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, 1997

                                       OR

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

                         Commission File Number 1-10581

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

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

4830 W. Kennedy Blvd., Suite 548, Tampa, FL                        33609
 ----------------------------------------                        ----------
 (Address of principal executive offices)                        (Zip Code)

       Registrant's telephone number, including area code: (813) 286-4401


           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, Inc.
 12% Convertible Senior                      American Stock Exchange and
   Subordinated Debentures                      Pacific Exchange, Inc.
 Class A Redeemable Warrants                 American Stock Exchange and
                                                Pacific Exchange, Inc.
 Class B Redeemable Warrants                 Applications Pending

        Securities registered pursuant to section 12(g) of the Act: None

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

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

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

  Title of Class          Aggregate Market Value      As of Close of Business on
  --------------          ----------------------      --------------------------
Common Stock, $.02            $24,900,000                   March 26, 1998
 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, $.02            8,427,699                     March 26, 1998
 par value
                       DOCUMENTS INCORPORATED BY REFERENCE
  Proxy Statement for the 1998 Annual Meeting of Stockholders - Incorporated by
                   Reference into Part III of this Form 10-K

<PAGE>
                                     PART I




ITEM 1.     BUSINESS

GENERAL


Bentley   Pharmaceuticals,   Inc.  (the   "Registrant")   is  an   international
pharmaceutical and health care company engaged in the manufacturing,   marketing
and distribution of pharmaceutical  products in Spain, with limited distribution
of health care products in the United States. The Registrant was organized under
the laws of the State of Florida in  February  1974.  In Spain,  the  Registrant
acquires,   licenses  or  develops  and  registers  late  stage  products,   and
manufactures,  packages and  distributes  its own  products  and products  under
contract for other pharmaceutical  companies. The Registrant divested its french
subsidiary,  Chimos/LBF  S.A.  (referred to herein as  Chimos/LBF)  in June 1997
which, until such time, consisted of the low margin brokerage of fine chemicals,
sourcing of raw materials and pharmaceutical intermediaries and the distribution
of biotechnology or orphan drugs (See "--Pharmaceutical Marketing and Sales in
France").  In the United States, the Registrant markets disposable linens, which
are manufactured  under  contract,  to emergency  health care  services.  The
percentage of the  Registrant's  total  revenues for the year ended December 31,
1997  attributable to its operations in Spain,  France and the United States are
approximately  84%, 14% and 2%,  respectively.  The Registrant's  pharmaceutical
operations  in  Spain  are a result  of its 1992  acquisition  of  Rimafar  S.A.
(subsequently renamed and referred to herein as Laboratorios Belmac S.A.).

The strategic  focus of the  Registrant has shifted in response to the evolution
of the global health care environment.  The Registrant has moved from a research
and  development-oriented  pharmaceutical  company,  which  required  developing
products from the chemistry  laboratory through marketing,  to a company seeking
to acquire late-stage development compounds that can be marketed within one year
or currently marketed products.  As a result of this transition,  the Registrant
has decreased its research and development  expenses  dramatically over the past
few  years  as  well  as  implemented   cost-cutting   measures  throughout  the
Registrant's  operations.  The Registrant  emphasizes  product  distribution  in
Spain,  strategic  alliances and product  acquisitions,  which management of the
Registrant  expects will move the Registrant closer to profitability in the near
future.

The  Registrant  has  entered  into a  negotiated  letter of intent to  purchase
domestic  and  international  rights to a portfolio  of branded  drugs,  with an
emphasis in gastrointestinal  products,  and a manufacturing facility located in
Mequon,  Wisconsin,  from Schwarz Pharma, Inc. The letter of intent,  dated July
21, 1997, was recently amended to take into  consideration the possible transfer
of control of the  Registrant's  Spanish  subsidiary,  Laboratorios  Belmac,  to
Schwarz  Pharma,  Inc.  and will  serve as the  basis for  negotiations  for the
definitive agreements.  The proposed transaction is subject to completion of due
diligence,  the  execution  of such  definitive  agreements  and approval of the
Registrant's stockholders and debenture holders. Upon execution of the letter of
intent,  the  Registrant was required to remit a  non-refundable  deposit in the
amount of $100,000.

                                       2

<PAGE>



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

                                                 For the Year Ended December 31,
                                                     1997      1996      1995
                                                   -------   -------   -------

Pharmaceutical and Consumer Health Care Products   $14,520   $22,924   $31,188
Disposable Linen Products                              382       209       249
                                                   -------   -------   -------
            Total                                  $14,902   $23,133   $31,437
                                                   =======   =======   =======

PRODUCT LINES

The Registrant currently manufactures, markets and sells pharmaceutical products
in Spain, and markets and sells disposable linens in the United States.

PHARMACEUTICAL MANUFACTURING AND MARKETING IN SPAIN

Laboratorios  Belmac S.A., the Registrant's  subsidiary in Spain  ("Laboratorios
Belmac"),  manufactures and markets pharmaceutical  products within four primary
therapeutic categories of cardiovascular,  gastrointestinal,  neurological,  and
infectious diseases. The Registrant manufactures or distributes approximately 40
dosage  forms of various  pharmaceuticals  in  its  manufacturing  facility  in
Zaragoza,  Spain  both  for  its  own  sales and under contract for  others. The
manufacturing  facility was recently  renovated and brought into full compliance
with European  Union Good Manufacturing  Practices  (GMPs) for  solid and liquid
dosage  forms.  Among  the  products  Laboratorios Belmac  manufactures  and/or
distributes,  each of which is registered with Spain's Ministry of Health, are:

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

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

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




                                       3
<PAGE>

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

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

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

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

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

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

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

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

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

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

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




                                       4
<PAGE>


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

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

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

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

Controlvas and Belmazol,  together,  represent approximately 55% of the sales of
Laboratorios Belmac.

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

The Registrant  maintains an internal marketing and sales staff of approximately
67, including 58 employees and 9 independent  sales  representatives  working on
commission in Spain to market the pharmaceuticals it produces.  The Registrant's
sales force competes by emphasizing  highly  individualized  customer service in
all major cities, provinces and territorial islands of Spain.

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

Contract  Manufacturing.  Since Laboratorios Belmac currently utilizes less than
100% of its plant capacity to manufacture its own products,  Laboratorios Belmac
has  engaged  in  contract  manufacturing  of  pharmaceuticals  owned  by  other
companies  such as  Rhone-Poulenc's  subsidiary  Natterman  S.A.,  Italpharmaco,
Ratiopharm,  Juste,  Wasserman-Chiese,  Vir,  Laboratorios  Juventus,  S.A.  and
Ethypharm.  Other  contracts  are  contemplated  in the future.  The  Registrant
manufactures  these  pharmaceuticals  to  its  customers'  specifications,   and
packages  them with the  customers'  labels.  Occasionally,  to  assure  product
uniformity  and  quality,   employees  of  these  customers  will  work  at  the
Registrant's manufacturing facility.

As a result of Spain's entry  into the European  Union, Spain  implemented  new
pharmaceutical





                                       5
<PAGE>



manufacturing  standards and the  Registrant was required to modify its facility
to  comply  with  these  regulations.   Laboratorios  Belmac  accomplished  such
renovations without interruption of sales or distribution.  After an inspection,
in July  1995 the  operating  areas of the  facility  were  determined  to be in
compliance with European GMPs by Spain's Ministry of Health.

PHARMACEUTICAL MARKETING AND SALES IN FRANCE

Until its  divestiture  in June  1997,  the  Registrant's  operations  in France
consisted of the import and distribution of specialty pharmaceutical products to
hospitals  and  others in France  as well as the  concentration  of the sales of
"orphan drugs" (drugs used for the treatment of rare diseases) and biotechnology
products.  The Registrant had marketed  throughout France over 26 pharmaceutical
products from Europe and the United States.  The primary  customer of Chimos/LBF
was Pharmacie Centrale des Hopitaux.  Chimos/LBF marketed Ceredase;  a drug used
in the  treatment  of  Gaucher's  Disease,  in  France  until  the  distribution
agreement between Genzyme  Corporation and Chimos/LBF expired on March 31, 1996.
Consequently,  the Registrant's sales in France declined significantly beginning
in the second quarter of 1996 as a result of the expiration of the  distribution
agreement.

The Registrant completed the sale of Chimos/LBF, for approximately $3,650,000 on
June 26, 1997.  The  Registrant  has since  received  approximately  $3,300,000,
including approximately $2,600,000 of cash and cash equivalents which resided on
Chimos/LBF's books prior to its disposition, of which approximately $500,000 was
used to repay  indebtedness  to the  former  subsidiary.  An escrow  fund in the
amount of approximately  $350,000,  representing the balance due the Registrant,
has been established for certain contingent  obligations or liabilities.  In the
opinion  of  management,  the  resolution  of those  contingencies  will have no
material effect on the Registrant's  financial position or results of operation.
The  Registrant  recorded  a loss  of  $591,000  related  to  this  divestiture,
including realized exchange loss of $386,000 due to fluctuations in the currency
exchange rates used to translate the foreign currency financial statements.

MARKETING AND DISTRIBUTION OF DISPOSABLE LINENS IN THE UNITED STATES

The  Registrant  markets  and  distributes  disposable  linen  products  to  the
emergency  health care industry in the United States through Bentley  Healthcare
Corporation,  one of the Registrant's U.S.  subsidiaries  ("Healthcare").  These
disposable linens include products such as blankets,  sheets and pillowcases and
are  distributed to entities  engaged in the provision of emergency  health care
services,  such as emergency rooms and ambulance services,  located primarily in
the southwestern region of the United States.

Healthcare  receives orders for these products at the Registrant's  headquarters
in Tampa, Florida and subcontracts the manufacturing of the disposable linens in
accordance  with  Healthcare's  specifications.  The  raw  materials  for  these
products are  provided by  Healthcare  and stored with one of the  manufacturers
until needed. Once produced,  the products are shipped directly to the customers
from the  manufacturer or held in inventory in anticipation of customer  demand.
The supply of disposable linens to health care providers in the United States is
a highly competitive business that includes many large companies. The Registrant
concentrates its marketing on the emergency  services segment of the health care
market,  where Bentley Healthcare believes it can compete based upon specialized
specifications and individual attention.




                                       6
<PAGE>



The  manufacture  and sale of disposable  linens is subject to regulation by the
FDA, which monitors the composition and labeling of health care products.

PRODUCTS TO WHICH THE REGISTRANT OWNS RIGHTS

Although the  Registrant  significantly  reduced its  research  and  development
activities when it implemented its austerity program in 1993, the Registrant has
maintained its rights to selected  products.  There can be no assurance that the
Registrant  will have the resources to bring any of these products to market or,
if  such  resources  are  available,  that  the  products  can  be  successfully
developed,  manufactured  or  marketed.  Due to the expense and time  commitment
required to bring a pharmaceutical  product to market, the Registrant is seeking
co-marketing,  licensing and promotional  arrangements and other  collaborations
with  other  international  or  national  pharmaceutical  companies.  Generally,
management  believes that the Registrant can compete more effectively in certain
markets  through   collaborative   arrangements  with  companies  that  have  an
established presence in a particular  geographic area and greater resources than
those of the  Registrant.  The  Registrant  owns the  rights  to  Biolid(R)  , a
non-crystalline   form  of   erythromycin   with  a   potential   for   enhanced
bioavailability   (quantity  absorbed  in  blood  over  time  compared  to  dose
received);  Alphanon(R) , designed  for the systemic  treatment of  hemorrhoids,
initially as a liquid formulation for intra-navel transdermal application; and a
phenantramine  analogue, which is a  pre-clinical  stage  antimalarial  that has
shown effectiveness against Plasmodium falciparum.

The  Registrant  is not  currently  marketing  any of these  products nor is the
Registrant  planning  additional  in-house research and development  activity at
this  time with  respect  to these  compounds  unless  in a  licensing  or other
collaboration.

PARTNERSHIP VENTURE

In  March  1994  the  Registrant  formed  a  partnership,  through  Healthcare's
wholly-owned subsidiary, Belmac Hygiene, Inc., with a wholly-owned subsidiary of
Maximed Corporation,  which is headquartered in New York, and planned to market,
through  this  partnership,  a range of  hydrogel  based  feminine  health  care
products,  including  a  contraceptive,  an  antiseptic,  an  antifungal  and an
antibacterial. In December 1994, the Registrant commenced litigation against its
partner  claiming   interference  in  the  management  of  the  partnership  and
misrepresentation   under  the  partnership   agreement.   (See  Item  3.  Legal
Proceedings.)  Pending  resolution  of  this  dispute,  the  partnership  is not
actively engaged in the development of any products.

SOURCES AND AVAILABILITY OF RAW MATERIALS

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




                                       7
<PAGE>



PATENTS, TRADEMARKS, LICENSES AND REGISTRATIONS

Few of the products  currently  being sold by the  Registrant  are  protected by
patents  owned  by  the  Registrant.   However,  where  possible,   patents  and
trademarks will be sought and obtained in the United States and in all countries
of principal marketing interest to the Registrant.

The Registrant has filed or has rights to patent  applications.  However,  there
can be no  assurance  that its rights will  afford  adequate  protection  to the
Registrant.  In addition,  the Registrant also relies on unpatented  proprietary
technology in the development and commercialization of its products. There is no
assurance  that  others  may not  independently  develop  the  same  or  similar
technology.

