POSITION
----                             ---       --------

<S>                              <C>      <C>
James R. Murphy                  53       Chairman, President, Chief Executive Officer and Director

Michael McGovern                 59       Vice Chairman and Director

Robert M. Stote, M.D.            63       Senior Vice President, Chief Science Officer and Director

Michael D. Price                 45       Vice President, Chief Financial Officer, Treasurer, Secretary and Director

Robert J. Gyurik                 56       Vice President of Pharmaceutical  Development and  Director

Jordan A. Horvath                41       Vice President and General Counsel

Charles L. Bolling               79       Director

Miguel Fernandez                 72       Director

William A. Packer                68       Director

John W. Spiegel                  61       Director

</TABLE>

         JAMES R. MURPHY has served as one of our directors since 1993. Mr.
Murphy became President of Bentley in September 1994, was named Chief Executive
Officer effective January 1995 and became Chairman of the Board in June 1995.
Prior to rejoining Bentley, Mr. Murphy served as Vice President of Business
Development at MacroChem Corporation, a publicly owned pharmaceutical and drug
delivery 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 Bentley from December 1991 to September 1992. Mr. Murphy
previously spent 14 years in pharmaceutical research and product development
with SmithKline Corporation and in international business development with
contract research and consulting laboratories. Mr. Murphy received a B.A. in
Biology from Millersville University.

         MICHAEL MCGOVERN has served as one of our directors since 1997 and was
named Vice Chairman of Bentley in October 1999. Mr. 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., is Vice Chairman of the Board of Employment
Technologies, Inc. and is a Director on the corporate boards of Training
Solutions Interactive, Inc. and the Reynolds Development Company. Mr. McGovern
received a B.S. and M.S. in accounting and his Juris Doctor from the University
of Illinois. He is a Certified Public Accountant.


                                       46
<PAGE>

         ROBERT M. STOTE, M.D. became Senior Vice President and Chief Science
Officer of Bentley in March 1992 and has served as one of our directors since
1993. Prior to joining Bentley, Dr. Stote was employed for 20 years by
SmithKline Beecham Corporation serving in a variety of executive clinical
research positions. 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 also serves as a Director of
Datatrak International, 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 Bentley in October 1993, April 1993 and
November 1992, respectively, and has served as one of our directors since 1995.
He has served Bentley in other capacities since March 1992. Prior to joining
Bentley, he was employed as a financial and management consultant with Carr
Financial Group from March 1990 to March 1992. Prior thereto, he was employed as
Vice President of Finance with Premiere Group, Inc. from June 1988 to February
1990. Prior thereto, Mr. Price was employed by Price Waterhouse 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 licensed by the
State of Florida.

         ROBERT J. GYURIK has served as one of our directors since 1998 and
became Vice President of Pharmaceutical Development of Bentley in March 1999.
Mr. Gyurik was Manager of Development and Quality Control at MacroChem
Corporation, a position he held from May 1993 to February 1999. From 1971 to
1993 Mr. Gyurik worked in various research and development positions at
SmithKline Beecham. Prior thereto, Mr. Gyurik worked at Schering as a Medicinal
Chemist. Mr. Gyurik 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.

         JORDAN A. HORVATH became Vice President and General Counsel of Bentley
in August 2000. Prior to joining Bentley, he was a partner at Parker Chapin LLP,
the Company's legal counsel in New York City (which has since merged to become
Jenkens & Gilchrist Parker Chapin LLP), since 1996. He was an associate of that
firm from 1991 to 1995. Mr. Horvath received an A.B. from Princeton University
and a J.D. from the University of California, Berkeley.

         CHARLES L. BOLLING has served as one of our directors since 1991. Mr.
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 received an A.B. from Princeton
University. Mr. Bolling has been retired since 1986.

         MIGUEL FERNANDEZ has served as one of our directors since 1999. Mr.
Fernandez served from 1980 to 1996 as President of the International Division
and corporate Vice President at Carter-Wallace, Inc., where he was responsible
for all product lines outside of the United States. Prior thereto, Mr. Fernandez
was employed for approximately eight years by SmithKline Beecham, where his last
position was Vice President for Latin America. Before SmithKline Beecham, Mr.
Fernandez served as Managing Director of Warner Lambert in Argentina for two
years. From 1962 to 1970, Mr. Fernandez was employed by Merck/Frost in Canada.
Mr. Fernandez attended the University of British Columbia in Canada and received
an M.B.A.


                                       47
<PAGE>

from the Ivey School of Business at the University of Western Ontario in London,
Ontario, Canada. Mr. Fernandez has been retired since 1996.

         WILLIAM A. PACKER has served as one of our directors since 1999. Mr.
Packer has been a business and industry consultant to a number of
biopharmaceutical companies since 1998. From 1992 until 1998, Mr. Packer was
President and Chief Financial Officer of Virus Research Institute, Inc., a
publicly owned biotechnology company. Prior to this, Mr. Packer was employed by
SmithKline Beecham Plc, where he held various senior management positions, the
most recent as Senior Vice President, Biologicals, in which position he was
responsible for the direction of SmithKline's global vaccine business. Mr.
Packer is a Chartered Accountant.

         JOHN W. SPIEGEL has served as one of our directors since June 2002. Mr.
Spiegel has served as Vice Chairman and Chief Financial Officer of SunTrust
Banks, Inc. since August 2000. Prior to August 2000, Mr. Spiegel was an
Executive Vice President and Chief Financial Officer of SunTrust Banks from
1985. Mr. Spiegel also serves as Chairman of the Board of the Bank
Administration Institute and on the Board of Directors of Rock-Tenn Company
(RKT), the Woodruff Arts Center, the High Museum of Art, the American
Cardiovascular Research Institute, and the Children's Healthcare of Atlanta. Mr.
Spiegel is also a member of the Dean's Advisory Council of the Goizueta Business
School at Emory University. Mr. Spiegel received an MBA from Emory University.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our executive officers and directors, and any persons who own more than
10% of any class of our 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 us with copies of such reports. To the best of our knowledge during the
year ended December 31, 2002, all Section 16(a) filing requirements have been
satisfied, with the exception that Robert J. Gyurik, Vice President of
Pharmaceutical Development and a Director, reported one transaction for 500
shares two days late and Miguel Fernandez, a Director, reported four
transactions for 2,500 shares ten months late.


ITEM 11. EXECUTIVE COMPENSATION
         ----------------------

         The information called for by this item is incorporated by reference to
our definitive Proxy Statement for the 2003 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
our definitive Proxy Statement for the 2003 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
our definitive Proxy Statement for the 2003 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A. ITEM 14.


                                       48
<PAGE>

ITEM 14. CONTROLS AND PROCEDURES
         -----------------------

         Bentley maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in Bentley's reports that
are filed with the Securities and Exchange Commission is recorded, processed and
reported within the time periods required for each report and that such
information is reported to Bentley's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.

         Within 90 days prior to the date of this report, Bentley carried out an
evaluation, under the supervision and with the participation of Bentley's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of Bentley's
disclosure controls and procedures. Based on that evaluation, Bentley's Chief
Executive Officer and Chief Financial Officer concluded that Bentley's
disclosure controls and procedures are effective in timely alerting them to
material information relating to Bentley (including its consolidated
subsidiaries) which is required to be included in its publicly filed reports.
There have been no significant changes in Bentley's internal controls or in
other factors which could significantly affect internal controls since that
evaluation.


                                       49

<PAGE>

                                     PART IV

ITEM 15.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
              ---------------------------------------------------------------


<TABLE>
<CAPTION>

                                                                                  Page Herein
                                                                                  -----------

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

          (1)  Financial Statements:

          Index to Consolidated Financial Statements                               F-1

          Independent Auditors' Report                                             F-2

          Consolidated Balance Sheets as of December 31, 2002 and 2001             F-3

          Consolidated Statements of Operations and of Comprehensive Income
          (Loss) for the years ended December 31, 2002, 2001 and 2000              F-4

          Consolidated Statements of Changes in Stockholders' Equity for the
          years ended December 31, 2002, 2001 and 2000                             F-5

          Consolidated Statements of Cash Flows for the years ended
          December 31, 2002, 2001 and 2000                                         F-6 to F-7

          Notes to Consolidated Financial Statements                               F-8 to F-26
</TABLE>


                                       50

<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 Appendix B to the Registrant's
                  Definitive Proxy Statement for Annual Meeting of Stockholders
                  filed with the Securities and Exchange Commission on May 18,
                  1999, which exhibit is incorporated herein by reference.)

3.2               Bylaws of the Registrant, as amended and restated. (Reference
                  is made to Appendix C to the Registrant's Definitive Proxy
                  Statement for Annual Meeting of Stockholders filed with the
                  Securities and Exchange Commission on May 18, 1999, which
                  exhibit is incorporated herein by reference.)

3.3               Rights Agreement, dated as of December 22, 1999, between the
                  Registrant and American Stock Transfer and Trust Company, as
                  Rights Agent, including the form of Rights Certificate as
                  Exhibit B thereto. (Reference is made to Exhibit 4.1 to the
                  Registrant's Form 8-K, filed December 27, 1999 (date of
                  earliest event reported December 22, 1999), 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 Appendix D to the Registrant's
                  Definitive Proxy Statement for Annual Meeting of Stockholders
                  filed with the Securities and Exchange Commission on May 18,
                  1999, 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 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.)

4.4               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.)


                                       51
<PAGE>

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

4.5               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.)

4.6               Registrant's 2001 Employee Stock Option Plan. (Reference is
                  made to Appendix B to the Registrant's Definitive Proxy
                  Statement for the Annual Meeting of Stockholders filed with
                  the SEC on April 9, 2001, which exhibit is incorporated herein
                  by reference.)