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

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

COMPETITION

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

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

Laboratorios  Belmac  competes  with  both  large  multinational  companies  and
national Spanish companies, which produce most of the same products Laboratorios
Belmac manufactures.  For example,  there are





                                       8
<PAGE>




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

CUSTOMERS

The incidence of certain  infectious  diseases,  which occur at various times in
different areas of the world, affects the demand for the Registrant's antibiotic
products  when they are  marketed  in each  area.  Orders  for the  Registrant's
products are generally  filled on a current basis,  and no order backlog existed
at December  31,  1997.  No  material  portion of the  Registrant's  business is
subject to  renegotiation of profits or termination of contracts at the election
of any  governmental  authority.  There were no customers  during the year ended
December  31,  1997,  which  accounted  for at  least  10%  of the  Registrant's
consolidated revenues. However, sales of approximately $2,200,000 and $7,300,000
to Pharmacie  Centrale des Hopitaux  accounted for  approximately 10% and 23% of
the  Registrant's  sales  for the  years  ended  December  31,  1996  and  1995,
respectively.  Due  to  the  March  31,  1996  expiration  of  the  Registrant's
distribution  agreement  with  Genzyme  Corporation,  for  the  distribution  of
Ceredase,  the  Registrant  experienced a significant  decrease in sales to this
customer during 1996 (see "- - Pharmaceutical Marketing and Sales in France").

RESEARCH AND DEVELOPMENT

The Registrant's  management has shifted the focus from research and development
to a more cost-effective  strategy of acquiring late-stage development compounds
that can be marketed within one year or currently marketed products. As a result
of this shift in  operations,  the  Registrant  has  decreased  its research and
development  spending  over  the  past  few  years.   Research  and  development
activities have been  performed,  under contract,  by various  universities  and
consulting research laboratories.

The Registrant spent $324,000,  $29,000 and $444,000 in the years ended December
31, 1997,  1996 and 1995,  respectively,  on research and development to develop
new products  and  processes  and to improve  existing  products and  processes.
Expenditures in 1997 were primarily  incurred in Spain and were  concentrated in
the  development of late stage products.  The Registrant  intends to continue to
carefully review research and development  activities with the  establishment of
priorities  based on both  technical  and  commercial  criteria and to carefully
manage such expenditures in view of its limited resources.

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

REGULATION

The  development,  manufacture,  sale,  and  distribution  of  the  Registrant's
products are subject to  comprehensive  government  regulation,  and the general
trend is toward more stringent regulation.





                                       9
<PAGE>




Government  regulation,  which  includes  detailed  inspection  and control over
research  laboratory   procedures,   clinical   investigations,   manufacturing,
marketing,  and  distribution  practices by various  federal,  state,  and local
agencies,  substantially  increases  the time,  difficulty  and cost incurred in
obtaining and  maintaining  the approval to market newly  developed and existing
products.

United States. The steps required before a pharmaceutical  agent may be marketed
in the United States include (i) preclinical  laboratory and animal tests,  (ii)
the submission to the FDA of an  Investgational  New Drug  Application  ("IND"),
which must become  effective  before human clinical  trials may commence,  (iii)
adequate and  well-controlled  human clinical trials to establish the safety and
efficacy of the drug, (iv) the submission of a New Drug  Application  ("NDA") to
the FDA,  and (v) the FDA  approval of the NDA prior to any  commercial  sale or
shipment of the drug.  In addition to obtaining  FDA approval for each  product,
each domestic drug-manufacturing  establishment must be registered with the FDA.
Domestic manufacturing establishments are subject to biennial inspections by the
FDA and must comply with current GMPs for drugs.  To supply  products for use in
the United States,  foreign  manufacturing  establishments must comply with GMPs
and are subject to periodic  inspection by the FDA or by regulatory  authorities
in such countries under reciprocal agreements with the FDA.

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

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

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





                                       10
<PAGE>




that obtains the first  marketing  approval  for a designated  Orphan Drug for a
given  indication is eligible to receive  marketing  exclusivity for a period of
seven years.

Spain.  As a  manufacturer  in Spain,  which is a member of the European  Union,
Laboratorios Belmac is subject to the regulations enacted by the European Union.
Prior to  Spain's  entry into the  European  Union in 1993,  the  pharmaceutical
regulations in Spain were less stringent and Laboratorios Belmac, along with all
Spanish  companies,  have had to  modify  their  procedures  to adapt to the new
regulations,  which are  similar to the  regulations  promulgated  by the United
States Food & Drug Administration discussed above. In general, these regulations
are essentially consistent with the FDA and require a manufacturer of a proposed
pharmaceutical  to show efficacy and safety.  The  development  process in Spain
goes through the same phases (i.e. I, II, III) as in the United States to assure
their safety and efficacy.  A dossier on each pharmaceutical is prepared,  which
takes  approximately two years or more for review by the Ministry of Health. The
pharmaceutical  can then only be sold to the public with a  prescription  from a
medical doctor.

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

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

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




                                       11
<PAGE>




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

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

EMPLOYEES

The Registrant and its subsidiaries  employ  approximately 122 people, 5 of whom
are employed in the United States and 117 in Spain as of March 26, 1998. Of such
employees, approximately 40 are principally engaged in manufacturing activities,
67 in sales and marketing, including 9 independent sales representatives, and 15
in management  and  administration.  In general,  the  Registrant  considers its
relations with its employees to be good.

FINANCIAL INFORMATION RELATING TO GEOGRAPHIC AREAS AND FOREIGN OPERATIONS

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

ITEM 2.     PROPERTIES

UNITED STATES

The Registrant's  corporate  headquarters are located at One Urban Centre, Suite
548, 4830 West Kennedy  Boulevard,  Tampa,  Florida 33609 and presently  include
4,900 square feet which are occupied in accordance  with a lease agreement which
expires in October  1998.  The  Registrant expects to be able to locate suitable
office space prior to expiration of the lease agreement.

SPAIN

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





                                       12
<PAGE>



in Spain are located in Madrid in approximately  5,000 square feet of renovated,
leased offices, which leases expire in April 1998. Such leases have been renewed
for one additional year and are renewable under the same terms for an additional
two years.

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

ITEM 3.     LEGAL PROCEEDINGS

Michael M. Harshbarger,  a former member of the Registrant's  Board of Directors
and its former  President and Chief  Executive  Officer filed a suit against the
Registrant in November  1993, in the Circuit  Court of the  Thirteenth  Judicial
Circuit, State of Florida, Hillsborough County Civil Division, alleging wrongful
termination.  The plaintiff is seeking monetary damages in excess of $1,400,000.
The Registrant views his claim as meritless and intends to vigorously oppose it.
The  Registrant  has  filed a  counterclaim  against  Harshbarger  for  wrongful
conversion and civil theft,  fraud and deceit,  and breach of contract,  seeking
the return of  corporate  assets  removed  by  Harshbarger  and for  restitution
related to  expenses of a personal  nature  that he charged to the  Registrant's
accounts. The Registrant amended its counterclaim to include breach of fiduciary
duty.  The  Registrant  is seeking  damages  from  Harshbarger,  relating to its
counterclaim,  in  excess  of  $1,000,000.  Harshbarger  attempted  to  use  the
Americans  with  Disabilities  Act (the "ADA") as a defense to the  Registrant's
counterclaim;  however,  the judge ruled in favor of the Registrant's  motion to
strike  Harshbarger's ADA defense. The Registrant has recently filed a motion to
set this matter for trial and attempted to secure a trial date.  However,  since
mediation  was  attempted  more than one year ago,  the  judge  ordered  another
mediation conference before setting this matter for trial. Harshbarger failed to
appear at his  deposition set in January 1998;  consequently,  discovery in this
matter is still outstanding.  On two separate occasions,  Harshbarger's  counsel
has withdrawn from the case,  citing  irreconcilable  differences.  As a result,
Harshbarger is now representing himself in this matter.

In  March  1994  the  Registrant  formed  a  partnership,  through  Healthcare's
wholly-owned subsidiary, Belmac Hygiene, Inc., with a wholly-owned subsidiary of
Maximed Corporation,  which is headquartered in New York, and planned to market,
through  this  partnership,  a range of  hydrogel  based  feminine  health  care
products,  including  a  contraceptive,  an  antiseptic,  an  antifungal  and an
antibacterial. In December 1994, the Registrant commenced litigation against its
partner  claiming   interference  in  the  management  of  the  partnership  and
misrepresentation under the partnership agreement. On January 12, 1996 the Court
ruled that the Registrant's reliance on its partner's  misrepresentation was not
justified  and that the  Registrant  had  performed  its  obligations  under the
agreement with its partner.  Accordingly, the Registrant's claims as well as the
counterclaims  of its  partner  were  dismissed.  On  September  25,  1996,  the
Registrant  filed an appeal in the United States Court of Appeals for the Second
Circuit.  On August 27, 1997,  the United States Court of Appeals for the Second
Circuit  affirmed in part and vacated and  remanded in part the  judgment of the
United States District Court for the Southern  District of New York. The appeals
court order vacated that portion of the district  court  judgment that dismissed
the Registrant's claim of fraud and remanded the claim to the district court for
further  proceedings.




                                       13
<PAGE>




Those portions of the district court judgment which  dismissed the  Registrant's
contract claim for breach of warranty,  the defendants'  counterclaim  for fraud
and  breach of  contract  and  Medstar,  Inc.'s  action for breach of an alleged
guaranty were affirmed.  On December 17, 1997, the United States  District Court
for the  Southern  District  of New York  awarded the  Registrant  a judgment of
$7,686,000  relating  to its claim of fraud that the  Registrant  filed  against
defendants  Medstar Inc.,  Maximed Inc.,  and Robert S. Cohen,  both jointly and
severally. On January 16, 1998, the defendants filed a notice of appeal from the
judgment.  The defendants have not obtained a stay of execution  pending appeal,
and  therefore,  efforts to collect the judgment are  proceeding.  These efforts
include a motion that has been filed by the Registrant, for the court to order a
sale of Medstar's  interest in the  partnership.  On March 16, 1998,  defendants
filed their  appellate  brief and the  Registrant's  brief is due to be filed on
April 16, 1998. Oral argument is scheduled for May 1998.  Pending  resolution of
this dispute,  the partnership is not actively engaged in the development of any
products.


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

Not applicable.





                                       14
<PAGE>




                                     Part II


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

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

Quarter Ended                       High Sales Price         Low Sales Price
-------------                       ----------------         ---------------
March 31, 1996                           $2.88                    $2.06
June 30, 1996                             4.13                     2.13
September 30, 1996                        3.94                     2.38
December 31, 1996                         3.75                     2.50

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

As of March 26,  1998  there were  2,015  holders of record of the  Registrant's
Common Stock,  excluding shares held in street name. No dividends have ever been
declared or paid on the  Registrant's  Common Stock and the Registrant  does not
anticipate paying any dividends in the foreseeable future.

ITEM 6.     SELECTED FINANCIAL DATA

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



                                       15
<PAGE>



         SUMMARY OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 Fiscal Year Ended
                                                                   December 31,
                                        --------------------------------------------------------------------
(In thousands, except per share data)    1997(1)        1996(2)        1995(3)        1994(3)        1993(4)
                                        --------       --------       --------       --------       --------
<S>                                     <C>            <C>            <C>            <C>              <C>
Sales                                   $ 14,902       $ 23,133       $ 31,437       $ 27,010         19,849

Cost of sales                              8,010         15,638         25,586         21,931         15,100
                                        --------       --------       --------       --------       --------

Gross margin                               6,892          7,495          5,851          5,079          4,749

Operating expenses                         8,438          8,794          8,198          9,050         14,722
                                        --------       --------       --------       --------       --------

Other (income) expense                     2,269          1,174            (21)          (393)           263
                                        --------       --------       --------       --------       --------

Loss before extraordinary item            (3,815)        (2,473)        (2,326)        (3,578)       (10,236)
                                        --------       --------       --------       --------       --------

Net loss                                $ (3,815)      $ (2,919)      $ (2,326)      $ (3,578)      $(10,236)
                                        ========       ========       ========       ========       ========

Loss per Common Share
before extraordinary item               $   (.97)      $   (.79)      $   (.83)      $  (1.56)      $  (6.32)
                                        ========       ========       ========       ========       ========

Basic net loss per Common Share         $   (.97)      $   (.92)      $   (.83)      $  (1.56)      $  (6.32)
                                        ========       ========       ========       ========       ========

Weighted average number of
Common Shares outstanding                  4,072          3,334          2,999          2,395          1,655
                                        ========       ========       ========       ========       ========

</TABLE>


<TABLE>
<CAPTION>

BALANCE SHEET INFORMATION
                                                 At December 31,
                          -----------------------------------------------------------
(In thousands)            1997(1)      1996(2)      1995(3)      1994(3)      1993(4)
                          -------      -------      -------      -------      -------
<S>                       <C>          <C>          <C>          <C>          <C>
Working capital           $10,648      $ 4,265      $ 3,113      $ 1,928      $ 2,043

Non-current assets          6,034        6,746        6,523        5,644        5,937

Total assets               21,043       16,558       16,290       16,332       16,160

Non-current liabilities     5,439        5,513        2,252          336        2,821

Redeemable Preferred
Stock                       2,338        2,203        2,068        2,256        2,218

Common Stockholders'
Equity                      8,905        3,295        5,316        4,980        2,941

See explanations on the following page.
</TABLE>





                                       16
<PAGE>


(1)  Revenues  declined  during  1997  due to the  Registrant's  divestiture  of
     Chimos/LBF  on June 26,  1997.  Other  (income)  expense for the year ended
     December 31, 1997 includes  interest  expense of $1,086,000 and a provision
     for loss on  disposition of subsidiary,  which totals  $591,000,  including
     realized  exchange  loss of $386,000  due to  fluctuations  in the currency
     exchange rates used to translate the foreign currency financial  statements
     and a loss  of  $205,000  recognized  upon  the  sale  of  Chimos/LBF.  The
     Regisrant  also  recorded a provision for income taxes during 1997 totaling
     $621,000.  During  the  fourth  quarter of 1997,  the  Registrant  received
     proceeds of  approximately  $9,800,000  from the exercise of  approximately
     4,900,000  Class  A  Warrants.  See  Notes  1,  8,  10 and 11 of  Notes  to
     Consolidated Financial Statements.