4.7               Registrant's 2001 Directors' Stock Option Plan. (Reference is
                  made to Appendix C to the Registrant's Definitive Proxy
                  Statement for the Annual Meeting of Stockholders filed with
                  the SEC on April 9, 2001, which exhibit is incorporated herein
                  by reference.)

4.8               Form of Stock Option contract under the Registrant's 2001
                  Employee Stock Option Plan. (Reference is made to Exhibit 4.8
                  to the Registrant's Form 10-K dated December 31, 2001,
                  Commission File No. 1-10581, which exhibit is incorporated
                  herein by reference.)

4.9               Form of Stock Option contract under the Registrant's 2001
                  Directors' Stock Option Plan. (Reference is made to Exhibit
                  4.9 to the Registrant's Form 10-K dated December 31, 2001,
                  Commission File No. 1-10581, which exhibit is incorporated
                  herein by reference.)

10.1              Employment Agreement dated as of January 1, 2002 between the
                  Registrant and James R. Murphy. (Reference is made to Exhibit
                  10.1 to the Registrant's Form 10-K dated December 31, 2001,
                  Commission File No. 1-10581, which exhibit is incorporated
                  herein by reference.)

10.2*             Employment Agreement dated as of January 1, 2003 between the
                  Registrant and Robert M. Stote, M.D.

10.3              Employment Agreement dated as of January 1, 2002 between the
                  Registrant and Michael D. Price. (Reference is made to Exhibit
                  10.3 to the Registrant's Form 10-K dated December 31, 2001,
                  Commission File No. 1-10581, which exhibit is incorporated
                  herein by reference.)

10.4              Employment Agreement dated as of January 1, 2002 between the
                  Registrant and Robert J. Gyurik. (Reference is made to Exhibit
                  10.4 to the Registrant's Form 10-K dated December 31, 2001,
                  Commission File No. 1-10581, which exhibit is incorporated
                  herein by reference.)




                                       52
<PAGE>

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

10.5              Employment Agreement dated as of August 14, 2000 between the
                  Registrant and Jordan A. Horvath. (Reference is made to
                  Exhibit 10.1 to the Registrant's Form 10-Q dated September 30,
                  2000, Commission File No. 1-10581, which exhibit is
                  incorporated herein by reference.)

10.6              Agreement between the Registrant and 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.)

10.7              License Agreement between the Registrant and Auxilium A2, Inc.
                  dated May 31, 2000, including Amendment No. 1 thereto dated
                  October 2000 and Amendment No. 2 dated May 31, 2001.
                  (Reference is made to Exhibit 10.10 to the Registrant's Form
                  10-K dated December 31, 2001, Commission File No. 1-10581,
                  which exhibit is incorporated herein by reference.)

10.8              Agreement between the Registrant and Pfizer Inc dated October
                  25, 2001. (Reference is made to Exhibit 10.11 to the
                  Registrant's Form 10-K dated December 31, 2001, Commission
                  File No. 1-10581, which exhibit is incorporated herein by
                  reference.)

10.9              Supply Agreement, License Agreement and Rights Agreement
                  between Laboratorios Belmac, S.A., Laboratorios Davur, S.A.
                  and Teva Pharmaceutical Industries Ltd. dated July 18, 2000.
                  (1) (Reference is made to Exhibit 10.12 to the Registrant's
                  Form 10-K dated December 31, 2001, Commission File No.
                  1-10581, which exhibit is incorporated herein by reference.)

10.10*            Amendment No. 3 dated September 6, 2002 to License Agreement
                  between the Registrant and Auxilium Pharmaceuticals, Inc.
                  dated May 31, 2000. (1)

10.11*            Amendment dated November 4, 2002 to Agreement between the
                  Registrant and Pfizer Inc dated October 25, 2001.

10.12*            License Agreement between the Registrant and Auxilium
                  Pharmaceuticals, Inc. dated May 31, 2001 relating to products
                  using Dihydrotestosterone. (1)

10.13*            Amendment No. 1 dated September 6, 2002 to License Agreement
                  between the Registrant and Auxilium Pharmaceuticals, Inc.
                  dated May 31, 2001 related to products using
                  Dihydrotestosterone. (1)


                                       53
<PAGE>

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

21.1*             Subsidiaries of the Registrant.

23.1*             Consent of Deloitte & Touche LLP.

99.1*             Certification of the Chief Executive Officer.

99.2*             Certification of the Chief Financial Officer.



   (b)            Reports on Form 8-K filed during the fiscal quarter ended
                    December 31, 2002:

                  None.

---------------
*         Filed herewith.

(1)       Confidential treatment has been requested with respect to certain
          portions of this exhibit, which have been separately filed with the
          Securities and Exchange Commission.


                                       54

<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 13, 2003

         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.

<TABLE>
<CAPTION>

Signature                                   Title                                       Date
---------                                   -----                                       ----
<S>                                         <C>                                         <C>


/s/ James R. Murphy                         Chairman, President,                        March 13, 2003
-------------------                         Chief Executive Officer
James R. Murphy                             and Director (principal
                                            executive officer)


/s/Michael McGovern                         Vice Chairman and Director                  March 13, 2003
-------------------
Michael McGovern


/s/ Robert M. Stote                         Senior Vice President,                      March 13, 2003
-------------------                         Chief Science Officer and
Robert M. Stote, M.D.                       Director


/s/ Michael D. Price                        Vice-President,                             March 13, 2003
--------------------                        Chief Financial Officer,
Michael D. Price                            Treasurer, Secretary and
                                            Director (principal
                                            financial and accounting officer)


/s/Robert J. Gyurik                         Vice President of                           March 13, 2003
------------------                          Pharmaceutical Development
Robert J. Gyurik                            and Director


/s/Charles L. Bolling                       Director                                    March 13, 2003
---------------------
Charles L. Bolling


/s/Miguel Fernandez                         Director                                    March 13, 2003
-------------------
Miguel Fernandez


/s/William A. Packer                        Director                                    March 13, 2003
--------------------
William A. Packer


/s/John W. Spiegel                          Director                                    March 13, 2003
------------------
John W. Spiegel

</TABLE>

<PAGE>
                                    FORM 10-K
                                  CERTIFICATION

I, James R. Murphy, certify that:

1. I have reviewed this annual report on Form 10-K of Bentley Pharmaceuticals,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

   (a) designed such disclosure  controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this annual report is being prepared;

   (b) evaluated the effectiveness of the registrant's  disclosure  controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

   (c) presented in this annual report our conclusions  about the  effectiveness
of the  disclosure  controls and  procedures  based on our  evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

   (a) all  significant  deficiencies  in the design or  operation  of  internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

   (b) any fraud,  whether or not material,  that  involves  management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date:  March 13, 2003


 /s/James R. Murphy
-------------------
James R. Murphy
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)


<PAGE>


                                    FORM 10-K
                                  CERTIFICATION

I, Michael D. Price, certify that:

1. I have reviewed this annual report on Form 10-K of Bentley Pharmaceuticals,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

   (a) designed such disclosure  controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this annual report is being prepared;

   (b) evaluated the effectiveness of the registrant's  disclosure  controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

   (c) presented in this annual report our conclusions  about the  effectiveness
of the  disclosure  controls and  procedures  based on our  evaluation as of the
Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

   (a) all  significant  deficiencies  in the design or  operation  of  internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

   (b) any fraud,  whether or not material,  that  involves  management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date:  March 13, 2003


/s/Michael D. Price
---------------------
Michael D. Price
Vice President and Chief Financial Officer
(Principal Financial Officer)

<PAGE>

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES


                                                                            PAGE
                                                                            ----

Independent Auditors' Report..............................................  F-2

Consolidated Balance Sheets as of December 31, 2002 and 2001..............  F-3

Consolidated Statements of Operations and of Comprehensive
  Income (Loss) for the years ended December 31, 2002, 2001 and 2000......  F-4

Consolidated Statements of Changes in Stockholders' Equity
  for the years ended December 31, 2002, 2001 and 2000....................  F-5

Consolidated Statements of Cash Flows for the years
  ended December 31, 2002, 2001 and 2000..................................  F-6

Notes to Consolidated Financial Statements................................  F-8



                                       F-1
<PAGE>



INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Bentley Pharmaceuticals, Inc.
North Hampton, New Hampshire

We have audited the accompanying consolidated balance sheets of Bentley
Pharmaceuticals, Inc. and subsidiaries (the "Company") as of December 31, 2002
and 2001, and the related consolidated statements of operations and of
comprehensive income (loss), changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2002
and 2001, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.



/s/ Deloitte & Touche LLP

Boston, Massachusetts
February 26, 2003


                                       F-2

<PAGE>
                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
(in thousands)

                                                                 DECEMBER 31,
                                                             -------------------
                                                              2002       2001
                                                              ----       ----

ASSETS

Current assets:
 Cash and cash equivalents                                   $26,581     $5,736
 Marketable securities                                           396          -
 Receivables, net                                             10,874      6,937
 Inventories, net                                              5,133      2,563
 Deferred foreign taxes                                          123        141
 Prepaid expenses and other                                      865        462
                                                             -------    -------
  Total current assets                                        43,972     15,839
                                                             -------    -------
 Non-current assets:
  Fixed assets, net                                            9,565      5,595
  Drug licenses and related costs, net                        10,975     10,276
  Other                                                          180        409
                                                             -------    -------
   Total non-current assets                                   20,720     16,280
                                                             -------    -------
                                                             $64,692    $32,119
                                                             =======    =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                            $7,206     $4,820
  Accrued expenses                                             4,059      2,490
  Short-term borrowings                                        1,598      1,757
  Current portion of long-term debt                              127          -
  Deferred income                                                279        496
                                                             -------    -------
    Total current liabilities                                 13,269      9,563
                                                             -------    -------

Non-current liabilities:
   Foreign taxes payable                                       2,141      1,827
   Long-term debt                                                345        142
   Other                                                         186        163
                                                             -------    -------
     Total non-current liabilities                             2,672      2,132
                                                             -------    -------

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $1.00 par value, authorized 2,000 shares,
     issued and outstanding, zero shares                           -          -
 Common  stock, $.02  par value,  authorized  35,000 shares,
     issued and outstanding, 17,404 and 14,585 shares            348        292
 Stock purchase warrants (to purchase 3,292 and 3,424
     shares of common stock)                                     431        433
 Additional paid-in capital                                  121,084     97,501
 Accumulated deficit                                         (72,696)   (74,332)
 Accumulated other comprehensive loss                           (416)    (3,470)
                                                             -------    -------
     Total stockholders' equity                               48,751     20,424
                                                             -------    -------
                                                             $64,692    $32,119
                                                             =======    =======


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


                                      F-3

<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                       AND OF COMPREHENSIVE INCOME (LOSS)

(in thousands except per share data)                  For the Year Ended
                                                         December 31,
                                                --------------------------------

                                                  2002       2001        2000
                                                  ----       ----        ----

Revenues:
 Net product sales                             $38,718    $26,411     $18,487
 Licensing and collaboration revenue               418          -         130
                                                ------     ------      ------
   Total revenues                               39,136     26,411      18,617

Cost of net product sales                       16,477     11,462       7,189
                                                ------     ------      ------
Gross profit                                    22,659     14,949      11,428
                                                ------     ------      ------
Operating expenses:
 Selling and marketing                          10,400      9,057       6,494
 General and administrative                      4,902      4,085       3,766
 Research and development                        2,960      2,084       1,102
 Depreciation and amortization                   1,015        911         580
                                                ------     ------      ------
   Total operating expenses                     19,277     16,137      11,942
                                                ------     ------      ------
Income (loss) from operations
  before sale of drug licenses                   3,382     (1,188)       (514)

Gain on sale of drug licenses                      650      5,050           -
                                                ------     ------      ------
Income (loss) from operations                    4,032      3,862        (514)
                                                ------     ------      ------

Other income (expenses):
  Interest income                                  279        168         347
  Interest expense                                (209)      (244)       (439)
  Other                                             68         27          83
                                                ------     ------      ------

Income (loss) before income taxes                4,170      3,813        (523)

Provision for foreign income taxes               2,534      2,452         222
                                                ------     ------      ------
Net income (loss)                               $1,636     $1,361       ($745)
                                                ======     ======      ======
Net income (loss) per common share:

  Basic                                          $.10       $.10       ($.06)
                                                ======     ======      ======
  Diluted                                        $.08       $.08       ($.06)
                                                ======     ======      ======
Weighted average common shares outstanding:

  Basic                                         16,569     14,196      12,981
                                                ======     ======      ======
  Diluted                                       19,798     16,147      12,981
                                                ======     ======      ======

Net income (loss)                               $1,636     $1,361       ($745)
Other comprehensive income (loss):
 Foreign currency translation gains (losses)     3,054       (842)       (289)
                                                ------     ------      ------
Comprehensive income (loss)                     $4,690       $519     ($1,034)
                                                ======     ======      ======

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


                                      F-4
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands)

<TABLE>
<CAPTION>
                                                  $.02 Par Value                                            Accumulated
                                                   Common Stock          Stock     Additional                  Other
                                                  --------------        Purchase     Paid-In   Accumulated  Comprehensive
                                                Shares      Amount      Warrants     Capital     Deficit    Income (Loss)    Total
                                                ------      ------      --------   ----------  -----------  -------------   -------
<S>                                             <C>          <C>          <C>         <C>       <C>           <C>           <C>
Balance at December 31, 1999                    10,230       $204         $799        $87,858   ($74,948)     ($2,339)      $11,574
  Conversion of debentures                       2,901         58            -          4,682          -            -         4,740
  Exercise of stock options/warrants               684         15         (414)         2,197          -            -         1,798
  Exercise of Class B redeemable warrants           99          1           (2)           493          -            -           492
  Exercise of underwriter's warrants                 -          -          249             (3)         -            -           246
  Foreign currency translation adjustment            -          -            -              -          -         (289)         (289)
  Net loss                                           -          -            -              -       (745)           -          (745)
                                                ------       ----         ----       --------   ---------       ------       ------


Balance at December 31, 2000                    13,914        278          632         95,227    (75,693)      (2,628)       17,816
  Exercise of stock options/warrants               171          4            -            443          -            -           447
  Exercise of underwriter's Class A warrants       460          9         (199)         1,570          -            -         1,380
  Equity based compensation                         40          1            -            261          -            -           262
  Foreign currency translation adjustment            -          -            -              -          -         (842)         (842)
  Net income                                         -          -            -              -      1,361            -         1,361
                                                ------       ----         ----       --------   ---------       ------       ------

Balance at December 31, 2001                    14,585        292          433         97,501    (74,332)      (3,470)       20,424
  Offering of common stock, net                  2,500         50            -         22,058          -            -        22,108
  Exercise of stock options/warrants               304          6           (2)         1,369          -            -         1,373
  Equity based compensation                         15          -            -            156          -            -           156
  Foreign currency translation adjustment            -          -            -              -          -        3,054         3,054
  Net income                                         -          -            -              -      1,636            -         1,636
                                                ------       ----         ----       --------   ---------       ------      -------
Balance at December 31, 2002                    17,404       $348         $431       $121,084   ($72,696)       ($416)      $48,751
                                                ======       ====         ====       ========   =========       ======      =======
</TABLE>

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


                                       F-5

<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
    (in thousands)                                                     For the Year Ended
                                                                          December 31,
                                                             ---------------------------------------
                                                                2002          2001          2000
                                                             -----------   -----------   -----------
<S>                                                              <C>           <C>            <C>
    Cash flows from operating activities:
      Net income (loss)                                          $ 1,636       $ 1,361        $ (745)
      Adjustments to reconcile net income (loss) to
        net cash provided by (used in) operating activities:
        Gain on sale of drug licenses                               (650)       (5,050)            -
        Depreciation and amortization                              1,584         1,235           840
        Equity-based compensation expense                            156           262            69
        Other non-cash items                                         597          (188)            2
        (Increase) decrease in assets and
          increase (decrease) in liabilities:
          Receivables                                             (1,949)       (2,060)       (1,385)
          Inventories                                             (1,796)         (864)       (1,003)
          Deferred foreign taxes                                      45         1,629             -
          Prepaid expenses and other current assets                 (259)          100          (205)
          Other assets                                                24           (11)          (97)
          Accounts payable and accrued expenses                    1,855         3,306          (171)
          Deferred income                                           (217)          496             -
          Other liabilities                                           23           (77)           (5)
                                                                ---------   -----------   -----------
            Net cash provided by (used in) operating activities    1,049           139        (2,700)
                                                                ---------   -----------   -----------

    Cash flows from investing activities:
      Proceeds from sale of drug licenses                            656         2,698         2,564
      Proceeds from sale of investments                           56,190        31,645        17,193
      Purchase of investments                                    (56,314)      (31,567)      (15,171)
      Additions to fixed assets                                   (3,432)       (1,595)       (1,014)
      Additions to drug licenses and related costs                  (796)         (437)       (5,560)
      Deferred compensation                                            -             -          (440)
                                                                ---------   -----------   -----------
            Net cash (used in) provided by investing activities  (3,696)           744        (2,428)
                                                                ---------   -----------   -----------


                          (Continued on following page)

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


                                      F-6
<PAGE>


                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)

    (in thousands)                                                     For the Year Ended
                                                                          December 31,
                                                             ---------------------------------------
                                                                2002          2001          2000
                                                             -----------   -----------   -----------
    Cash flows from financing activities:
      Proceeds from offering of common stock, net              $ 22,108       $     -       $     -
      Proceeds from exercise of stock options/warrants            1,375         1,827         2,843
      Proceeds from borrowings                                    2,841         2,514         5,004
      Repayment of borrowings                                    (3,039)       (4,219)       (2,279)
                                                               ---------   -----------   -----------
            Net cash provided by financing activities            23,285           122         5,568
                                                               ---------   -----------   -----------

    Effect of exchange rate changes on cash                         207           (85)          (46)
                                                               ---------   -----------   -----------

    Net increase in cash and cash equivalents                    20,845           920           394

    Cash and cash equivalents at beginning of year                5,736         4,816         4,422
                                                               ---------   -----------   -----------

    Cash and cash equivalents at end of year                   $ 26,581       $ 5,736       $ 4,816
                                                               =========   ===========   ===========

    SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
      The Company paid cash during the year
      for (in thousands):
        Interest                                                  $ 202         $ 247         $ 486
                                                               =========   ===========   ===========
        Taxes                                                   $ 2,164         $ 317         $ 897
                                                               =========   ===========   ===========

    SUPPLEMENTAL DISCLOSURES OF NON-CASH
     FINANCING AND INVESTING ACTIVITIES
       The Company has issued or is obligated to
       issue Common Stock in exchange for services
       as follows (in thousands):
        Shares                                                       15            40             8
                                                               =========   ===========   ===========
        Amount                                                    $ 151         $ 233          $ 69
                                                               =========   ===========   ===========

    Included in year-end accounts payable are fixed asset and
      drug license purchases totaling (in thousands):             $ 922         $ 514         $ 225
                                                               =========   ===========   ===========
</TABLE>



    During the year ended December 31, 2000, 7,254 of the Company's 12%
    Convertible Debentures with principal amount of $7,254,000, net of discount
    of $1,585,000 (and applicable unamortized debt issuance costs totaling
    $929,000) were converted into approximately 2,901,000 shares of Common
    Stock.