(2)  Revenues in France declined beginning in the second quarter of 1996, due to
     the March 31, 1996 expiration of the distribution agreement for the product
     Ceredase,  which  accounted  for  approximately  60%  of  the  Registrant's
     revenues in 1995 and approximately 54% of its revenues in the quarter ended
     March  31,  1996.  Ceredase  gross  margins,  as a percent  of sales,  were
     approximately  5% during the quarter ended March 31, 1996.  The  Registrant
     completed a public offering in February 1996,  whereby it issued $6,900,000
     of 12% convertible subordinated debentures and warrants.  Consequently, the
     Registrant  incurred  interest  expense  totaling  $1,227,000 in 1996.  The
     Registrant incurred an extraordinary  charge of $446,000,  representing the
     unamortized  discount and issuance  costs at the date of repayment of Notes
     from its October 1995 private  placements.  Operating expenses for the year
     ended  December 31, 1996 include  approximately  $340,000,  representing  a
     provision for goodwill  impairment  related to Chimos/LBF.  See Notes 1, 8,
     10, 13 and 14 of Notes to Consolidated Financial Statements.

(3)  The  Registrant  sold its  Spanish  marketing  rights to its  ciprofloxacin
     antibiotic,   Belmacina(R),   in  1994  and   included   the  gain  thereon
     (approximately  $884,000)  in Other  (Income)  Expense  in the  year  ended
     December 31, 1994 and recorded the anticipated  gain on sale of the related
     trademark of $380,000 as deferred  revenue as of December  31, 1994,  which
     was  recognized  as revenue  in the year ended  December  31,  1995.  Other
     (Income)  Expense for the year ended  December  31, 1995 also  includes the
     recognition of income of $360,000 from the  commercialization  of a certain
     drug  provided by the  Registrant's  former  Chairman  and Chief  Executive
     Officer,  $533,000 of expense  related to the settlement of litigation with
     the Registrant's  former Chief Financial Officer and income of $375,000 due
     to the reversal of an over-accrual for a liability.  See Notes 6, 10 and 13
     of Notes to Consolidated Financial Statements.

(4)  The year ended  December  31,  1993  includes  the  effects of writing  off
     capitalized costs with respect to the sachet formulation of Biolid(R),  its
     noncrystalline  form of  erythromycin  and a  charge  to  earnings  for the
     settlement of class action litigation.



                                       17
<PAGE>



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

GENERAL

The  Registrant  is presently an  international  pharmaceutical  and health care
company with its primary focus on the manufacturing,  marketing and distribution
of pharmaceutical and health care products.  Historically,  substantially all of
its  revenues  have come from its  operations  in Europe.  The  Registrant  also
markets  disposable  linens to  emergency  health  care  services  in the United
States.  In an effort  to  increase  its  presence  in the  United  States,  the
Registrant  has  entered  into a letter  of  intent  to  purchase  domestic  and
international  rights  to a  portfolio  of  branded  drugs  and a  manufacturing
facility in Wisconsin from Schwarz Pharma Inc. Although no definitive agreements
have been  finalized,  the  letter of intent was  recently  amended to take into
consideration  the  possible  transfer  of control of the  Registrant's  Spanish
subsidiary, Laboratorios  Belmac, to Schwarz Pharma. The proposal transaction is
subject to completion of due diligence,  the execution of definitive  agreements
and approval of the Registrant's Stockholders and Debenture holders.

The Registrant incurred a net loss of $3,815,000 for the year ended December 31,
1997.  The  Registrant  intends to  continue  to focus its  efforts on  business
activities which management  believes should result in operating  profits in the
future,  of which  there  can be no  assurance.  To  improve  its  results,  the
Registrant's  management will focus on increasing  higher margin  pharmaceutical
and health care  product  sales,  controlling  expenses  through  its  austerity
program, careful  prioritization of research and development projects resulting
in continued low overall research and development expenditures,  and potentially
acquiring  marketable  products or profitable  companies in the United States or
Europe that are  compatible  with the  Registrant's  strategy  for growth.  (See
"--Liquidity and Capital  Resources").  The Company sold its French  subsidiary,
Chimos/LBF in June 1997.  Sales generated by Chimos/LBF  began to decline in the
second quarter of 1996 due to the expiration of a distribution agreement for the
product  Ceredase.   For  business  segment   information  on  the  Registrant's
operations  outside  the  United  States,  see Note 12 of Notes to  Consolidated
Financial Statements.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 1997 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1996

The Registrant  reported revenues of $14,902,000 and a net loss of $3,815,000 or
$.97 per common share for the year ended  December 31, 1997 compared to revenues
of  $23,133,000  and a net loss of  $2,919,000  or $.92 per common share for the
same period in the prior year.

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




                                       18
<PAGE>




margins than those of  Chimos/LBF,  as well as the loss of  low-margin  Ceredase
sales.  Chimos/LBF generated relatively low gross margins (approximately 21% for
the year ended  December  31,  1997)  compared  to  Laboratorios  Belmac,  which
experienced  substantially higher margins  (approximately 51% for the year ended
December 31, 1997).

Operating Expenses. Selling, general and administrative expenses were $7,819,000
for the year ended  December 31, 1997 compared to $7,923,000 for the same period
in the prior  year.  Chimos/LBF's  divestiture  in June 1997  resulted  in lower
selling,  general and administrative  expenses in France; however, this decrease
was  partially  offset by  increased  selling  expenses  incurred by the Spanish
subsidiary  to support the  increase in sales volume  generated  during the year
ended  December  31,  1997.  The  Registrant  intends to continue its efforts to
control general and administrative  expenses as part of its austerity program in
its effort to reach and maintain profitability.

Research and development  expenses were $324,000 for the year ended December 31,
1997  compared to $29,000  for the prior  year.  The  research  and  development
expenditures  for the year ended  December  31, 1997 were  primarily  related to
bio-equivalency  studies,  which are  necessary  in order to obtain  approval to
export  products  from  Spain to other  countries.  The modest  expenditures  in
research and development reflect the Registrant's continued de-emphasis of basic
research and redirection of its resources to  developmental  expenses  necessary
for expansion of its portfolio of marketed  products.  The Registrant intends to
continue to carefully  manage its research and development  expenditures in view
of its limited resources.

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

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

Other  (income)  expenses  for the year  ended  December  31,  1997  includes  a
provision  for  loss  on  disposition  of  subsidiary,  which  totals  $591,000,
including  realized  exchange  loss  of  $386,000,  due to  fluctuations  in the
currency  exchange  rates  used to  translate  the  foreign  currency  financial
statements and a loss of $205,000 recognized upon the sale of Chimos/LBF.  Other
(income)  expenses in 1996 are




                                       19
<PAGE>



primarily  comprised of the loss of  approximately  $71,000  recognized upon the
disposition  of certain  unnecessary  fixed  assets and  leasehold  improvements
associated  with the  Registrant's  relocation to smaller,  more cost effective,
office space in April 1996.

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

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

The  Registrant  utilizes  software  and  related  technologies  throughout  its
business  that will be  affected by the "Year 2000  problem"  which is common to
most businesses,  and concerns the inability of information  systems,  primarily
computer software programs,  to recognize and process date sensitive information
properly as the year 2000  approaches.  An internal study is currently under way
to determine the full scope and related costs of the Year 2000 problem to ensure
that the  Registrant's  systems continue to meet its internal needs and those of
its customers.  The Registrant  currently  believes it will be able to modify or
replace its  affected  systems in time to minimize  any  detrimental  effects on
operations.  While it is not possible,  at present, to give an accurate estimate
of the cost of this  project,  the  Registrant  expects  that such  costs  could
possibly be material to its results of operations in one or more fiscal quarters
or years, but will not have a material  adverse impact on the long-term  results
of operations,  liquidity or consolidated  financial position of the Registrant.
System maintenance or software  modification costs will be expensed as incurred,
while the costs of new  software  will be  capitalized  and  amortized  over the
software's useful life.

FISCAL YEAR ENDED DECEMBER 31, 1996 VERSUS FISCAL YEAR ENDED DECEMBER 31, 1995

The Registrant  reported revenues of $23,133,000 and a net loss of $2,919,000 or
$.92 per common share for the year ended  December 31, 1996 compared to revenues
of  $31,437,000  and a net loss of  $2,326,000  or $.83 per common share for the
prior year.

Sales and Cost of Sales. The 26% decrease in revenues was primarily attributable
to a 52% decrease in sales by the Registrant's French subsidiary, Chimos/LBF, to
$11,625,000,  which  was  partially  offset  by a 68%  increase  in sales by the
Registrant's Spanish subsidiary,  Laboratorios  Belmac, to $11,299,000,  for the
year  ended  December  31,  1996.  As  previously  reported,  revenues  declined
beginning in the second quarter of 1996, due to the March 31, 1996 expiration of
its  distribution  agreement  for the  product




                                       20
<PAGE>




Ceredase,  which accounted for approximately 60% of the Registrant's revenues in
the year ended December 31, 1995. Ceredase gross margins, as a percent of sales,
were  approximately  5%.  Gross  margins  for the year ended  December  31, 1996
improved  to 32%  when  compared  to gross  margins  of 19% in the  prior  year,
primarily as a result of the more rapid rate of growth in sales at  Laboratorios
Belmac,  whose sales generated  significantly higher gross margins than those of
Chimos/LBF,  as well as the loss of low-margin  Ceredase sales. The Registrant's
distribution  operations in France,  Chimos/LBF,  generated relatively low gross
margins  (approximately  12% for the year ended December 31, 1996) as opposed to
the Registrant's  Spanish  subsidiary,  Laboratorios  Belmac,  which experienced
substantially higher margins  (approximately 53% for the year ended December 31,
1996).

Operating Expenses. Selling, general and administrative expenses were $7,923,000
for the year ended  December 31, 1996 compared to $7,204,000 for the prior year.
Overall,   selling,  general  and  administrative  expenses  increased  and  the
composition  changed as a result of increased  selling expenses  incurred by the
Spanish  subsidiary,  which were  necessary  in order to sustain the increase in
sales  volume  that the  Spanish  sales  force had  generated  in the year ended
December  31, 1996.  This  increase was offset in part by a decrease in selling,
general and administrative expenses by Chimos/LBF,  primarily due to the loss of
Ceredase sales, during the year ended December 31, 1996.

Research and  development  expenses were $29,000 for the year ended December 31,
1996 compared to $444,000 for the prior year.  The  Registrant's  management has
shifted  the  focus  from  research  and  development  to a more  cost-effective
strategy of  acquiring  late-stage  development  compounds  that can be marketed
within  one year as well as  currently  marketed  products.  As a result of this
shift in operations,  the Registrant has decreased its research and  development
spending over the past few years. Research and development  activities have been
performed,  under  contract,  by various  universities  and consulting  research
laboratories.

Depreciation and amortization  expenses decreased by 9% to $502,000 for the year
ended December 31, 1996, compared to $550,000 for the prior year,  primarily due
to the disposal of certain  fixed assets  during the quarters  ended June 30 and
September 30, 1996 as a result of the  Registrant's  move to smaller,  more cost
effective office space.

As a result of estimating  the proceeds  from the proposed  sale of Chimos,  the
Registrant  reviewed,  for  impairment,  the  recoverable  value of the carrying
amount of  long-lived  assets  and  intangibles.  Based  upon this  review,  the
Registrant  charged  to  operations,   a  provision  for  goodwill   impairment,
representing the remaining unamortized Chimos goodwill of approximately $340,000
at December 31, 1996.

Other  Income/Expense.  Interest  expense  was  $1,227,000  for the  year  ended
December 31, 1996 compared to $563,000 for the prior year. The $664,000 increase
reflected  interest  expense  arising  primarily  from (i) the Notes sold by the
Registrant  in its October 1995 private  placements,  which Notes were paid with
the  proceeds of the Public  Offering  completed  in February  1996 and (ii) the
Debentures sold in the February 1996 Public Offering. The Registrant incurred an
extraordinary  charge of $446,000,  representing  the unamortized  discount and
issuance  costs at the date of  repayment  of the





                                       21
<PAGE>




Notes from its October 1995 private placements. Interest income was $103,000 for
the year ended  December  31, 1996  compared  to $3,000 for the prior year.  The
increase  was with  respect to  interest  earned on the  proceeds  of the Public
Offering and cash collected  from Ceredase  receivables  which were  temporarily
invested in short-term  interest bearing  investments  included in cash and cash
equivalents in the Balance Sheet.

Other (income) expense, net of $50,000 for the year ended December 31, 1996, was
substantially lower than other (income) expense, net of ($581,000) for the prior
year,  which was  primarily  comprised of  ($360,000)  related to  settlement of
litigation,  a  ($380,000)  gain  recognized  upon the sale of the  Registrant's
Belmacina  trademark in Spain and the effect of a reversal of an over-accrual of
a liability  related to the proposed sale of Biolid(R),  which did not occur, in
the amount of ($375,000), offset by a charge of $533,000 for cancellation of the
stock subscription  receivable and related interest from a former officer of the
Registrant.

Although the  Registrant  reported a 26% decrease in sales,  the improved  gross
margins of 32% and controlled spending with respect to operating expenses in the
year ended December 31, 1996,  resulted in a $1,048,000  improvement in its loss
from  operations  from  $2,347,000 in the prior year to $1,299,000  for the year
ended  December 31,  1996.  The 1996 loss from  operations  included a charge of
$340,000 for a provision for goodwill  impairment related to the proposed Chimos
disposition. This improvement was offset by interest expense associated with (i)
the Notes sold by the  Registrant  in its October 1995 private  placements,  and
(ii) the Debentures  sold in the February 1996 Public  Offering,  resulting in a
net loss of $2,919,000, or $.92 per common share for the year ended December 31,
1996,  compared to a net loss of  $2,326,000,  or $.83 per common  share for the
prior year.