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




                                      F-7

<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - HISTORY AND OPERATIONS

         Bentley Pharmaceuticals, Inc. and its Subsidiaries (the "Company") is a
specialty pharmaceutical company operating in two business segments: research,
development and licensing/commercialization of advanced drug delivery
technologies and pharmaceutical products; and manufacturing and selling of
generic and branded pharmaceutical products. In the research and development
segment based in the U.S., the Company owns U.S. and international patent and
other proprietary rights to technologies that enhance or facilitate the
absorption of drugs across biological membranes. The Company is developing
products incorporating these technologies and seeks to form strategic alliances
with pharmaceutical and biotechnology companies to facilitate the development
and commercialization of its products. The Company currently has strategic
alliances regarding its drug delivery technologies with Pfizer Inc and Auxilium
Pharmaceuticals, Inc. and is in preliminary discussions with a number of other
pharmaceutical companies to form additional alliances. The Company is
incorporated in the State of Delaware.

         In the pharmaceutical product sales segment based in Spain, the Company
manufactures and markets branded and generic pharmaceutical products within four
primary therapeutic areas: cardiovascular, gastrointestinal, infectious and
neurological diseases.

         The Company anticipated the opportunities that the emerging generic
drug market in Spain present and began taking measures over four years ago to
enter the Spanish generic drug market. The Company created a wholly-owned
subsidiary to register, market and distribute generic pharmaceutical products in
Spain and began aligning its business model to be competitive in this arena,
including hiring and training a new generic sales force, submission of
generic-equivalent products to the Spanish Ministry of Health for approval and a
marketing campaign designed to position the Company as a leader in the Spanish
generic drug market. In July 2000, the Company entered into a strategic alliance
with Teva Pharmaceutical Industries, Ltd. ("Teva"), whereby the Company has
received the right to register and market in Spain more than 75 of Teva's
products. Teva also entered into a supply agreement with the Company pursuant to
which Teva will manufacture the products and supply them to the Company for
marketing and sale in Spain. Teva was also granted a right of first refusal to
acquire Laboratorios Davur in the event that the Company decides to sell that
subsidiary or its direct parent, Laboratorios Belmac. The Company also granted
Teva the right to bid for Laboratorios Belmac in the event the Company intends
to sell that subsidiary.

         Given the Company's current liquidity and cash balances and
expectations with respect to the execution of its business model, management
believes that it has sufficient resources to fund operations for at least
twenty-four months. However, there can be no assurance that changes in the
Company's research and development plans or other events affecting the Company's
revenues or operating expenses will not result in the earlier depletion of the
Company's funds.

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:  Pharma de  Espana,  Inc.  and its
wholly-owned   subsidiary,   Laboratorios   Belmac  S.A.  and  its  wholly-owned
subsidiaries,  Laboratorios  Davur S.L. and Laboratorios  Rimafar S.L.;  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.; and Belmac
Jamaica,  Ltd. All  significant  inter-company  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  are  credited  to  or  charged  against  other


                                      F-8
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


comprehensive income (loss). 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 less when purchased to be cash equivalents for
purposes of classification in the Consolidated Balance Sheets and the
Consolidated Statements of Cash Flows. Investments in securities that do not
meet the definition of cash equivalents are classified as marketable securities
in the Consolidated Balance Sheets.

MARKETABLE SECURITIES

         The Company has investments in securities, with maturities of greater
than three months when purchased, totaling $396,000, which are classified as
marketable securities as of December 31, 2002. The Company had no marketable
securities as of December 31, 2001. These investments are considered
available-for-sale and are carried at fair value. Unrealized gains or losses are
treated as a component of other comprehensive income (loss).

INVENTORIES

         Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out ("FIFO") method. Reserves for slow moving
and obsolete inventories are provided based on historical experience and current
product demand.

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 and improvements..................................          30
Equipment...................................................         3-7
Furniture and fixtures......................................         5-7
Other.......................................................           5


         Leasehold improvements are amortized 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 to 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 for periods not
exceeding fifteen years from the dates of acquisition. Carrying values of such
assets are reviewed quarterly by the Company, by comparing the carrying amounts
to their estimated undiscounted cash flows, and adjustments are made for any
diminution in value. In accordance with the guidelines in Statement of Financial
Accounting Standards ("SFAS") No. 142, the Company determined it has one
reporting unit. The Company performed a review for diminution in value and has
concluded that no diminution in value has occurred. The Company has also
reassessed the useful lives of its drug


                                      F-9
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


licenses and related costs and  determined  the useful lives are  appropriate in
determining amortization expense.

RESEARCH AND DEVELOPMENT

         Research and development costs are expensed when incurred.

USE OF ESTIMATES

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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
estimates.

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 is capitalized and
amortized to interest expense using the effective interest method over the lives
of the related debt.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying amounts of cash, cash equivalents, marketable securities,
receivables, accounts payable, accrued expenses and short-term borrowings
approximate fair value because of their short-term nature. The carrying amount
of the Company's long-term obligations approximate fair value given the amounts
outstanding at December 31, 2002 and 2001.

         The fair value information presented herein is based on information
available to management as of December 31, 2002. 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 has stock-based employee compensation plans that are
described more fully in Note 11. The Company accounts for these plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in the Consolidated Statements of Operations, as
all options granted under these plans had an exercise price equal to or greater
than the market value of the underlying common stock on the dates of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.

         Had the compensation cost for the plans been determined based on the
fair value at the grant dates for awards under the plans, consistent with the
method described in SFAS No. 123, the Company's net income (loss) and basic and
diluted net income (loss) per common share on a pro forma basis would have been:


                                      F-10
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


                                          YEAR ENDED DECEMBER 31,
                                          -----------------------
                                  2002            2001                2000
                                  ----            ----                ----
                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income (loss), as reported  $ 1,636          $1,361            $  (745)

Total stock-based employee
  compensation expense
  determined under fair
  value method for
  all awards
                                 (3,673)         (2,040)            (2,554)
                                 ------          ------            -------
Pro forma net loss              $(2,037)         $ (679)           $(3,299)
                                =======          ======            =======

Earnings (loss) per share:

    Basic - as reported         $  0.10          $ 0.10            $ (0.06)

    Basic - pro forma           $ (0.12)         $(0.05)           $ (0.25)

    Diluted - as reported       $  0.08          $ 0.08            $ (0.06)

    Diluted - pro forma         $ (0.12)         $(0.05)           $ (0.25)


         The preceding pro forma results were calculated using the Black-Scholes
option-pricing model. The following assumptions were used for the years ended
December 31, 2002, 2001 and 2000, respectively: (1) risk-free interest rates of
5.1%, 5.2% and 6.6%, respectively; (2) dividend yields of 0.0%; (3) expected
lives of 5, 10 and 10 years, respectively; and (4) volatility of 57.6%, 140.8%
and 126.9%, respectively. The weighted average fair value of options granted
during the years ended December 31, 2002, 2001 and 2000 was $5.58, $3.72 and
$4.48, respectively. Results may vary depending on the assumptions applied
within the model.

         Stock or other equity-based compensation for non-employees is accounted
for under the fair value method as required by SFAS No. 123 and Emerging
Issues Task Force ("EITF") Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services and other related interpretations. Under this method,
the equity-based instrument is valued at either the fair value of the
consideration received or the equity instrument issued on the date of grant. The
resulting compensation cost is recognized and charged to operations over the
service period, which is usually the vesting period.

REVENUE RECOGNITION

         Revenue on product sales is recognized when persuasive evidence of an
arrangement exists, the price is fixed and final, delivery has occurred and
there is a reasonable assurance of collection of the sales proceeds. The Company
generally obtains purchase authorizations from its customers for a specified
amount of product at a specified price and considers delivery to have occurred
when the customer takes possession of the products. The Company provides its
customers with a limited right of return. Revenue is recognized upon delivery
and a reserve for sales returns is recorded. The Company has demonstrated the
ability to make reasonable and reliable estimates of product returns in
accordance with SFAS No. 48 and of allowances for doubtful accounts based on
significant historical experience.

         Revenue from service sales is recognized when the service procedures
have been completed or applicable milestones have been achieved. Revenue from
research and development contracts is recognized over applicable contractual
periods or as defined milestones are attained, as specified by each contract and
as costs related to the contracts are incurred. Payments received under such
arrangements prior to the completion of the related procedures or attainment of
milestones are recorded as deferred income.


                                      F-11
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


INCOME TAXES

         The Company accounts for income taxes under SFAS No. 109, Accounting
for Income Taxes, which requires the recognition of deferred tax assets and
liabilities relating to the expected future tax consequences of events that have
been recognized in the Company's consolidated financial statements and tax
returns. As permitted by APB Opinion No. 23, Accounting for Income Taxes -
Special Areas, provisions for income taxes on undistributed earnings of foreign
subsidiaries that are considered permanently invested are not recognized in the
Company's consolidated financial statements.

BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE

         Basic and diluted net income (loss) per common share is based on the
weighted average number of shares of Common Stock outstanding during each
period. The effect of the Company's outstanding stock options and stock purchase
warrants were considered in the diluted net income per share calculation for the
years ended December 31, 2002 and 2001. The effect of outstanding stock options
and stock purchase warrants were not considered for the year ended December 31,
2000, because the results would have been anti-dilutive.

         The following is a reconciliation between basic and diluted net income
per common share for the years ended December 31, 2002 and 2001. Dilutive
securities issuable for the years ended December 31, 2002 and 2001 include
approximately 1,309,000 and 663,000 shares, respectively, issuable as a result
of Class B Warrants, and approximately 1,920,000 and 1,288,000 shares,
respectively, issuable as a result of various stock options and warrants
outstanding.


    YEAR ENDED DECEMBER 31, 2002
                                                        EFFECT OF
                                             BASIC       DILUTIVE       DILUTED
                                              EPS       SECURITIES        EPS
                                              ---       ----------        ---
                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income.................................   $ 1,636      $   --       $1,636
Weighted average common shares outstanding.    16,569       3,229       19,798
Net income per common share................   $   .10      $ (.02)      $  .08


    YEAR ENDED DECEMBER 31, 2001
                                                          EFFECT OF
                                               BASIC       DILUTIVE     DILUTED
                                                EPS       SECURITIES      EPS
                                                ---       ----------      ---
                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income.................................   $ 1,361      $   --        $1,361
Weighted average common shares outstanding.    14,196       1,951        16,147
Net income per common share................   $   .10      $ (.02)       $  .08

         For the years ended December 31, 2002 and 2001, warrants and options to
purchase 324,000 and 467,000 shares of Common Stock were excluded from the
diluted EPS presentation because their exercise prices were greater than the
average fair value of the Common Stock.

         Potential common Shares totaling 3,013,000, representing the effect of
potential exercises of options and warrants and the effect of potential
conversion of Debentures into shares of Common Stock were not included in the



                                      F-12
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


computation of diluted net loss per common share for the year ended December 31,
2000, because the effect would have been anti-dilutive.

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

         SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, redefines how operating segments are determined and requires
disclosure of certain financial and descriptive information about a company's
operating segments. The Company operates in two business segments that are in
two geographical locations. See Note 13 for the disclosures required by SFAS No.
131.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 supersedes APB Opinion No. 16, Business Combinations, and
SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased
Enterprises, and requires that all business combinations be accounted for by a
single method - the purchase method. SFAS No. 141 also provides guidance on the
recognition of intangible assets identified in a business combination and
requires enhanced financial statement disclosures. SFAS No. 142 adopts a more
aggregate view of goodwill and bases the accounting for goodwill on the units of
the combined entity into which an acquired entity is integrated. In addition,
SFAS No. 142 concludes that goodwill and intangible assets that have indefinite
useful lives will not be amortized, but rather will be tested at least annually
for impairment. Intangible assets that have finite lives will continue to be
amortized over their useful lives. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. The adoption of SFAS No. 142 was
required for fiscal years beginning after December 15, 2001, except for the
nonamortization and amortization provisions that are required for goodwill and
intangible assets acquired after June 30, 2001. The adoption of SFAS No. 141 and
SFAS No. 142 did not have a material impact on the Company's financial position,
results of operations or cash flows.

         In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 supersedes previous guidelines for financial accounting and reporting
for the impairment or disposal of long-lived assets and for segments of a
business to be disposed of. The adoption of SFAS No. 144 on January 1, 2002 did
not have a material impact on the Company's financial position, results of
operations or cash flows.

         In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. SFAS No. 148
also amends the disclosure requirements of SFAS No. 123 to require disclosure in
the summary of significant accounting policies, the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The disclosure provision is required for all companies with stock-based employee
compensation, regardless of whether the company utilizes the fair value method
of accounting described in SFAS No. 123 or the intrinsic value method described
in APB Opinion No. 25, Accounting For Stock Issued to Employees. SFAS No. 148's
amendment of the transition and annual disclosure provisions of SFAS No. 123 are
effective for fiscal years ending after December 15, 2002. The disclosure
provisions for interim financial statements are effective for interim periods
beginning after December 15, 2002. The Company currently accounts for
stock-based compensation utilizing the intrinsic value method of accounting for
stock-based employee compensation described by APB Opinion No. 25.

         In December 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45").
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Company has adopted the
disclosure requirements of FIN 45 as of December 31, 2002 and determined that no
additional disclosures were required. In addition, the Company is required to
adopt the initial recognition and measurement of the fair value of the
obligation undertaken in issuing the guarantee on a prospective basis to
guarantees issued or modified after December 31, 2002.


                                      F-13
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


The Company does not believe the adoption of FIN 45 will have a material  effect
on the Company's financial position, results of operations or cash flows.

         In November 2002, the EITF issued EITF Issue No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which it
will perform multiple revenue-generating activities. EITF Issue No. 00-21
establishes three principles: revenue arrangements with multiple deliverables
should be divided into separate units of accounting, arrangement consideration
should be allocated among the separate units of accounting based on their
relative fair values, and revenue recognition criteria should be considered
separately for separate units of accounting. EITF Issue No. 00-21 is effective
for all revenue arrangements entered into in fiscal periods beginning after June
15, 2003, with early adoption permitted. The Company does not believe the
adoption of EITF Issue No. 00-21 will have a material effect on its financial
position, results of operations or cash flows.

         In November 2001, the EITF reached a consensus on EITF Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor's Products, which is a codification of EITF Issues No. 00-14, 00-22
and 00-25. This issue presumes that consideration from a vendor to a customer or
reseller of the vendor's products to be a reduction of the selling prices of the
vendor's products and, therefore, should be characterized as a reduction of
revenues under certain circumstances. Revenue reduction is required unless
consideration relates to a separate identifiable benefit and the benefit's fair
value can be established. EITF Issue No. 01-09 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
The adoption of EITF Issue No. 01-09 did not have a material effect on the
Company's financial position, results of operations or cash flows.

RECLASSIFICATIONS

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

NOTE 3 - RECEIVABLES

         Receivables consist of the following:

                                                                 DECEMBER 31,
                                                                 ------------
                                                                2002      2001
                                                                ----      ----
                                                                (IN THOUSANDS)
Trade receivables (of which $1,340 and $1,747,
 respectively, collateralize short-term borrowings
 with Spanish financial institutions)......................   $ 9,829    $6,397
VAT, income and social security taxes receivable...........     1,033       584
Other......................................................       112        22
                                                              -------    ------

                                                               10,974     7,003
Less-allowance for doubtful accounts.......................      (100)      (66)
                                                              -------    ------

                                                              $10,874    $6,937
                                                              =======    ======


                                      F-14
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 4 - INVENTORIES

         Inventories consist of the following:

                                                               DECEMBER 31,
                                                               ------------
                                                              2002      2001
                                                              ----      ----
                                                              (IN THOUSANDS)
Raw materials...........................................   $  3,518   $  1,387
Finished goods..........................................      1,677      1,230
                                                           --------   --------

                                                              5,195      2,617
Less-allowance for slow moving inventory................        (62)       (54)
                                                           --------   --------

                                                           $  5,133   $  2,563
                                                           ========   ========


NOTE 5 - FIXED ASSETS

         Fixed assets consist of the following:

                                                             DECEMBER 31,
                                                             ------------
                                                          2002          2001
                                                          ----          ----
                                                              (IN THOUSANDS)
Land...............................................     $    930      $    790
Buildings and improvements.........................        5,576         3,008
Equipment..........................................        5,197         3,168
Furniture and fixtures.............................        1,006           692
Leasehold improvements.............................           52            44
                                                        --------      --------

                                                          12,761         7,702
Less-accumulated depreciation......................       (3,196)       (2,107)
                                                        --------      --------

                                                        $  9,565      $  5,595
                                                        ========      ========

         The Company entered into a purchase and sale agreement during the year
ended December 31, 2002, whereby it agreed to purchase a 15,700 square foot
commercial building located on approximately 14 acres of land in Exeter, NH for
$1,776,600. The Company paid a deposit of $157,660 during the year ended
December 31, 2002, which has been included in other non-current assets as of
December 31, 2002. The Company completed the acquisition of the property
subsequent to December 31, 2002.

         Depreciation expense of approximately $212,000, $139,000 and $72,000
has been charged to operations as a component of depreciation and amortization
expense in the Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000, respectively. The Company has included
depreciation totaling approximately $569,000, $324,000 and $260,000 in cost of
net product sales during the years ended December 31, 2002, 2001 and 2000,
respectively.

NOTE 6 - DRUG LICENSES AND RELATED COSTS

         Drug licenses and related costs consist of the following:

                                                        DECEMBER 31,
                                                        ------------
                                                      2002        2001
                                                      ----        ----
                                                       (IN THOUSANDS)
Drug licenses and related costs.................   $   13,908  $   12,245
Less-accumulated amortization...................       (2,933)     (1,969)
                                                   ----------  ----------

                                                   $   10,975  $   10,276
                                                   ==========  ==========

                                      F-15
<PAGE>


                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         In November 2000, Laboratorios Belmac entered into an agreement to sell
the trademark, registration rights and dossier for its branded pharmaceutical
product, Controlvas(R), for approximately $5,148,000. Laboratorios Belmac
received a 50% deposit from the purchaser in November 2000, which was reflected
as deferred income in the Consolidated Balance Sheet as of December 31, 2000.
The transaction was completed in February 2001, resulting in a gain of
approximately $4,977,000 being recognized in the year ended December 31, 2001.

         In June 2001, Laboratorios Belmac agreed to sell the trademark,
registration rights and dossier for its pharmaceutical product, Amantadine(R),
to a third party for approximately $153,000. A deposit of approximately $56,000
was received from the purchaser in June 2001 and a second payment of the same
amount was received upon approval of the transfer of the rights to the purchaser
by the Spanish Ministry of Health, which occurred during the quarter ended
September 30, 2001, resulting in recognition of a pre-tax gain of approximately
$73,000. The remaining amount of approximately $41,000 is payable over the
five subsequent years, in the form of a royalty arrangement.

         The Company acquired the rights to market and manufacture in Spain, the
product and trademark, Codeisan(R), from Abello, a subsidiary of Merck & Co.,
Inc. during the year ended December 31, 2000 for approximately $5,200,000. The
brand line consists of tablet and liquid presentations, which is marketed and
promoted by the Laboratorios Belmac sales force. Also acquired in the
transaction was the associated manufacturing equipment.