LIQUIDITY AND CAPITAL RESOURCES:
--------------------------------

Total assets  increased from  $16,558,000 at December 31, 1996 to $21,043,000 at
December 31, 1997, while Common  Stockholders'  Equity increased from $3,295,000
at December 31, 1996 to $8,905,000 at December 31, 1997.  The increase in Common
Stockholders' Equity reflects primarily the exercise of approximately  4,900,000
Class A  Warrants  during the fourth  quarter of 1997,  partially  offset by the
fluctuation  in the exchange rates of European  currencies  compared to the U.S.
Dollar and the loss incurred by the  Registrant  for the year ended December 31,
1997.

The Registrant's  working capital increased from $4,265,000 at December 31, 1996
to  $10,648,000  at  December  31,  1997.  The  increase  in working  capital is
primarily attributable to the fourth quarter exercise of approximately 4,900,000
Class A  Warrants,  partially  offset  by the  fluctuation  of  foreign currency
exchange rates and the net cash used by the Registrant's  operating  activities.

Cash and cash  equivalents  increased  from  $4,425,000  at December 31, 1996 to
$11,117,000 at December 31, 1997,  primarily as the combined  result of proceeds
from the exercise, during the fourth quarter of 1997, of approximately 4,900,000
Class  A  Warrants   and  proceeds   from   short-term   borrowings   and  stock
options/warrants  exercises,  offset by cash used for operational  purposes and,
the



                                       22
<PAGE>




effect of foreign  exchange rate changes on cash balances.  Included in cash and
cash   equivalents  are  approximately  $10,860,000  of  short-term  investments
considered to be cash equivalents.

Accounts receivable decreased from $3,632,000 at December 31, 1996 to $2,428,000
at December 31, 1997 due to a combination of the disposition of the Registrant's
French  subsidiary and foreign currency exchange rate  fluctuations,  which were
offset  by higher  receivables  resulting  from  increased  sales in Spain.  The
Registrant has not experienced  any material  delinquent  accounts.  Inventories
decreased to $714,000 at December 31, 1997  compared to $945,000 at December 31,
1996,  due to the  disposition  of the  Registrant's  French  subsidiary and the
fluctuation of foreign currency  exchange rates,  which were partially offset by
an increase in inventory  levels in Spain to  accommodate  the increase in sales
volume.

Prepaid  expenses and other current  assets  increased from $644,000 at December
31,  1996  to  $750,000  at  December  31,  1997  due  to a  combination  of the
disposition  of the  Registrant's  French  subsidiary  and the effect of foreign
currency  exchange  rate  fluctuations,  which  were  offset by a combination of
(i)  expenditures  for  marketing and promotional items which will  be  utilized
by the Registrant's  Spanish  subsidiary  during 1998 and (ii)  pre-payment  for
certain  bio-equivalency studies which are  scheduled to take place during 1998.

Accounts payable and accrued expenses  decreased from $4,528,000 at December 31,
1996 to  $3,216,000  at December 31, 1997 due to the combined  effect of (i) the
disposition of the Registrant's  French  subsidiary;  (ii) the effect of foreign
currency  exchange rate  fluctuations;  and (iii) the reversal of an amount owed
for a drug license in Spain,  for which the proposed  purchase by the Registrant
was canceled, partially offset by income taxes payable totaling $608,000.

Fixed assets,  net decreased from  $3,544,000 at December 31, 1996 to $2,918,000
at December 31, 1997, due to recurring depreciation charges and a fluctuation in
foreign currency exchange rates.

Drug licenses and related costs,  net decreased from  $1,475,000 at December 31,
1996 to  $691,000  at December  31,  1997,  due to a  combination  of  recurring
amortization  charges, the effect of foreign currency exchange rate fluctuations
and the cancellation of the proposed purchase of a drug license in Spain.

Other  non-current  assets  increased  from  $1,727,000  at December 31, 1996 to
$2,425,000 at December 31, 1997 primarily due to capitalization of approximately
$546,000 of pre-acquisition costs,  including a non-refundable  $100,000 deposit
paid for the proposed  acquisition  of certain  assets owned by Schwarz  Pharma,
Inc. and other possible  acquisitions,  offset by amortization  costs related to
the 1996 Public  Offering.

Long term debt increased  from  $5,164,000 at December 31, 1996 to $5,329,000 at
December 31, 1997, due primarily to accretion recorded on the





                                       23
<PAGE>





Debentures issued in the February 1996 Public Offering.

Investing  activities  provided  net cash of  $396,000  during  the  year  ended
December 31, 1997.  Financing  activities  for the year ended  December 31, 1997
provided net cash of  $10,711,000  and operating  activities  for the year ended
December 31, 1997 used net cash of $3,982,000.

Seasonality.  In the past, the Registrant has experienced lower sales in certain
calendar  quarters of each year,  although the  Registrant  has not  experienced
fluctuations due to seasonality during the year ended December 31, 1997 and does
not currently  expect  fluctuations  due to  seasonality.  Should the Registrant
begin  large  sales  of a  pharmaceutical  product  whose  sales  are  seasonal,
seasonality of sales may become more significant.

Currency.  A  substantial  amount of the  Registrant's  business is conducted in
Europe and is therefore influenced by the extent to which there are fluctuations
in the dollar's value against other  currencies.  The effect of foreign currency
fluctuations  on long lived  assets for the year ended  December  31, 1997 was a
decrease  of $774,000  and the  cumulative  historical  effect was a decrease of
$1,855,000,  as reflected in the Registrant's Consolidated Balance Sheets in the
"Liabilities  and  Stockholders'   Equity"  section.   Although  exchange  rates
fluctuated  significantly  in recent years, the Registrant does not believe that
the effect of foreign  currency  fluctuation  is  material  to the  Registrant's
results  of  operations  as the  expenses  related  to much of the  Registrant's
foreign  currency  revenues are in the same currency as such revenues.  However,
the carrying value of assets and reported  values can be materially  impacted by
foreign  currency  translation.  Nonetheless,  the  Registrant  does not plan to
modify its business  practices.  The Registrant  relies primarily upon financing
activities to fund the operations of the Registrant in the United States. In the
event that the  Registrant is required to fund United States  operations or cash
needs with funds  generated in Spain,  currency rate  fluctuations in the future
could have a significant impact on the Registrant. However, at the present time,
the Registrant does not anticipate  altering its business plans and practices to
compensate for future currency fluctuations.

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



                                       24
<PAGE>




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

In order to generate working capital  necessary to sustain the Registrant's long
range  strategic  objectives,  the Registrant  temporarily  lowered the exercise
price on its Class A and Class B redeemable  warrants.  Effective  September 16,
1997, the exercise price of the Class A warrants was lowered by $1.00,  to $2.00
each.  This  exercise  period at the reduced  price expired on December 5, 1997.
After this date,  the Class A warrants  reverted  back to the original  exercise
price of $3.00 per share until their expiration on February 14, 1999.

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

The exercise  price of the  Registrant's  Class B  redeemable  warrants was also
temporarily lowered by $2.00, to $3.00 as to each two Class B warrants effective
September  16, 1997  through  January 13,  1998.  After  January 13,  1998,  the
warrants  reverted back to the original  exercise price of $5.00 per share until
their expiration on February 14, 2001.

Given the Registrant's  current  liquidity and significant  cash  balances   and
considering its future  strategic  plans, the Registrant  should have sufficient
liquidity   to  fund  operations  and   further  its  strategic  objectives. The
Registrant,  however, continues to explore alternative sources for financing its
business.  In  appropriate  situations,  that will be strategically  determined,
the Registrant may seek  financial  assistance  from  other  sources,  including
contribution  by others to joint ventures and other collaborative  or  licensing
arrangements   for  the   development,   testing,  manufacturing  and  marketing
of products under  development  and the sale of certain of the assets of, or its
subsidiary.  As discussed previously, the Registrant has entered  into  a letter
of intent to acquire  pharmaceutical  products  and a manufacturing  facility in
the United States.  The  Registrant must finance the acquisition of these assets
and  is  exploring  various  options intended  to  secure  such  financing.  The
Registrant has  amended its letter of intent  to  take  into  consideration  the
possible transfer of control of its Spanish subsidiary to Schwarz Pharma, Inc.

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

The statements contained in or incorporated by reference into this Annual Report
on Form 10-K which are not historical facts contain forward looking  information
with respect to plans, projections or future performance of the Registrant,  the
occurrence of which involve certain risks and uncertainties that could cause the
Registrant's  actual  results to differ  materially  from those  expected by the
Registrant,  including





                                       25
<PAGE>




the  history of  operating  losses;  uncertainty  of future  financial  results;
possible  negative cash flow from  operating  activities;  additional  financing
requirements; no assurance of successful and timely development of new products;
risks  inherent  in   pharmaceutical   development;   dependence  on  regulatory
approvals;    uncertainty   of   pharmaceutical    pricing   or   profitability;
unpredictability of patent protection;  rapid technological change; competition;
and other uncertainties  detailed in the Registrant's  Registration Statement on
Form S-3 (SEC File No.  333-28593)  declared  effective  by the  Securities  and
Exchange Commission on June 10, 1997 and any amendments thereto.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Item 14 of this Form 10-K.

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

Not applicable.












                                       26
<PAGE>







                                    Part III


ITEM 10.    DIRECTORS,  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF
            THE REGISTRANT

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

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

James R. Murphy        48       Chairman, President,          III         1993
                                Chief Executive Officer
                                and Director

Robert M. Stote        58       Senior Vice President,        III         1993
                                Chief Operating Officer
                                and Director

Michael D. Price       40       Vice President,                I          1995
                                Chief Financial Officer,
                                Treasurer,  Secretary and
                                Director

Randolph W. Arnegger   54       Director                       II         1994

Charles L. Bolling     74       Director                       II         1991

Michael McGovern       54       Director                       *          1997


*     Indicates  that person  named was  appointed  to the Board of Directors to
      serve until the next Annual Meeting of Stockholders.

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


                                       27
<PAGE>




Robert M. Stote,  M.D. became Senior Vice President and Chief Science Officer of
the  Registrant  in March 1992 and was named  Chief  Operating  Officer in March
1998.  Prior to joining the  Registrant,  Dr. Stote was employed for 20 years by
Smith Kline  Beecham  Corporation  serving as Senior Vice  President and Medical
Director,   Worldwide   Medical   Affairs   from   1989  to   1992,   and   Vice
President-Clinical  Pharmacology-Worldwide from 1987 to 1989. From 1984 to 1987,
Dr. Stote was Vice President-Phase I Clinical Research, North America. Dr. Stote
was Chief of Nephrology at Presbyterian Medical Center of Philadelphia from 1972
to  1989  and  was  Clinical   Professor  of  Medicine  at  the   University  of
Pennsylvania. Dr. Stote serves as a Director of Collaborative Research, Inc. Dr.
Stote received a B.S. in Pharmacy from the Albany  College of Pharmacy,  an M.D.
from Albany  Medical  College and is Board  Certified  in Internal  Medicine and
Nephrology.  He was a Fellow in  Nephrology  and  Internal  Medicine at the Mayo
Clinic and is currently a Fellow of the American College of Physicians.

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

Randolph W.  Arnegger is the  President of Targeted  Marketing,  a developer and
producer of continuing  medical education  programs,  medically  oriented direct
mail  programs  and medical  convention  programs,  a position he has held since
1986.  Prior thereto,  Mr. Arnegger served as Vice President of Account Services
for Curtin &  Pease/Peneco,  a national direct mail firm, and Vice President for
Pro Clinica, a medical advertising agency in New York.

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

Michael  McGovern  serves as  President of McGovern  Enterprises,  a provider of
corporate  and  financial  consulting  services,  which he founded in 1975.  Mr.
McGovern is  Chairman of the Board of  Specialty  Surgicenters,  Inc.,  and is a
Director on the corporate boards of North Fulton Bancshares,  Suburban Lodges of
America Inc., Career Publishing Network,  L.L.C., Training Solutions Interactive
Inc., and the Reynolds  Development  Company.  Mr. McGovern  received a B.S. and
M.S. in accounting  and his Juris Doctor from the  University  of Illinois.  Mr.
McGovern  is a  Certified  Public  Accountant  and a member  of the State Bar of
Georgia and the American Bar Association.




                                       28
<PAGE>



The Registrant is currently in arrears on four annual  dividend  payments on its
Series A Preferred Stock and,  therefore,  the holders of the Series A Preferred
Stock  have the  right,  as a class,  to elect  two  additional  members  of the
Registrant's  Board of  Directors.  As of the date hereof,  the holders have not
exercised such right.

The Registrant's  Articles of Incorporation and By-Laws provide for a classified
Board of Directors. The Board is divided into three classes, designated Class I,
Class II and Class  III.  The  directors  included  in Class  II above  and  the
director designated with * will hold  office until the 1998  Annual  Meeting  of
Stockholders.  The directors included in Class III above  will hold office until
the 1999 Annual Meeting of  Stockholders.  The  director  included  in  Class  I
above will hold office  until the 2000 Annual Meeting of Stockholders.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities  Exchange Act of 1934, as amended,  requires the
Registrant's executive officers and directors, and any persons who own more than
10% of any class of the Registrant's equity securities,  to file certain reports
relating to their  ownership of such  securities  and changes in such  ownership
with the Securities and Exchange  Commission and the American Stock Exchange and
to furnish the  Registrant  with  copies of such  reports.  To the  Registrant's
knowledge  during the year ended  December  31, 1997,  all Section  16(a) filing
requirements have been satisfied.

ITEM 11.    EXECUTIVE COMPENSATION

The  information  called for by this item is  incorporated  by  reference to the
Registrant's   definitive  Proxy  Statement  for  the  1998  Annual  Meeting  of
Stockholders to be filed pursuant to Regulation 14A.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  called for by this item is  incorporated  by  reference to the
Registrant's   definitive  Proxy  Statement  for  the  1998  Annual  Meeting  of
Stockholders to be filed pursuant to Regulation 14A.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  called for by this item is  incorporated  by  reference to the
Registrant's   definitive  Proxy  Statement  for  the  1998  Annual  Meeting  of
Stockholders to be filed pursuant to Regulation 14A.


                                       29
<PAGE>



                                     Part IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

(a)   The following documents are filed as a part of this report:

      (1) Financial Statements:

      Independent Auditors' Report                                   F-1

      Consolidated Balance Sheets as of December 31, 1997 and
      1996                                                           F-2

      Consolidated Statements of Operations for the years
      ended December 31, 1997, 1996 and 1995                         F-3

      Consolidated Statements of Changes in Common
      Stockholders' Equity for the years ended December 31,
      1997, 1996 and 1995                                            F-4

      Consolidated Statements of Cash Flows for the years ended
      December 31, 1997, 1996 and 1995                               F-5 to F-6

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

      (2) Financial Statement Schedule:

      Independent Auditors' Report on Financial Statement Schedule   F-28

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

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


                                       30
<PAGE>




                                  EXHIBIT INDEX





            (3) Exhibits filed as part of this report:

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

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

3.2*        Bylaws of the Registrant, as amended and restated.

4.1         Form of  Subscription  Agreement  between  the  Registrant  and each
            purchaser in connection with the Registrant's  October 1991 sales of
            its  $2.25  Convertible  Exchangeable  Preferred  Shares,  Series A.
            (Reference is made to Exhibit 4.1 to the Registrant's Form 8-K filed
            October 17, 1991,  Commission  File No.  1-10581,  which  exhibit is
            incorporated herein by reference.)

4.2         Indenture  relating to the Registrant's 9% Convertible  Subordinated
            Debentures due 2016 (with the Form of Debenture  attached thereto as
            Exhibit A.)  (Reference  is made to Exhibit 4.2 to the  Registrant's
            Form 8-K filed October 17, 1991, Commission File No. 1-10581,  which
            exhibit is incorporated herein by reference.)

4.3         Specimen   Certificate  of  the   Registrant's   $2.25   Convertible
            Exchangeable  Preferred  Shares,  Series  A.  (Reference  is made to
            Exhibit 4.3 to the  Registrant's  Form 8-K filed  October 17,  1991,
            Commission File No. 1-10581, which exhibit is incorporated herein by
            reference.)

4.4*        Registrant's Amended and Restated 1991 Stock Option Plan.

4.5         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.)

4.6         Subscription  Agreement between the Registrant and Bodel Inc.  dated
            November  23, 1993.  (Reference  is  made  to  Exhibit  4.20  to the
            Registrant's Form 10-K filed December 31, 1993,  Commission File No.
            1-10581, which Exhibit is incorporated herein by reference.)




                                       31
<PAGE>




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

4.7         Warrants  issued  by the  Registrant  to  Grant  Harshbarger,  dated
            November 11, 1993 and November 17, 1993, respectively. (Reference is
            made to Exhibit 4.8 to the  Registrant's  Registration  Statement on
            Form  S-3,   Commission   File  No.   33-69946,   which  exhibit  is
            incorporated herein by reference.)

4.8         Warrants issued by the Registrant to Healthcare Capital Investments,
            Inc.,  dated November 11, 1993 and November 17, 1993,  respectively.
            (Reference is made to Exhibit 4.9 to the  Registrant's  Registration
            Statement on Form S-3,  Commission File No. 33-69946,  which exhibit
            is incorporated herein by reference.)

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

4.10        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.)

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

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

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

10.1        Employment   Agreement  dated  as  of  June  12,  1995  between  the
            Registrant  and James R. Murphy.  (Reference is made to Exhibit 10.1
            to the Registrant's  Registration  Statement on Form S-1, Commission
            File  No.  33-65125,   which  exhibit  is  incorporated   herein  by
            reference.)

10.2        Employment   Agreement  dated  as  of  June  12,  1995  between  the
            Registrant and Robert M. Stote,  M.D.  (Reference is made to Exhibit
            10.2  to  the  Registrant's  Registration  Statement  on  Form  S-1,
            Commission File No. 33-65125,  which exhibit is incorporated  herein
            by reference.)



                                       32
<PAGE>



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

10.3        Employment   Agreement  dated  as  of  June  12,  1995  between  the
            Registrant and Michael D. Price.  (Reference is made to Exhibit 10.3
            to the Registrant's  Registration  Statement on Form S-1, Commission
            File  No.  33-65125,   which  exhibit  is  incorporated   herein  by
            reference.)

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

21.1*       Subsidiaries of the  Registrant.

23.1*       Consent of Deloitte & Touche LLP.

27.1*       Financial Data Schedule.

---------------

*     Filed herewith.

(b)         Reports on Form 8-K filed during the fiscal  quarter ended  December
            31, 1997:

            None.

            Subsequent to December 31, 1997, the Registrant  filed the following
            Reports on Form 8-K:

            None.



                                       33
<PAGE>

                                   SIGNATURES


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


                                         BENTLEY PHARMACEUTICALS, INC.

                                        By:  /s/ James R. Murphy
                                             ----------------------------
                                             James R. Murphy
                                             Chairman, President and
                                             Chief Executive Officer
                                             Date:  March 30, 1998

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

Signature                          Title                              Date

/s/ James R. Murphy            Chairman, President,               March 30, 1998
------------------------       Chief Executive Officer
James R. Murphy                and Director (principal
                               executive officer)


/s/ Robert M. Stote            Senior Vice President,             March 30, 1998
------------------------       Chief Science Officer
Robert M. Stote, M.D.          and Director )


/s/ Michael D. Price           Vice President,                    March 30, 1998
------------------------       Chief Financial Officer
Michael D. Price               Treasurer, Secretary, and
                               Director (principal financial
                               and accounting officer)

/s/ Randolph W. Arnegger       Director                           March 30, 1998
------------------------
Randolph W. Arnegger


/s/ Charles L. Bolling         Director                           March 30, 1998
------------------------
Charles L. Bolling


/s/ Michael McGovern           Director                           March 30, 1998
------------------------
Michael McGovern

<PAGE>


INDEPENDENT AUDITOR'S REPORT


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

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Bentley
Pharmaceuticals,  Inc. and subsidiaries  (the "Company") as of December 31, 1997
and 1996,  and the related  consolidated  statements of  operations,  changes in
common  stockholders'  equity, and cash flows for each of the three years in the
period ended December 31, 1997. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial  position of the Company at December 31, 1997
and 1996,  and the results of its  operations and its cash flows for each of the
three years in the period ended  December 31, 1997 in conformity  with generally
accepted accounting principles.


DELOITTE & TOUCHE LLP

Tampa, Florida
March 27, 1998


                                      F-1


<PAGE>



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

(In thousands, except per share data)                           December 31,
                                                            --------------------
                                                              1997        1996
                                                            --------    --------
<S>                                                         <C>         <C>
ASSETS

Current assets:
 Cash and cash equivalents                                  $ 11,117    $  4,425
 Investments                                                    --           166
 Receivables                                                   2,428       3,632
 Inventories                                                     714         945
 Prepaid expenses and other                                      750         644
                                                            --------    --------
  Total current assets                                        15,009       9,812
                                                            --------    --------
Fixed assets, net                                              2,918       3,544
Drug licenses and related costs, net                             691       1,475
Other non-current assets, net                                  2,425       1,727
                                                            --------    --------
                                                            $ 21,043    $ 16,558
                                                            ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
  Accounts payable                                          $  1,493    $  2,998
  Accrued expenses                                             1,723       1,530
  Short term borrowings                                        1,140       1,014
  Current portion of long term debt                                5           5
                                                            --------    --------
    Total current liabilities                                  4,361       5,547
                                                            --------    --------
Long term debt, net                                            5,329       5,164
                                                            --------    --------
Other non-current liabilities                                    110         349
                                                            --------    --------

Commitments and contingencies

Redeemable preferred stock, $1.00 par value,
     authorized 2,000 shares:
     Series A, issued and outstanding, 60 shares               2,338       2,203
                                                            --------    --------

Common Stockholders' Equity:
 Common stock,  $.02 par value, authorized 35,000 shares,
   issued and outstanding, 8,426 and 3,345 shares                168          67
 Stock  purchase  warrants (to purchase 6,122 and 8,304
   shares of common stock)                                       192         435
Paid-in capital in excess of par value                        81,382      71,146
Stock subscriptions receivable                                 --          (105)
Accumulated deficit                                         (70,982)    (67,167)
Cumulative foreign currency translation adjustment           (1,855)     (1,081)
                                                            --------    --------
                                                               8,905       3,295
                                                            --------    --------
                                                            $ 21,043    $ 16,558
                                                            ========    ========
</TABLE>




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

                                       F-2


<PAGE>




                          BENTLEY PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

(In thousands, except per share data)                    For the Year Ended
                                                            December 31,
                                                  --------------------------------
                                                    1997        1996        1995
                                                  --------    --------    --------
<S>                                               <C>         <C>         <C>
Sales                                             $ 14,902    $ 23,133    $ 31,437
Cost of sales                                        8,010      15,638      25,586
                                                  --------    --------    --------
Gross margin                                         6,892       7,495       5,851

Operating expenses:
 Selling, general and administrative                 7,819       7,923       7,204

 Research and development                              324          29         444
 Depreciation and amortization                         295         502         550
 Provision for goodwill impairment                    --           340        --
                                                  --------    --------    --------
   Total operating expenses                          8,438       8,794       8,198
                                                  --------    --------    --------
 Loss from operations                               (1,546)     (1,299)     (2,347)

Other (income) expenses:
  Interest expense                                   1,086       1,227         563
  Interest income                                     (123)       (103)         (3)
  Loss on disposition of subsidiary                    591        --          --
  Other (income) expense, net                           94          50        (581)
                                                  --------    --------    --------
Loss before income taxes and extraordinary item     (3,194)     (2,473)     (2,326)
Provision for income taxes                             621        --          --
                                                  --------    --------    --------
Loss before extraordinary item                      (3,815)     (2,473)     (2,326)
Extraordinary item-extinguishment of debt             --           446        --
                                                  --------    --------    --------
Net loss                                          ($ 3,815)   ($ 2,919)   ($ 2,326)
                                                  ========    ========    ========
Loss per common share before extraordinary item   ($  0.97)   ($  0.79)   ($  0.83)
Extraordinary item - extinguishment of debt           --         (0.13)       --
                                                  --------    --------    --------
Basic net loss per common share                   ($  0.97)   ($  0.92)   ($  0.83)
                                                  ========    ========    ========
Weighted average common shares outstanding           4,072       3,334       2,999
                                                  ========    ========    ========

</TABLE>

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

                                      F-3
<PAGE>

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

<TABLE>
<CAPTION>
(In thousands, except per share data)
                                                  $.02 Par Value
                                                   Common Stock       Additional                Other
                                                -------------------     Paid-In   Accumulated   Equity
                                                 Shares     Amount      Capital    Deficit   Transactions   Total
                                                --------   --------    --------    --------    --------    --------
<S>                                                <C>     <C>         <C>         <C>         <C>         <C>
Balance at December 31, 1994                       2,977   $     60    $ 69,493    ($61,922)   ($ 2,651)   $  4,980
 Private placements of common stock, net             251          5         465        --          --           470
 Stock subscriptions received                       --         --          --          --           562         562
 Stock subscriptions revaluation/cancellation       --         --          (351)       --           883         532
 Conversion of redeemable preferred stock              3       --           340        --          --           340
 Issuance of stock purchase warrants                --         --          --          --           150         150
 Conversion of stock purchase warrants                90          2         212        --          --           214
 Common stock issued as compensation                   9       --            58        --          --            58
 Miscellaneous                                      --           (1)        (18)       --          --           (19)
 Accrual of dividends - preferred stock             --         --          (152)       --          --          (152)
 Foreign currency translation adjustment            --         --          --          --           507         507
 Net loss                                           --         --          --        (2,326)       --        (2,326)
                                                --------   --------    --------    --------    --------    --------
Balance at December 31, 1995                       3,330         66      70,047     (64,248)       (549)      5,316
 Public offering of units, net                      --         --         1,184        --           285       1,469
 Common stock issued as compensation                  15          1          50        --          --            51
 Accrual of dividends-preferred stock               --         --          (135)       --          --          (135)
 Foreign currency translation adjustment            --         --          --          --          (487)       (487)
 Net loss                                           --         --          --        (2,919)       --        (2,919)
                                                --------   --------    --------    --------    --------    --------

Balance at December 31, 1996                       3,345         67      71,146     (67,167)       (751)      3,295
 Exercise of Class A Redeemable Warrants           4,899         98       9,902        --          (202)      9,798
 Exercise of other stock options/warrants            172          3         570        --          (150)        423
 Exercise of underwriter warrants                   --         --            30        --             7          37
 Conversion of Debentures                              9       --            23        --          --            23
 Issuance of stock options/warrants                 --         --           (51)       --           102          51
 Common stock issued as compensation                   1       --             2        --          --             2
 Accrual of dividends-preferred stock               --         --          (135)       --          --          (135)
 Stock subscription receivable cancellation         --         --          (105)       --           105          --
 Foreign currency translation adjustment            --         --            --        --          (774)       (774)
 Net loss                                           --         --            --      (3,815)       --        (3,815)
                                                --------   --------    --------    --------    --------     --------