         Amortization expense for drug licenses and related costs was
approximately $803,000, $772,000 and $508,000 for the years ended December 31,
2002, 2001 and 2000, respectively, and has been recorded in depreciation and
amortization expense in the accompanying Consolidated Statements of Operations.

         Amortization expense for drug licenses and related costs for each of
the five years ending December 31, 2007 and for all years remaining thereafter
is estimated to be approximately $991,000 and $6,020,000, respectively.

NOTE 7 - RELATED PARTY NOTES

         The Company provided loans to each of Messrs. Murphy, Price and Gyurik,
who are executive officers of the Company, in the amounts of $250,000, $50,000
and $140,000, respectively, in March 2000, which Messrs. Murphy, Price and
Gyurik used to pay income taxes on equity-based compensation received in the
prior year. In December 2001, the Compensation Committee of the Company's Board
of Directors agreed to amend the loan agreements resulting in the forgiveness of
principal and accrued interest totaling approximately $56,000, $11,000 and
$31,000, due from Messrs. Murphy, Price and Gyurik, respectively. The amounts
forgiven were applied first to unpaid accrued interest and then to principal.
These amounts were recorded as compensation expense during the year ended
December 31, 2001 and treated as taxable income to the respective executives.

         In January 2002, the Compensation Committee of the Company's Board of
Directors agreed to amend the loan agreements, resulting in the forgiveness of
principal and accrued interest totaling approximately the same amounts as in
December 2001 and the reduction in the number of shares collateralizing the
remaining loan amounts to 18,700, 4,000 and 10,700 shares of the Company's
Common Stock owned by Messrs. Murphy, Price and Gyurik, respectively. These
amounts were recorded as compensation expense during the year ended December 31,
2002 and treated as taxable income to the respective executives. The remaining
loan balances, which bear interest at 2.37% annually, mature in March 2003.
Accrued interest on such loans totals approximately $7,000 and $1,000 at
December 31, 2002 and 2001, respectively.

         The balance outstanding at December 31, 2002 of approximately $301,000
has been included in prepaid expenses and other current assets in the
Consolidated Balance Sheet. As of December 31, 2001, the Company included the


                                      F-16
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


current portion of approximately $98,000 in prepaid expenses and other current
assets and the non-current portion of approximately $294,000 in other
non-current assets in the Consolidated Balance Sheet.

NOTE 8 - ACCRUED EXPENSES

         Accrued expenses consist of the following:

                                                               DECEMBER 31,
                                                               ------------
                                                              2002     2001
                                                              ----     ----
                                                              (IN THOUSANDS)
Foreign income taxes payable.............................   $ 1,177    $ 596
Provision for sales returns..............................       349      402
Accrued payroll..........................................       756      698
Other accrued expenses...................................     1,777      794
                                                             ------    -----

                                                             $4,059   $2,490
                                                             ======   ======



NOTE 9 - DEBT

         Short-term borrowings consist of the following:

                                                              DECEMBER 31,
                                                              ------------
                                                             2002      2001
                                                             ----      ----
                                                             (IN THOUSANDS)
Trade receivables discounted with a Spanish financial
  institution, with recourse, effective
  interest rate is 5.2% and 5.9%, respectively...........   $1,340    $1,747
Revolving lines of credit payable to Spanish financial
  institutions, weighted average interest
  rate is 4.5% and 5.3%, respectively....................      258        10
                                                            ------    ------

                                                            $1,598    $1,757
                                                            ======    ======



         The weighted average stated interest rate on short-term borrowings
outstanding at December 31, 2002 and 2001 was 5.1% and 5.9%, respectively.

         The Company has revolving lines of credit with Spanish financial
institutions, which entitle the Company to borrow up to $5,537,000 at December
31, 2002. The lines are scheduled to mature on various dates through November
30, 2003 and are renewable. At December 31, 2002, advances outstanding under the
lines of credit were approximately $258,000. The weighted average interest rate
at December 31, 2002 and 2001 was 4.5% and 5.3%, respectively, and interest is
payable quarterly.

         Long-term debt consists of the following:

                                                              DECEMBER 31,
                                                              ------------
                                                           2002       2001
                                                           ----       ----
                                                             (IN THOUSANDS)
Loans payable to Spanish government, net of
  unamortized discount of $105 and $72,
  respectively.....................................         $282     $ 142
Loans payable for equipment financing..............          190         -
                                                             ---     -----

                                                             472       142
Less-current portion...............................         (127)        -
                                                             ---     -----

  Total long-term debt.............................         $345     $ 142
                                                            ====     =====


                                      F-17
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         In March 2002, the Company entered into a loan agreement to finance the
acquisition of manufacturing equipment. The terms of the loan require repayment
over a two-year period at an average original interest rate of 2.9%. As of
December 31, 2002, approximately $190,000 of the balance remains outstanding.

         In November 2002, the Company entered into a loan agreement with the
Spanish government as part of a research-funding program. The loan is
non-interest bearing and is payable in equal annual installments of
approximately $17,000 beginning in 2006. Accordingly, the Company has imputed
interest at the market rate in Spain (4.8%), has recorded a discount on the
obligation of $33,000 and has classified the obligation at December 31, 2002 as
non-current. The discount is being amortized over the ten-year term of the loan.

         In December 2001, the Company entered into a loan agreement with the
Spanish government as part of a research-funding program. The loan is
non-interest bearing and is payable in equal annual installments of
approximately $30,600 beginning in 2005. Accordingly, the Company imputed
interest at the market rate in Spain (6%), recorded a discount on the obligation
of $72,000 and has classified the obligation at December 31, 2002 and 2001 as
non-current. The discount is being amortized over the ten-year term of the loan.

         In February 1996, the Company publicly sold 6,900 Units at $1,000 per
Unit. Each Unit consisted of One 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 at $5.00 per share. During the year ended
December 31, 2000, holders of the Company's 12% Debentures converted all 7,254
of such Debentures, with a net carrying value of approximately $5,669,000, into
approximately 2,901,000 shares of Common Stock. Interest on the Debentures was
payable quarterly.

         For financial reporting purposes, the $1,000 purchase price of each
Unit was allocated as follows: $722 to the Debenture, $224 to the conversion
discount feature of the Debenture and $54 to the 1,000 Class A Warrants. None of
the Unit purchase price was allocated to the Class B Warrants. Such allocation
was based upon the relative fair value 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 was being amortized to interest expense using the
effective interest method over the lives of the related Debentures until the
date that such Debentures were converted into shares of Common Stock. The
remaining unamortized original issue discount and related issuance costs were
recorded as an offset to additional paid-in capital at the time of conversion.
The effective interest rate on the Debentures was 18.1%.

         On May 29, 1996, the Debentures and Class A Redeemable Warrants began
trading separately. The expiration date of the Class A Warrants was extended to
August 16, 1999. The expiration date of the underlying Class B Warrants was
subsequently extended to December 31, 2003.

NOTE 10 - PREFERRED STOCK

         The Company has 2,000,000 shares of $1.00 Preferred Stock authorized
for issuance. As of December 31, 2002 and 2001, no shares of Preferred Stock
were outstanding.


                                      F-18
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 11 - STOCKHOLDERS' EQUITY

         At December 31, 2002 the Company had the following Common Stock
reserved for issuance under various plans and agreements (in thousands):

                                                             COMMON SHARES
For exercise of stock purchase warrants................          3,292
For exercise of outstanding stock options..............          3,459
For future stock option grants.........................            309
                                                                 -----

                                                                 7,060
                                                                 =====

         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, 2002, warrants to purchase an aggregate of
approximately 3,292,000 shares of Common Stock were outstanding, which were
exercisable at prices ranging from $1.50 to $20.00 per share, of which 400,000
warrants have an exercise price of $1.50 per share, approximately 2,872,000
warrants have an exercise price of $5.00 per share and 20,000 warrants have an
exercise price of $20.00 per share. The warrants expire on various dates from
December 2003 through February 2009.

         During the year ended December 31, 2002, approximately 263,800 Class B
Warrants were exercised to acquire an aggregate of 131,900 shares of Common
Stock. The Company received net cash proceeds of approximately $660,000 from all
such exercises during the year ended December 31, 2002.

         During the year ended December 31, 2001, underwriter's Class A Warrants
were exercised to acquire 460,000 shares of Common Stock and 460,000
underwriter's Class B Warrants. Approximately 8,400 Class B Warrants and 150,000
other stock purchase warrants were exercised during 2001 to acquire an aggregate
of 154,200 shares of Common Stock. The Company received net cash proceeds of
approximately $1,776,000 from all such exercises during the year ended December
31, 2001.

         During the year ended December 31, 2000, approximately 197,000 Class B
Warrants were exercised to acquire approximately 98,500 shares of Common Stock.
Approximately 670,000 of other stock purchase warrants were also exercised to
acquire approximately 670,000 shares of Common Stock, and Underwriter's Warrants
were exercised to acquire 460 Debentures and 460,000 underwriter's Class A
Warrants. The Company received net cash proceeds of approximately $2,843,000
from all such exercises during the year ended December 31, 2000.

         In addition, the Company has granted warrants in connection with
various services. These warrants have been granted for terms not exceeding ten
years from the date of grant.


                                      F-19
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         The table below summarizes warrant activity for the years ended
December 31, 2000, 2001 and 2002.