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

</TABLE>




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

                                       F-4
<PAGE>


                          BENTLEY PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                            For the Year Ended
                                                                                December 31,
                                                                        -----------------------------
(In thousands)                                                           1997       1996       1995
                                                                        -------    -------    -------
<S>                                                                     <C>        <C>        <C>
Cash flows from operating activities:
 Loss before extraordinary item                                         ($3,815)   ($2,473)   ($2,326)
 Adjustments to reconcile loss before extraordinary item to
  net cash used in operating activities:
  Depreciation and amortization                                             295        502        550
  Loss on disposition of subsidiary                                         591       --         --
  Extraordinary item-extinguishment of debt                                --         (446)      --
  Provision for goodwill impairment                                        --          340       --
  Loss on disposal of fixed assets                                         --           79       --
  Gain on sale of Belmacina(R)                                             --         --         (380)
  Cancellation of stock subscription receivable                            --         --          532
  Other non-cash items                                                      267        468        610
(Increase) decrease in assets and increase (decrease) in liabilities:
   Receivables                                                             (137)      2,991        150
   Inventories                                                             (229)        43       (297)
   Prepaid expenses and other current assets                               (340)      (272)      (270)
   Other assets                                                            (649)       (93)      (160)
   Accounts payable and accrued expenses                                    257       (716)    (2,246)
   Other liabilities                                                       (222)      (496)       500
                                                                        -------    -------    -------
    Net cash used in operating activities                                (3,982)       (73)    (3,337)
                                                                        -------    -------    -------
Cash flows from investing activities:
 Proceeds from sale of investments                                          166        161        214
 Purchase of investments                                                     --       (166)      (147)
 Net proceeds from disposition of subsidiary                                378         --         --
 Additions to fixed assets                                                 (108)      (170)      (603)
 Acquisition of Spanish drug license                                        (40)        --       (156)
 Proceeds from sale of Belmacina(R)                                          --         --      1,140
 Investment in partnership                                                   --         --        (13)
                                                                        -------    -------    -------

    Net cash provided by (used in)investing activities                     396       (175)       435
                                                                        -------    -------    -------
</TABLE>



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

                                       F-5

<PAGE>

                          BENTLEY PHARMACEUTICALS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Concluded)
<TABLE>
<CAPTION>

(In thousands)                                                       For the Year Ended
                                                                         December 31,
                                                               --------------------------------
                                                                 1997        1996        1995
                                                               --------    --------    --------
<S>                                                            <C>         <C>         <C>
Cash flows from financing activities:
Net increase (decrease) in short term borrowings               $    363    ($   120)   $    533
Proceeds from exercise of Class A warrants, net                   9,798        --          --
Proceeds from exercise of other options/warrants, net               423        --           214
Proceeds from exercise of underwriter warrants, net                 132        --          --
Proceeds from public offering of units                             --         6,900        --
Proceeds from private placements:
 Common stock                                                      --          --           544
 Promissory notes                                                  --          --         1,226
Offering costs                                                     --        (1,275)       (187)
Collection of stock subscription receivable, net                   --          --           506
Repayments of long term debt                                       --        (1,770)        (59)
Payments on capital leases                                           (5)        (28)        (33)
                                                               --------    --------    --------

    Net cash provided by financing activities                    10,711       3,707       2,744
                                                               --------    --------    --------

Effect of exchange rate changes on cash                            (433)       (154)        (43)
                                                               --------    --------    --------

Net increase (decrease) in cash and cash equivalents              6,692       3,305        (201)

Cash and cash equivalents at beginning of period                  4,425       1,120       1,321
                                                               --------    --------    --------

Cash and cash equivalents at end of period                     $ 11,117    $  4,425    $  1,120
                                                               ========    ========    ========


SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION
 The Company paid cash during the period for (in thousands):

 Interest                                                      $    965    $    907    $    222
                                                               ========    ========    ========
 Taxes                                                         $     12        --          --
                                                               ========    ========    ========


SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
The Company has issued Common Stock
in exchange for services as follows (in thousands):

 Shares issued                                                        1          15           9
                                                               ========    ========    ========
 Amount
                                                               $      2    $     51    $     58
                                                               ========    ========    ========

In 1996, the Company acquired a drug license in Spain, assuming approximately $477,000 in liabilities therefore.



</TABLE>

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


                                       F-6

<PAGE>




                          BENTLEY PHARMACEUTICALS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1--HISTORY AND OPERATIONS

Bentley Pharmaceuticals, Inc. (the "Company") is an international pharmaceutical
and health care company engaged  primarily in the  manufacturing,  marketing and
distribution of pharmaceutical  products in Spain, with limited  distribution of
health care products in the United States.  In Spain,  the Company  develops and
registers late stage products,  and manufactures,  packages and distributes both
its own and other companies'  pharmaceutical products. In the United States, the
Company markets  disposable linens,  which are manufactured  under contract,  to
emergency health services.

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

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

The Company has entered into a negotiated  letter of intent to purchase domestic
and  international  rights to a portfolio of branded drugs,  with an emphasis in
gastrointestinal  products,  and a  manufacturing  facility  located  in Mequon,
Wisconsin,  from Schwarz Pharma, Inc. The letter of intent, dated July 21, 1997,
was recently amended to take into  consideration the posible transfer of control
of the Company's Spanish subsidiary,  Laboratorios Belmac, to Schwarz Pharma and
will serve as the basis for  negotiations  for the  definitive  agreements.  The
proposed transaction is subject to completion of due diligence, the execution of
such definitive  agreements and approval of the  Registrant's  stockholders  and
Debenture  holders.  Upon execution of the letter of intent,  the Registrant was
required to remit a non-refundable deposit in the amount of $100,000.

In order to fund operations,  the Company  primarily has issued Common Stock and
other  securities.  In February 1996, the Company completed a public offering of
its securities,  which  generated net proceeds of  approximately  $5,700,000,  a
portion  of which  was  used to  retire  $1,770,000  principal  balance  of debt
incurred in previous private placements (see Notes 8 and 14). The balance of the
net  proceeds  were  used  for  working  capital  needs,  limited  research  and
development  activities,  and search for possible  acquisitions of complementary
products,  technologies  and/or  businesses.  During the year ended December 31,
1997,  the Company  temporarily  lowered the  exercise  price on its Class A and
Class  B  redeemable  warrants.  Approximately  70% of the  outstanding  Class A
warrants  (approximately  4,900,000 Class A warrants) were exercised during this
period, which generated approximately $9,800,000 in proceeds to the Company. The
exercise of the Class A warrants resulted in issuance of approximately 4,900,000
shares of common stock and 4,900,000 Class B warrants. The exercise price of the
Company's Class B warrants was also  temporarily  lowered;  however,  no Class B
warrants  were  exercised  during 1997.  The  proceeds  from the Class A warrant
exercises are being used for working capital needs.  Given the Company's current
liquidity and significant  cash balances and  considering  its future  strategic
plans,  management  believes  that  it now  has  sufficient  resources  to  fund
operations and further its strategic objectives.


                                      F-7

<PAGE>



The  strategic  focus of the Company has shifted in response to the evolution of
the global  health care  environment.  The Company has moved from a research and
development-oriented  pharmaceutical company, which required developing products
from the chemistry laboratory through marketing, to a company seeking to acquire
late-stage  development  compounds  that  can be  marketed  within  one  year or
currently  marketed  products.  As a result of this transition,  the Company has
decreased its research and development  expenses  dramatically over the past few
years as well as  implemented  cost-cutting  measures  throughout the Company's'
operations.  The Company  emphasizes  product  distribution in Spain,  strategic
alliances and product acquisitions, which management of the Company expects will
move the Company closer to profitability in the near future.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original  maturities of
three months or less when purchased to be cash  equivalents  for purposes of the
Consolidated  Balance  Sheets and the  Consolidated  Statements  of Cash  Flows.
Investments in securities  which do not meet the definition of cash  equivalents
are classified as  investments  available for sale in the  Consolidated  Balance
Sheets.

INVESTMENTS AVAILABLE FOR SALE

Investments  available for sale are reported at approximate  market value and at
December  31,  1996  were  comprised  of  restricted  Certificates  of  Deposit,
collateralizing Letters of Credit, which the Company redeemed in June 1997.


                                      F-8

<PAGE>



INVENTORIES

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

FIXED ASSETS

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

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

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

DRUG LICENSES AND RELATED COSTS

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

INVESTMENT IN PARTNERSHIP

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

RESEARCH AND DEVELOPMENT

Research and development costs are expensed when incurred.


                                      F-9

<PAGE>



USES OF ESTIMATES

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

ORIGINAL ISSUE DISCOUNT/DEBT ISSUANCE COSTS

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

AMORTIZATION OF GOODWILL

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

During the year ended  December 31, 1996, as a result of estimating the expected
net  proceeds  from  the then  pending  proposed  sale of  Chimos,  the  Company
reviewed,  for  impairment,  the  recoverable  value of the  carrying  amount of
long-lived  assets and  intangibles.  Based upon this review,  the Company fully
reserved  the  remaining  unamortized  goodwill of  approximately  $340,000,  at
December 31, 1996. Goodwill amortization  expense,  excluding the 1996 provision
for  impairment,  for each of the years  ended  December  31,  1996 and 1995 was
$38,000. There was no goodwill amortization for the year ended December 31, 1997
(see Note 13).

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial  Accounting  Standards  No. 107  "Disclosures  about Fair
Value of Financial  Instruments" (FAS 107) requires  disclosure of the estimated
fair values of certain financial  instruments.  The estimated fair value amounts
have been determined  using available  market  information or other  appropriate
valuation  methodologies  that  require  considerable  judgment in  interpreting
market data and  developing  estimates.  Accordingly,  the  estimates  presented
herein are not  necessarily  indicative  of the amounts  that the Company  could
realize in a current market exchange.  The use of different  market  assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts. Long-term debt is estimated to have a fair value of approximately
$9,432,000  as of December  31, 1997  (based upon market  price on December  31,
1997).  The carrying amount of other  financial  instruments  approximate  their
estimated fair values.




                                      F-10


<PAGE>




The fair value information presented herein is based on information available to
management  as of December 31,  1997.  Although  management  is not aware of any
factors that would significantly  affect the estimated fair value amounts,  such
amounts have not been  comprehensively  revalued for purposes of these financial
statements  since that date and,  therefore the current  estimates of fair value
may differ significantly from the amounts presented herein.

STOCK-BASED COMPENSATION PLANS

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

REVENUE RECOGNITION

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

INCOME TAXES

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

BASIC NET LOSS PER COMMON SHARE

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

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

The Company effected a one-for-ten reverse split of its Common Stock on July 25,
1995 as a result of an  amendment  to its  Articles of  Incorporation  which was
approved by the stockholders at the Company's Annual Stockholders'  Meeting held
on June 9, 1995.  All  information  with respect to



                                      F-11


<PAGE>






per share data and number of common  shares has been  retroactively  adjusted to
give effect to the reverse stock split.

COMPREHENSIVE INCOME

Statement of Financial  Accounting  Standards No. 130  "Reporting  Comprehensive
Income"  (FAS 130) was issued in June 1997 and requires  businesses  to disclose
comprehensive income and its components in their financial  statements.  FAS 130
is  effective  for fiscal  years  beginning  after  December  15,  1997,  and is
applicable  to  interim  periods.  Had the  Company  adopted  FAS  130 in  1997,
comprehensive income (loss) would have been ($4,589,000). The difference between
net loss as reported  and  comprehensive loss is the effect of foreign  currency
translation losses totaling $774,000.

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

Statement of Financial Accounting  Standards No. 131 "Disclosures About Segments
of an Enterprise and Related  Information" (FAS 131) was issued in June 1997 and
redefines  how  operating  segments are  determined  and requires  disclosure of
certain  financial  and  descriptive  information  about a  company's  operating
segments.  FAS 131 is effective for the Company beginning  January 1, 1998.  The
statement is not expected to materially  affect  the  results of  operations  or
financial position of the Company.

NOTE 3--RECEIVABLES

Receivables consist of the following (In Thousands):


                                                              December 31,
                                                         ----------------------
                                                           1997           1996
                                                         -------        -------
Trade receivables                                        $ 2,129        $ 3,529
Other (Note 13)                                              358            129
                                                         -------        -------
                                                           2,487          3,658
Less-allowance for doubtful accounts                        (59)           (26)
                                                         -------        -------
                                                         $ 2,428        $ 3,632
                                                         =======        =======


                                      F-12

<PAGE>




NOTE 4--INVENTORIES

Inventories consist of the following (In Thousands):


                                                               December 31,
                                                         ----------------------
                                                           1997           1996
                                                         -------        -------
Raw materials                                            $   338        $   515
Finished goods                                               501          1,257
                                                         -------        -------

                                                             839          1,772
Less allowance for slow-moving inventory                    (125)          (827)
                                                         -------        -------
                                                         $   714        $   945
                                                         =======        =======




NOTE 5--FIXED ASSETS

Fixed assets consist of the following (In Thousands):

                                                             December 31,
                                                       ------------------------
                                                         1997             1996
                                                       -------          -------
Land                                                   $   967          $ 1,138
Buildings                                                2,329            2,673
Equipment                                                  430              828
Furniture and fixtures                                     435              501
Leasehold improvements                                      92              117
Equipment under capital lease                               27               27
                                                       -------          -------
                                                         4,280            5,284
Less-accumulated depreciation                           (1,362)          (1,740)
                                                       -------          -------
                                                       $ 2,918          $ 3,544
                                                       =======          =======

Depreciation  expense was  $185,000,  $345,000  and $424,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.



                                      F-13


<PAGE>




NOTE 6--DRUG LICENSES AND RELATED COSTS, NET

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

                                                             December 31,
                                                             ------------
                                                         1997             1996
                                                       -------          -------
Drug licenses and related costs                        $ 1,219          $ 1,972
Less-accumulated amortization                             (528)            (497)
                                                       -------          -------
                                                       $   691          $ 1,475
                                                       =======          =======


In September  1992,  the Company,  through its Spanish  subsidiary  Laboratorios
Belmac,  acquired  the Spanish  license and product  rights to  Belmacina(R),  a
ciprofloxacin  antibiotic,  for  approximately  $577,000.  The Company  sold its
Spanish  license and product rights to  Belmacina(R)  in 1994 for  approximately
$1,556,000 and sold the related  trademark for  approximately  $380,000 in 1995.
The Company received  approximately $651,000 in cash in 1994, net of transaction
costs and a receivable  of  approximately  $1,140,000,  which  included  amounts
related  to the  sale of the  trademark.  The  gain on sale of the  license  and
product rights of approximately  $884,000 was included in Other  income/expense,
net for the year ended December 31, 1994 and the gain on the sale of the related
trademark  was recorded as a receivable  and as deferred  revenue as of December
31, 1994. The Company  recognized the gain on the sale of the related  trademark
upon the transfer of the trademark to the buyer in 1995.