                                                                 WEIGHTED
                                         NUMBER OF          AVERAGE EXERCISE
                                       COMMON SHARES         PRICE PER SHARE
                                       -------------         ---------------
                                       (IN THOUSANDS, EXCEPT PER SHARE DATA)
Outstanding at December 31, 1999.....       4,806                 $4.17
  Exercised..........................        (768)                $2.93
                                            -----
Outstanding at December 31, 2000.....       4,038                 $4.41
  Exercised..........................        (614)                $2.89
                                            -----

Outstanding at December 31, 2001.....       3,424                 $4.68
  Exercised..........................        (132)                $5.00
                                            -----

Outstanding at December 31, 2002.....       3,292                 $4.67
                                            =====

COMMON STOCK TRANSACTIONS

         During the year ended December 31, 2002, the Company issued
approximately 2,500,000 shares of Common Stock in a Common Stock Offering which
raised gross proceeds of $24,500,000, approximately 132,000 shares of Common
Stock upon exercise of Class B Warrants, approximately 172,000 shares of Common
Stock upon exercise of stock purchase options, and approximately 15,000 shares
of Common Stock as equity-based compensation in lieu of cash.

         During the year ended December 31, 2001, the Company issued
approximately 460,000 shares of Common Stock as a result of the exercise of
underwriter's Class A Warrants, approximately 4,200 shares of Common Stock upon
exercise of Class B Warrants, approximately 150,000 shares of Common Stock upon
exercise of 150,000 other stock purchase warrants, approximately 16,900 shares
of Common Stock upon exercise of stock purchase options, and approximately
40,000 shares of Common Stock as equity-based compensation in lieu of cash.

         During the year ended December 31, 2000, the Company issued
approximately 98,500 shares of Common Stock as a result of the exercise of
approximately 197,000 Class B Warrants, approximately 670,000 shares of Common
Stock upon exercise of other stock purchase warrants, approximately 14,000
shares of Common Stock upon exercise of stock purchase options and approximately
2,901,000 shares of Common Stock upon conversion of 7,254 of the Company's 12%
Convertible Debentures.

         General and administrative expenses for the years ended December 31,
2002, 2001 and 2000 include $100,000, $160,000 and $39,000, respectively, of
non-cash equity-based compensation. Research and development expenses for the
years ended December 31, 2002, 2001 and 2000 include $56,000, $102,000 and
$30,000, respectively, of non-cash equity-based compensation.

STOCK OPTION PLANS

         The Company has in effect Stock Option Plans (the "Plans"), pursuant to
which directors, officers and employees of the Company are eligible to receive
grants of options for the Company's Common Stock. Approximately 3,768,000 shares
of Common Stock have been reserved for issuance under the Plans, of which
approximately 778,000 are outstanding under the 1991 Plan, approximately
1,181,000 are outstanding under the 2001 Employee and Director Plans and
1,500,000 are outstanding under the Executive Plan as of December 31, 2002.
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 that 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). Options granted under the Plans generally vest over one, two or three



                                      F-20
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


years. Options to purchase 172,300, 16,900 and 14,000 shares of Common Stock
were exercised during the years ended December 31, 2002, 2001 and 2000,
respectively, resulting in net cash proceeds of approximately $715,000, $51,000
and $35,000, respectively.

         The table below summarizes activity in the Company's Plans for the
years ended December 31, 2000, 2001 and 2002.

                                           NUMBER OF            WEIGHTED AVERAGE
                                         COMMON SHARES           EXERCISE PRICE
                                         -------------           --------------
                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
Outstanding at December 31, 1999             1,927                  $   5.50
  Granted..............................        570                      7.56
   Exercised...........................        (14)                     2.52
  Canceled.............................        (26)                   113.96
                                             -----
Outstanding at December 31, 2000             2,457                      4.87
  Granted..............................        553                      6.04
  Exercised............................        (17)                     3.00
  Canceled.............................        (56)                     9.66
                                             -----
Outstanding at December 31, 2001             2,937                      5.00
  Granted..............................        699                     10.28
  Exercised............................       (172)                     4.15
  Canceled.............................         (5)                    29.40
                                             -----
Outstanding at December 31, 2002             3,459                  $   6.07
                                             =====



         The table below summarizes options outstanding and exercisable at
December 31, 2002 (number of options in thousands):

                                                          OPTIONS CURRENTLY
                          OPTIONS OUTSTANDING               EXERCISABLE
                          -------------------               -----------
                              WEIGHTED     WEIGHTED                WEIGHTED
RANGE OF            NUMBER    AVERAGE       AVERAGE       NUMBER    AVERAGE
EXERCISE              OF      EXERCISE  REMAINING LIFE      OF     EXERCISE
PRICES              OPTIONS    PRICE        (YEARS)      OPTIONS     PRICE
------              -------    -----        -------      -------     -----
$1.50-2.89........    565      $ 2.83         3.5          565      $ 2.83
3.00-3.75.........    674        3.64         3.4          674        3.64
4.73..............    500        4.73         3.3          500        4.73
5.70-5.88.........    172        5.85         7.4          172        5.85
6.00-6.38.........    432        6.01         8.3          432        6.01
7.10-7.90.........    262        7.53         7.5          212        7.48
8.00-8.93.........     60        8.54         8.1           43        8.45
9.00-9.80.......      490        9.74         8.9           25        9.00
10.63-11.81.......    274       11.42         9.0           57       11.22
20.00-22.50.......     30       20.08         0.6           30       20.08
------------------  -----      ------         ---        -----      ------
$1.50-22.50.......  3,459      $ 6.07         5.8        2,710      $ 4.96
==================  =====      ======         ===        =====      ======

         Options and warrants outstanding at December 31, 2002, include
approximately 3,292,000 warrants, all of which are exercisable, and
approximately 3,459,000 options, of which approximately 2,710,000 are vested and
exercisable at December 31, 2002.

         Options and warrants outstanding at December 31, 2001, included
approximately 3,424,000 warrants, all of which were exercisable, and
approximately 2,937,000 options, of which approximately 2,317,000 were vested
and exercisable at December 31, 2001.


                                      F-21
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


401(K) RETIREMENT PLAN

         The Company sponsors a 401(k) retirement savings plan (the "401(k)
Plan") under which eligible employees may contribute, on a pre-tax basis,
between 1% and 15% of their respective total annual income from the Company,
subject to maximum aggregate annual contribution imposed by the Internal Revenue
Code of 1986, as amended. All full-time employees who work for the Company in
the U.S. are eligible to participate in the 401(k) Plan. All employee
contributions are allocated to the employee's individual account and are
invested in various investment options as directed by the employee. Employees'
cash contributions are fully vested and nonforfeitable. The Company made
matching contributions to the 401(k) Plan during the years ended December 31,
2002 and 2001 in the form of approximately 9,300 and 13,700 shares,
respectively, of the Company's Common Stock valued at approximately $92,000 and
$83,000, respectively. The Company made matching cash contributions to the
401(k) Plan for the year ended December 31, 2000 of approximately $2,500 and in
the form of approximately 7,000 shares of the Company's Common Stock valued at
approximately $57,000. All Company matching contributions vest 25% each year for
the first four years of each employee's employment.

STOCKHOLDER RIGHTS PLAN

         On December 22, 1999, the Board of Directors adopted a stockholder
rights plan pursuant to which a dividend of one right for each outstanding share
of the Company's Common Stock on the record date of December 27, 1999 was
declared. The plan is designed to prevent a potential acquirer from gaining
control of the Company without fairly compensating all of the Company's
stockholders and to protect the Company from coercive takeover attempts. Each of
the rights, which are not currently exercisable, entitles the holder to purchase
one one-thousandth of a share of Series A Junior Participating Preferred Stock
at an exercise price of $16.50. The rights will become exercisable only if a
person or group of affiliated persons beneficially acquire(s) 15% or more of the
Company's Common Stock. Under certain circumstances, each holder of a right
(other than the person or group who acquired 15% or more of the Company's Common
Stock) is entitled to purchase a defined number of shares of the Company's
Common Stock at 50% of the market price of the Common Stock at the time that the
right becomes exercisable.

EQUITY TRANSACTIONS SUBSEQUENT TO YEAR END

         Subsequent to December 31, 2002, the Company issued a total of 41,000
shares of restricted Common Stock, which shares vest ratably over 12-months, to
certain employees of the Company as equity-based compensation in lieu of cash
and granted options to purchase an aggregate of 250,000 shares of Common Stock
to certain employees of the Company.

NOTE 12 - PROVISION FOR INCOME TAXES

         For all periods presented the income (loss) before income taxes as
shown in the Consolidated Statements of Operations consists of losses generated
in the United States and income derived from foreign operations. See Note 13 for
information regarding the components of income before taxes.



                                      F-22
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         The provision (benefit) for income taxes consists of the following:

                                                  YEAR ENDED DECEMBER 31,
                                               2002        2001        2000
                                               ----        ----        ----
                                                      (IN THOUSANDS)
Foreign taxes...........................     $ 2,534     $2,452      $   222
Tax benefit from US operating losses....        (933)      (954)        (657)
Federal and state deferred taxes........      10,453       (898)       1,162
Change in valuation allowance...........      (9,520)     1,852         (505)
                                             -------     ------      -------

  Total provision for income taxes......     $ 2,534     $2,452      $   222
                                             =======     ======      =======

         A reconciliation between the federal statutory rate and the Company's
effective income tax rate is as follows:

                                                      YEAR ENDED DECEMBER 31,
                                                    2002       2001      2000
                                                    ----       ----      ----
                                                         (IN THOUSANDS)
Statutory federal income tax (benefit)..........   $1,418    $1,296    $(178)
Permanent differences from foreign subsidiary...      183       202     (257)
Valuation allowance.............................      933       954      657
                                                   ------    ------    -----

                                                   $2,534    $2,452    $ 222
                                                   ======    ======    =====

         The components of the Company's deferred taxes are as follows:

                                                            DECEMBER 31,
                                                            ------------
                                                          2002        2001
                                                          ----        ----
                                                           (IN THOUSANDS)
Deferred tax assets:
  NOL carryforwards.................................   $  15,118   $  14,075
  Capital loss carryforwards........................           -      10,799
  Disposition of subsidiary.........................       6,912       6,850
  Foreign tax on deferred income....................         123         141
  Tax credit carryforwards..........................         415         415
  Other, net........................................         719         603
                                                       ---------   ---------

      Total deferred tax assets.....................      23,287      32,883
Deferred tax liabilities............................        (217)       (275)
Valuation allowance.................................     (22,947)    (32,467)
                                                       ---------   ---------
Deferred tax asset, net.............................   $     123   $      141
                                                       =========   ==========

         The Company has established a valuation allowance equal to the full
amount of the domestic deferred tax asset, as future domestic operating profits
cannot be assured. The Company has a current deferred tax asset of $123,000 and
a non-current tax liability of $2,141,000 due to temporary differences arising
as a result of the Company's Spanish subsidiary recording the gain on the sale
of Controlvas and the corresponding taxes for Spanish statutory purposes
during the year ended December 31, 2000. The deferred tax asset is a result of
taxes that related to deferred income and the tax liability results from taxes
that will be payable in Spain beginning in 2004.

         Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may have limited, or may limit in the future,
the amount of net operating loss (the "NOL") carryforwards that could be
utilized annually to offset future taxable income and income tax liabilities.
The amount of any annual limitation is determined based upon the Company's value
prior to an ownership change.


                                      F-23
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


         At December 31, 2002, the Company has NOL carryforwards of
approximately $38,366,000 available to offset 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 tax year ended December 31, 1998 is available to offset future
taxable income along with the 1999, 2000, 2001 and 2002 losses without
limitation. Additionally, approximately $1,800,000 of the NOL generated in 1995
available to offset future U.S. taxable income is limited to approximately
$300,000 per year over the subsequent six years due to the change in tax year
end during 1995. If not offset against future taxable income, the NOL
carryforwards will expire in tax years 2007 through 2023. Capital loss
carryforwards totaling approximately $10,799,000 expired unused during the year
ended December 31, 2002.

         The valuation allowance increased (decreased) by approximately
($9,520,000), $1,852,000 and ($505,000) for each of the years ended December 31,
2002, 2001 and 2000, respectively.

NOTE 13 - BUSINESS SEGMENT INFORMATION

         The Company is a U.S.-based specialty pharmaceutical company focused on
advanced drug delivery  technologies and  pharmaceutical  products.  The Company
also has a commercial  presence in Europe.  The Company's Spanish  subsidiaries,
Laboratorios Belmac S.A., Laboratorios Davur S.L. and Laboratorios Rimafar S.L.,
manufacture and market branded and generic pharmaceutical  products in Spain. In
the U.S., the Company's activities consist primarily of limited product research
and  development,  business  development  activities,  corporate  management and
administration.

         Laboratorios Belmac and its subsidiaries derive its revenues from the
sales of its own products as well as from product manufacturing for others,
within four primary therapeutic categories of cardiovascular, gastrointestinal,
infectious and neurological diseases.

         Set forth in the tables below is certain financial information with
respect to the Company's business and geographical segments for the years ended
December 31, 2002, 2001 and 2000. The segments use the same accounting policies
as those described in the summary of significant accounting policies in Note 2.

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31, 2002
                                                                             (IN THOUSANDS)
                                                                             --------------
                                                                  PRODUCT          R&D/
                                                                   SALES/    COLLABORATIONS/
                                                                   SPAIN           U.S.          CONSOLIDATED
                                                                   -----       -----------       ------------
<S>                                                               <C>               <C>               <C>
Total revenues.............................................       $38,718        $   418              $39,136
Interest income............................................            --            279                  279
Interest expense...........................................           200              9                  209
Depreciation and amortization expense......................           655            360                1,015
Income (loss) before income taxes..........................         6,913         (2,743)               4,170
Provision for income taxes.................................         2,534             --                2,534
Net income (loss)..........................................         4,379         (2,743)               1,636
Fixed assets...............................................         9,417            148                9,565
Drug licenses and related costs............................         7,463          3,512               10,975
Total assets...............................................        38,199         26,493               64,692
Total liabilities..........................................        15,417            524               15,941
Expenditures for drug licenses/delivery technology.........           615            181                  796
Expenditures for fixed assets..............................         3,408             24                3,432

</TABLE>


                                      F-24
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


<TABLE>
<CAPTION>

                                                                       YEAR ENDED DECEMBER 31, 2002
                                                                             (IN THOUSANDS)
                                                                             --------------
                                                                  PRODUCT          R&D/
                                                                   SALES/    COLLABORATIONS/
                                                                   SPAIN           U.S.          CONSOLIDATED
                                                                   -----       -----------       ------------
<S>                                                               <C>            <C>                  <C>
Total revenues.............................................       $26,411        $     -              $26,411
Interest income............................................            27            141                  168
Interest expense...........................................           244              -                  244
Depreciation and amortization expense......................           523            388                  911
Income (loss) before income taxes..........................         6,618         (2,805)               3,813
Provision for income taxes.................................         2,452             --                2,452
Net income (loss)..........................................         4,166         (2,805)               1,361
Fixed assets...............................................         5,427            168                5,595
Drug licenses and related costs............................         6,663          3,613               10,276
Total assets...............................................        24,890          7,229               32,119
Total liabilities..........................................        10,974            721               11,695
Expenditures for drug licenses/delivery technology.........           412             72                  484
Expenditures for fixed assets..............................         2,029             40                2,069

</TABLE>

<TABLE>
<CAPTION>

                                                                      YEAR ENDED DECEMBER 31, 2002
                                                                             (IN THOUSANDS)
                                                                             --------------
                                                                  PRODUCT          R&D/
                                                                   SALES/    COLLABORATIONS/
                                                                   SPAIN           U.S.          CONSOLIDATED
                                                                   -----       -----------       ------------
<S>                                                               <C>            <C>                  <C>
Total revenues.............................................       $18,487        $   130              $18,617
Interest income............................................            16            331                  347
Interest expense...........................................           205            234                  439
Depreciation and amortization expense......................           235            345                  580
Income (loss) before income taxes..........................         1,408         (1,931)                (523)
Provision for income taxes.................................           222             --                  222
Net income (loss)..........................................         1,186         (1,931)                (745)
Fixed assets...............................................         3,959            180                4,139
Drug licenses and related costs............................         7,135          3,844               10,979
Total assets...............................................        19,896          8,981               28,877
Total liabilities..........................................        10,567            494               11,061
Expenditures for drug licenses/delivery technology.........         5,518             42                5,560
Expenditures for fixed assets..............................           957             57                1,014
</TABLE>

         Interest income and interest expense are based upon the actual results
of each operating segment's assets and borrowings. The R&D/Collaborations/U.S.
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 one customer exceeded 10% of consolidated total revenues
during the year ended December 31, 2002, accounting for 14% of 2002 consolidated
total revenues and 7.6% of the consolidated receivables balance at December 31,
2002. Revenues from one customer exceeded 10% of consolidated total revenues
during the year ended December 31, 2001, accounting for 15% of 2001 consolidated
total revenues and 7.5% of the consolidated receivables balance at December 31,
2001. Revenues from one customer exceeded 10% of consolidated net sales during
the year ended December 31, 2000, accounting for 14% of 2000 consolidated net
sales.


                                      F-25
<PAGE>

                 BENTLEY PHARMACEUTICALS, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 14 - COMMITMENTS AND CONTINGENCIES

         The Company is obligated to pay certain royalty payments upon
commercialization of products using technologies acquired in a transaction,
which it consummated during the year ended December 31, 1999 (see Note 6).

         The Company has entered into various employment agreements with its
executive officers, which agreements provide for salaries, potential bonuses and
other benefits in exchange for services provided by the executive officers. The
employment agreements also provide for certain compensation in the event of
termination or change in control of the Company. Such agreements, which are
renewable, are scheduled to expire on December 31, 2003.

         On February 4, 2002, the Company was notified that a legal proceeding
had been commenced against it by Merck & Co. Inc. and its Spanish subsidiary,
Merck Sharp & Dohme de Espana, S.A., alleging that the Company violates their
patents in its production of the product simvastatin and requesting an
injunction ordering the Company not to manufacture or market the product. The
case was brought against the Company's Spanish subsidiaries in the 39th First
Instance Court of the City of Madrid. After a hearing on February 18, 2002, the
court refused to grant the requested injunction and dismissed the case on
February 25, 2002, awarding the Company court and legal fees. Merck has appealed
the award of fees. Simvastatin was launched in January 2002 and sales of this
product totaled approximately $1,300,000 during the year ended December 31,
2002. Merck re-instituted its claim against the Company in another proceeding
brought in the 19th First Instance Court of the City of Madrid, which the
Company received notice of on January 23, 2003. This case also alleges violation
of Merck's patents in the production of the product simvastatin, requests an
order that the Company cease manufacturing the product and demands damages
during the period of manufacture. The Company intends to vigorously oppose this
claim as management of the Company believes it is without merit. The Company
believes that the resolution of this claim will not have a material adverse
effect on its financial position, results of operations or cash flows.

         The Company is a party to various other legal actions that arose in the
ordinary course of business. The Company does not expect that resolution of
these matters will have, individually or in the aggregate, a material adverse
effect on the Company's financial position, results of operations or cash flows.

         The Company leases certain equipment and facilities under
non-cancelable operating leases, which expire through the year 2007. Total
charges to operations under operating leases were approximately $785,000,
$705,000 and $557,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. Future minimum lease payments under operating leases are as
follows:

                                           YEAR ENDING DECEMBER 31,
                                           ------------------------
                                                (IN THOUSANDS)

2003................................                   $808
2004................................                    765
2005................................                    755
2006................................                    120
2007 and beyond.....................                      5


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