The Company owns all rights, title and interest to Alphanon(R),  a camphor based
anti-hemorrhoidal  drug. In connection with the acquisition of Alphanon(R),  the
Company  agreed to pay for the longer of fifteen years from the first  marketing
of  Alphanon(R)  in each  country or the life of an  Alphanon(R)  patent in each
country,  a royalty fee of 5% of the gross profit from the  manufacture and sale
of the product and 5% of the net royalty  payments  received  from any licensing
agreements  of the product.  Although the Company owns rights to Alphanon(R), it
has determined  that  it  will  not attempt  to further develop this product nor
commercialize it without a collaborative partner.

Amortization  expense for drug licenses  and  related  costs  was  approximately
$110,000,  $119,000  and  $88,000  for  the  years ended December 31, 1997, 1996
and 1995, respectively.




                                      F-14

<PAGE>






NOTE 7--ACCRUED EXPENSES

Accrued expenses consist of the following (In Thousands):

                                                             December 31,
                                                             ------------
                                                        1997               1996
                                                       ------             ------
Accrued expenses                                       $  924             $1,247
Income taxes payable                                      608                 --
Accrued payroll                                           191                283
                                                       ------             ------
                                                       $1,723             $1,530
                                                       ======             ======

NOTE 8--DEBT

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

                                                                  December 31,
                                                                  ------------
                                                                 1997      1996
                                                                ------    ------
Trade receivables discounted (with a Spanish financial
institution), with recourse, effective interest rate
on the note is 6.5% and 11.6%, respectively                    $1,036    $  804

Revolving line of credit (with a Spanish financial
institution), interest rate 7.5% and 8.5% respectively            104        154

Other                                                             --          56
                                                                ------    ------
    Total short term borrowings                                 $1,140    $1,014
                                                                ======    ======



                                      F-15


<PAGE>




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

                                                                December 31,
                                                                ------------
                                                              1997        1996
                                                            -------     -------
Debentures, maturing February 13, 2006, stated
rate of interest 12% (net of $1,670 and $1,753
discount, respectively)                                      $ 5,317     $ 5,147
                                                            -------     -------
Capitalized lease obligations, relating to various
equipment used by the Company                                    17          22
                                                            -------     -------
                                                              5,334       5,169
Less current portion                                             (5)         (5)
                                                            -------     -------
     Total long term debt                                   $ 5,329     $ 5,164
                                                            =======     =======

The weighted average stated interest  rate on short-term borrowings  outstanding
at December 31, 1997 and 1996 was 6.6% and 11.7%, respectively.

The Company has  $722,000 of  available  revolving  lines of credit with Spanish
financial institutions.  At December 31, 1997, advances outstanding under one of
the lines of credit was  approximately  $104,000.  The interest rate at December
31, 1997 was 7.5% and interest is payable quarterly.

In February 1996,  the Company  completed a Public  Offering of its  securities,
whereby  an  aggregate  of 6,900  Units were sold at a price of $1,000 per Unit.
Each Unit  consisted  of  One  Thousand Dollars ($1,000)  Principal  Amount  12%
Convertible  Senior  Subordinated  Debenture  due February 13,  2006  and  1,000
Class A Redeemable  Warrants, each to purchase one share of Common Stock and one
Class B Redeemable Warrant. Two Class B Redeemable Warrants  entitle a holder to
purchase one share of Common  Stock.  Interest  on  the  Debentures  is  payable
quarterly.

Gross and net proceeds (after deducting  underwriting  commissions and the other
expenses  of  the  offering),  were  approximately  $6,900,000  and  $5,700,000,
respectively.  Approximately  $1,770,000 of the net proceeds were used to retire
the principal balance of debt incurred in 1995 private placements (See Note 14).
The balance of the net proceeds, approximately $4,000,000, was  used for working
capital  needs,  limited  research and  development  activities,  and search for
possible acquistions of complementary products, technologies and/or businesses.

On May 29, 1996, the  Debentures  and Class A Redeemable  Warrants began trading
separately.  The  characteristics  of the  Debentures  and  Class  A  Redeemable
Warrants are consistent  with their  description as components of the Units.

Of the Unit purchase  price of $1,000,  for financial  reporting  purposes,  the
consideration  allocated to the Debenture was $722, to the  conversion  discount
feature of the  Debenture  was $224 and to


                                      F-16

<PAGE>




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

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


NOTE 9--REDEEMABLE PREFERRED STOCK

During  1991,  the  Company  issued  290,000  shares  of $1 par  value  Series A
Convertible  Exchangeable  Preferred Stock (the "Series A Preferred  Stock") and
340,000 shares of $1 par value Series B Convertible Exchangeable Preferred Stock
(the "Series B Preferred  Stock") at $25 per share. The issuance of these shares
provided aggregate  proceeds to the Company of $15,750,000.  Since the Preferred
Stock meets the definition of Mandatorily  Redeemable  Preferred  Stock,  it has
been excluded from the Common  Stockholders'  Equity section of the Consolidated
Balance  Sheets.  As of  December  31,  1997 and 1996,  230,000  of the Series A
Preferred  Stock had been  converted  into 51,200 shares of Common Stock and all
340,000  shares of the Series B Preferred  Stock had been  converted into 56,100
shares of Common Stock.



                                      F-17

<PAGE>




The  dividend  payment date for Series A Preferred   Stock  is  October 15.  The
Series A Preferred  Stock has a  liquidation  preference  equal  to  $25.00  per
share,  plus accrued and unpaid dividends up to the liquidation date. The Series
A Preferred Stock is redeemable for  cash at  the  option of  the  Company.  The
Series A Preferred Stock is also redeemable for cash at the option of the holder
upon certain  major  stock  acquisitions  or  business  combinations  at  $25.00
per share,  plus accrued and unpaid dividends through the redemption  dates. The
holders of  Preferred  Stock  have  no  voting  rights  except  as  required  by
applicable  law  and   except  that   if  the  equivalent  of  two  full  annual
cash  dividends  shall be  accrued  and  unpaid,  the  holders  of the  Series A
Preferred  Stock  shall  have the  right,  as a class,  to elect two  additional
members of the Company's Board of Directors.  As of the date hereof, the holders
of the Series A  Preferred  Stock have not  exercised  their right to elect such
directors.

The Series A Preferred Stock has been exchangeable in whole, but not in part, at
the option of the Company on any dividend  payment date  since October 15, 1993,
for 9% Convertible Subordinated Debentures of the Company due  2016.  Holders of
Series A Preferred Stock will be entitled to $25 principal  amount of Debentures
for each share of Series A  Preferred  Stock.  The Series A  Preferred  Stock is
recorded  at  redemption  value,  which is  $25.00  per  share  plus  cumulative
dividends of 9% per annum. The following table summarizes activity of the Series
A Preferred Stock (In Thousands):

                                                                Series A
                                                                --------
                                                          Shares          Amount
                                                          ------          ------
Balance at December 31, 1995                                  60          $2,068
     Accrual of 9% dividends                                --               135
                                                          ------          ------
Balance at December 31, 1996                                  60           2,203
     Accrual of 9% dividends                                --               135
                                                          ------          ------
Balance at December 31, 1997                                  60          $2,338
                                                          ======          ======


                                      F-18

<PAGE>



NOTE 10--COMMON STOCKHOLDERS' EQUITY

At December 31, 1997 the Company had the  following  Common  Stock  reserved for
issuances under various plans and agreements (In Thousands):

                                                       Common Shares
For exercise of stock purchase warrants                    7,407
For conversion of debentures                               2,979
For exercise of stock options                              2,091
For other                                                     93
                                                          ------
                                                          12,570
                                                          ======

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.  Under the
terms of the Series A Preferred  Stock,  the Company is  restricted  from paying
dividends  on its  Common  Stock so long as there  are  arrearages  on  dividend
payments on the Series A Preferred Stock. There currently are such arrearages.

STOCK PURCHASE WARRANTS

At December  31,  1997,  stock  purchase  warrants to purchase an  aggregate  of
6,122,000  shares of Common Stock were  outstanding,  which were  exercisable at
prices ranging from $2.50 to $24.60 per share, of which 787,000 warrants have an
exercise price of $2.50 per share,  2,571,000 warrants have an exercise price of
$3.00 per share and warrants to purchase 2,450,000 shares have an exercise price
of $5.00 per share. The warrants expire through  December 2004.  During the year
ended December 31, 1997, the Company issued stock purchase  warrants to purchase
an aggregate of 2,999,000  shares of the Company's Common Stock (including Class
B warrants to purchase approximately  2,450,000 shares, which became outstanding
upon  exercise of the Class A  warrants),  all of which were granted at exercise
prices  which were equal to or greater  than the market  price of the  Company's
Common Stock on the dates of grant. During the year ended December 31, 1997, the
Company  temporarily  lowered  the  exercise  price on its  Class A and  Class B
redeemable  warrants.  Approximately  70% of all outstanding  Class A redeemable
warrants  (approximately  4,900,000 Class A warrants) were exercised during this
period which generated approximately  $9,800,000 in proceeds to the Company. The
exercise of the Class A warrants resulted in issuance of approximately 4,900,000
shares  of  common  stock.  The  exercise  price  of the  Registrant's  Class  B
redeemable warrants was also temporarily  lowered;  however, no Class B warrants
were exercised during 1997.  Additionally,  162,000 stock purchase warrants were
converted  into shares of the Company's  Common Stock,  yielding net proceeds of
$405,000  to the  Company  during  1997.  Also during  1997,  110  underwriters'
warrants were exercised,  providing  proceeds of $132,000 to the Company,  which
resulted in the  issuance of 110 $1,000 face value 12%  Debentures  due February
13, 2006 and 110,000 Class A warrants.  Such warrants were exercised during 1997
and are included in the 4,900,000  discussed  above. The proceeds were allocated
between the Debentures,  the Class A Warrants and the conversion  feature of the
Debentures  based upon the relative fair values of each on the date of issuance.
During the year  ended  December  31,  1996,  no stock  purchase  warrants  were
converted  into  shares of the  Company's  Common  Stock.  During the year ended
December 31, 1995, stock purchase  warrants were converted into 90,000 shares of
the Company's Common Stock at $2.50 per share. Such

                                      F-19
<PAGE>



conversions  yielded  net  proceeds of $214,000 to the Company in the year ended
December 31, 1995.

In addition, the Company has granted warrants outside of the Plans in connection
with private  placements  of its  securities  and as  consideration  for various
services.  These  warrants  have been granted for terms not  exceeding ten years
from the date of grant.  The table below  summarizes  warrant  activity  for the
years ended December 31, 1995, 1996 and 1997.

(In thousands except per share data)

                                                   Number of          Price
                                                 Common Shares      Per Share
                                                 -------------      ---------
Outstanding at December 31, 1994                        479                 --

 Granted                                                176        $2.50-$7.50

 Exercised                                              (90)       $        2.50

 Canceled                                               (18)       $5.00-$20.00
                                                   --------

Outstanding at December 31, 1995                        547

 Granted                                              7,845        $2.50-$3.00

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

Outstanding at December 31, 1996                      8,304

 Granted                                              2,999        $2.50-$5.00

 Exercised                                           (5,061)       $2.00-$2.50

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

Outstanding at December 31, 1997                      6,122
                                                   ========

COMMON STOCK TRANSACTIONS

During the year ended  December  31,  1997,  the  Company  awarded 600 shares of
Common  Stock to outside  Directors  as  compensation.  The Company  also issued
approximately  4,900,000  shares  of Common Stock as a result of the exercise of
approximately 4,900,000 Class A warrants.  Also,  172,000 shares of Common Stock
were issued in connection with the exercise of other stock options/warrants  and
9,000 shares of Common Stock were issued as the result  of  conversion of 23  of
the Company's $1,000 face value 12%  Debentures due February

                                      F-20


<PAGE>




13, 2006.

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

During the year ended  December 31, 1995,  the Company  issued 251,000 shares of
Common  Stock and 12%  promissory  notes in the  aggregate  principal  amount of
$1,770,000  in  private  placement  transactions,  with  total net  proceeds  of
$1,583,000,  which were  allocated  between the notes and the Common Stock based
upon the  relative  fair  values of each on the dates of  issuance.  Also 10,000
shares of the  Company's  Series A  Preferred  Stock were  converted  into 3,100
shares of Common Stock at the conversion price of $110.00 per share. The Company
also  issued 800 shares of Common  Stock to outside  Directors  as  compensation
during the year ended December 31, 1995.

STOCK SUBSCRIPTIONS RECEIVABLE

Stock  subscriptions  receivable  at December 31, 1996 relate to a  subscription
agreement whereby the subscriber had entered into a subscription  agreement with
the Company and delivered  promissory notes for the purchase of the shares.  The
shares were issued in the name of the individual but were pledged to the Company
to secure  payment for such shares under the promissory  notes.  The shares were
released  from  the  pledge  as they  were  paid  for.  Under  the  terms of the
subscription  agreement and the related  promissory note, the purchase price for
the stock was set at the closing  price for the  Company's  Common  Stock on the
date that the subscriber made the payment for shares to be delivered and payment
was made to the  Company  under the  promissory  notes.  The stock  subscription
receivable  and additional  paid in capital were reduced by $351,000  during the
year ended  December  31,  1995 to reflect  the  current  trading  price for the
Company's Common Stock. The stock subscription receivable and additional paid in
capital were further  reduced by $105,000 in 1997, upon the  discontinuation  of
this arrangement.

STOCK OPTION PLANS

The Company has in effect Stock Option  Plans (the  "Plans"),  pursuant to which
directors,  officers,  and employees of the Company who contribute materially to
the  success of the Company  are  eligible to receive  grants of options for the
Company's  Common Stock.  An aggregate of 2,091,000  shares of Common Stock have
been reserved for issuance  under the Plans,  of which  241,000 are  outstanding
under the 1991 and 1994 Plans and 1,500,000 are outstanding  under the Executive
Plan as of December 31, 1997. Options may be granted for terms not exceeding ten
years  from the date of grant  except  for stock  options  which are  granted to
persons owning more than 10% of the total  combined  voting power of all classes
of stock of the Company. For these individuals, options may be granted for terms
not exceeding five years from the date of grant. Options may not be granted at a
price which is less than 100% of the fair  market  value on the date the options
are  granted  (110% in the case of  persons  owning  more  than 10% of the total
combined voting power of the Company).  During the year ended December 31, 1997,
9,000 stock options were  converted  into shares of the


                                      F-21


<PAGE>


Company's Common Stock. Holders of stock options exercised no options during the
years ended December 31, 1996 or 1995.

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

                                                          For the Year Ended
                                                             December 31,
                                                     --------------------------
                                        1997             1996            1995
                                      -------          --------         -------
Net loss                              $(3,938)         $(6,354)         $(2,727)
Basic net loss per common share       $( 1.00)         $( 1.95)         $ ( .96)

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

In addition,  the Company has granted options outside of the Plans in connection
with private  placements  of its  securities  and as  consideration  for various
services. These options have been granted for terms not exceeding ten years from
the date of grant.  The table below  summarizes  activity in the Company's Plans
for the years ended December 31, 1995, 1996 and 1997.






                                      F-22

<PAGE>










(In thousands except per share data)
                                             NUMBER OF          WEIGHTED AVERAGE
                                           COMMON SHARES          EXERCISE PRICE
                                           -------------          --------------

Outstanding at December 31, 1994                   164                $ 54.71

 Granted                                           123                $  3.75

 Canceled                                          (74)               $ 31.94
                                                ------

Outstanding at December 31, 1995                   213                $ 33.04

 Granted                                         1,525                $  3.74

 Canceled                                          (20)               $ 83.71
                                                ------

Outstanding at December 31, 1996                 1,718                $  6.39

 Granted                                            53                $  2.93

 Exercised                                          (9)               $  2.31

 Canceled                                          (21)               $ 47.68
                                                ------

Outstanding at December 31, 1997                 1,741                $  5.81
                                                ======

Options and warrants  outstanding include 6,122,000  warrants,  all of which are
exercisable,  and 1,741,000 options, of which 679,000 are vested and exercisable
at December 31, 1997.


NOTE 11--PROVISION FOR INCOME TAXES

The Company has recognized a deferred tax asset of approximately  $18,900,000 as
of December 31, 1997,  primarily related to net operating loss carryforwards and
basis differences in the stock of its foreign subsidiary;  however,  the Company
has established a valuation allowance  equal  to the full amount of the deferred
tax asset, as future operating profits cannot be assured.

At  December  31,  1997,   the  Company  has  net  operating  loss  (the  "NOL")
carryforwards  of  approximately  $28,000,000  available  to offset  future U.S.
taxable income. The Company calculates that its use of the NOL may be limited to
approximately  $1,000,000  each year as a result of stock,  option  and  warrant
issuances during current and prior fiscal years resulting in an ownership change
of  more  than  50%  of  the   Company's   outstanding   equity.   Additionally,
approximately $1,800,000 of the NOL generated in 1995 available to offset future
U.S. taxable income will be limited to approximately  $300,000 per year over the
next six years  due  to  the  change in tax year end  during  1995.  The Company
utilized approximately $14,000,000 of NOLs to offset taxable income during 1997.
If not  offset against future taxable income, the NOL carryforwards  will expire
in tax years 1998 through 2012.

Total income tax expense was $280,000  (domestic) and $341,000 (foreign) for the
year ended December 31, 1997.  These amounts differ from the amounts computed by
applying the U.S.  federal  income tax rate of 34% to pretax loss as a result of
U.S. alternative minimum taxes and certain nondeductible expenses in Spain.  The
Company  incurred  no income tax expense in the years ended December 31, 1996 or
1995.


                                      F-23

<PAGE>

NOTE 12--BUSINESS SEGMENT INFORMATION ON FOREIGN OPERATIONS

The following is a summary of the results of operations and identifiable  assets
of the Company's wholly-owned foreign subsidiaries and its U.S. operations as of
and for the years ended December 31, 1997, 1996 and 1995, respectively.

                                                  (In Thousands)
                                         Year Ended December 31, 1997
                               -------------------------------------------------
                                France       Spain         U.S.     Consolidated
                                ------       -----         ----     ------------
Revenue                        $  2,029     $ 12,491    $    382     $ 14,902
Net income (loss)              $    (20)    $    282    $ (4,077)    $ (3,815)
Identifiable assets            $      0     $  6,949    $ 14,094     $ 21,043



                                                  (In Thousands)
                                         Year Ended December 31, 1996
                               -------------------------------------------------
                                France       Spain         U.S.     Consolidated
                                ------       -----         ----     ------------
Revenue                        $ 11,625     $ 11,299     $    209      $ 23,133
Net income (loss)              $    178     $    722     $ (3,819)     $ (2,919)
Identifiable assets            $  5,322     $  7,887     $  3,349      $ 16,558


                                                  (In Thousands)
                                         Year Ended December 31, 1995
                               -------------------------------------------------
                                France       Spain         U.S.     Consolidated
                                ------       -----         ----     ------------
Revenue                        $ 24,452    $  6,736     $    249     $ 31,437
Net income (loss)              $  1,268    $   (313)    $ (3,281)    $ (2,326)
Identifiable assets            $  7,100    $  6,829     $  2,361     $ 16,290


Total liabilities attributable to foreign operations were $2,909,000, $4,472,000
and $5,607,000 at December 31, 1997, 1996 and 1995, respectively.  There were no
dividends  from foreign  subsidiaries,  and net foreign  currency gains (losses)
reflected in results of operations for the years ended  December 31, 1997,  1996
and 1995 were approximately ($24,000), ($1,000) and $3,000, respectively.  Sales
in France for the years ended  December 31, 1996 and 1995 include  approximately
$2,200,000 and $7,300,000, respectively, to Pharmacie Centrale des Hopitaux.


                                      F-24

<PAGE>




The  Company  divested  its French  subsidiary  in June 1997.  Therefore,  total
revenue  generated by Chimos/LBF  for the year ended  December 31, 1997 includes
results for six months only.

NOTE 13 - COMMITMENTS AND CONTINGENCIES

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

On July 15, 1993,  Michael M.  Harshbarger,  the Company's  former President and
Chief Executive  Officer was discharged for cause from the Company.  At the time
of his  discharge,  Harshbarger  owed the  Company  approximately  $121,000 as a
result of  expenses  of a personal  nature  which he  charged  to the  Company's
accounts and removal of corporate assets for personal use.  Harshbarger has sued
the Company for wrongful  termination,  seeking  damages in excess of $1,400,000
and the Company has countersued for wrongful  conversion and civil theft,  fraud
and deceit, and breach of contract,  in an effort to recover the amounts owed by
Harshbarger. The Company amended its counterclaim against Harshbarger for breach
of fiduciary duty and is seeking  damages in excess of  $1,000,000.  Harshbarger
attempted to use the Americans with Disabilities Act (the "ADA") as a defense to
the Company's  counterclaim;  however, the judge ruled in favor of the Company's
motion to strike  Harshbarger's  ADA defense.  The Company has recently  filed a
motion  to set this  matter  for  trial and  attempted  to secure a trial  date.
However, since mediation was attempted more than one year ago, the judge ordered
another mediation  conference before setting this matter for trial.  Harshbarger
failed to appear at his deposition set in January 1998;  consequently  discovery
in this matter is still outstanding.  On two separate  occasions,  Harshbarger's
counsel has withdrawn from the case,  citing  irreconcilable  differences.  As a
result,  Harshbarger is now representing  himself in this matter. In the opinion
of current management, the outcome will have no material effect on the financial
position or results of operations of the Company.

Belmac Hygiene, Inc. ("Hygiene"),  a subsidiary of the Company,  filed an action
on  December  9, 1994 in the  United  States  District  Court  for the  Southern
District of New York against  Medstar,  Inc.  ("Medstar"),  Maximed  Corporation
("Maximed") and Robert S. Cohen. The defendants are Hygiene's  partners (or such
partner's  control  persons) in the  Company's  partnership  with  Maximed  (the
"Partnership"),  which was  formed  for the  development  and  ultimate  sale of
Maximed's  intra-vaginal  controlled release products.  The action sought (i) to
enjoin the defendants from interfering with the management of the Partnership by
Hygiene's  representatives,   and  (ii)  to  recover  damages  as  a  result  of
defendants'  misrepresentations  and  breach  of  warranty  in  the  Partnership
agreement.  The defendants filed a counterclaim  against  Hygiene.  Medstar also
filed a separate  action on May 4, 1995 in the United States  District Court for
the  Southern  District of New York  against the Company  alleging  that Hygiene
failed to fund the Partnership and seeking $10,000,000 from the Company pursuant
to its guaranty of Hygiene's obligations. The issues were tried, without a jury,
on August 21 through 23,  1995.  On January 12,  1996,  the Court ruled that the
Company's reliance on defendants'  misrepresentation  was not justified and that
the Company had performed its


                                      F-25


<PAGE>




obligations under the Partnership agreement. Accordingly, the Court rendered its
decision  dismissing all claims and counter-claims  asserted by the parties.  On
September  25, 1996,  the Company  filed an appeal in the United States Court of
Appeals for the Second  Circuit.  On August 27, 1997, the United States Court of
Appeals for the Second Circuit affirmed in part and vacated and remanded in part
the judgment of the United States  District  Court for the Southern  District of
New York.  The appeals  court order  vacated that portion of the district  court
judgment that  dismissed the Company's  claim of fraud and remanded the claim to
the district court for further proceedings. Those portions of the district court
judgment  which  dismissed the Company's  contract claim for breach of warranty,
the  defendants'  counterclaim  for fraud and breach of  contract  and  Medstar,
Inc.'s action for breach of an alleged  guaranty were affirmed.  On December 17,
1997,  the United  States  District  Court of the Southern  District of New York
awarded the Company a judgment of $7,686,000 relating to its claim of fraud that
the Company filed against  defendants  Medstar  Inc.,  Maximed  Corporation, and
Robert S. Cohen, both jointly and severally. On January 16, 1998, the defendants
filed a notice of appeal from the judgment.  The defendants  have not obtained a
stay of execution pending appeal, and therefore, efforts to collect the judgment
are proceeding.  These  efforts  include  a  motion  that  has been filed by the
Company, for the court to order a sale of Medstar's interest in the partnership.
On March 16, 1998,  defendants filed their appellate  brief  and  the  Company's
brief is due to be filed on April 16, 1998. Oral argument  is scheduled for  May
1998.  Pending resolution  of  this  dispute,  the  partnership  is not actively
engaged in the development of any products.  In  the  opinion of management, the
carrying value of its investment in the  partnership,   accounted  for using the
equity  method,  of $553,000 as of December  31, 1997 and 1996, is not  impaired
and no reserve is considered necessary.

The Company is also obligated to pay royalties on sales of the drug  Alphanon(R)
(See Note 6). An agreement  entered  into between the Company and  Jean-Francois
Rossignol,  its former  Chairman and Chief  Executive  Officer,  in August 1993,
entitled  the  Company  to  receive  aggregate  payments  of  $360,000  upon the
commercialization  of a certain  drug.  The  Company  received  $160,000 of such
amount in December 1995 and the remaining $200,000 in 1996. The Company recorded
the entire $360,000 as other income in the year ended December 31, 1995.

On November 30, 1992, Marc S. Ayers resigned as Chief  Financial  Officer of the
Company and  effective  December 17, 1992,  resigned as a member of the Board of
Directors.  At December 31, 1994 Ayers owed the Company  $412,000  plus $121,000
accrued interest under two stock  subscription  notes receivable,  both of which
had matured and  remained  unpaid.  Ayers sued the  Company  alleging  breach of
contract and the Company  countersued Ayers. This matter was tried in 1994 and a
jury verdict  rendered on August 18, 1994,  found in favor of Ayers on one issue
and in favor of the Company on another  issue.  The judge ordered a new trial on
all issues and no judgement  was entered in the case.  After a jury trial in May
1995, the jury found no binding  contract was made between the Company and Ayers
while awarding Ayers a recovery of approximately $27,000 for consulting services
rendered and  cancellation  of the promissory  notes and interest  thereon.  The
cancellation of the promissory  notes and related  interest has been included in
other income/expense, net, for the year ended December 31, 1995.





                                      F-26


<PAGE>




The Company leases certain of its assets under noncancellable  operating leases.
Total charges to operations under operating leases were approximately  $350,000,
$448,000  and $493,000  for the years ended  December  31, 1997,  1996 and 1995,
respectively.  Future  minimum  lease  payments  under  operating  leases are as
follows:

                              (In Thousands)
                         Year Ending December 31,
                         ------------------------

                       1998                   $ 402
                       1999                     321
                       2000                     330
                       2001                     340
                       2002 andthereafter       350



NOTE 14 - EXTRAORDINARY ITEM - FISCAL YEAR 1996

The Company recorded an extraordinary  charge, net of income tax effect of zero,
of $446,000,  or $.13 per common share, in February 1996 upon the extinguishment
of  debt  that  it  had  incurred  in  its  October  1995  private   placements,
representing  unamortized  discount and issuance  costs at the date of repayment
(see Note 8).



                                      F-27
<PAGE>



INDEPENDENT AUDITORS' REPORT



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

We   have   audited   the   consolidated   financial   statements   of   Bentley
Pharmaceuticals,  Inc., and subsidiaries (the "Company") as of December 31, 1997
and 1996, and for each of the three years in the period ended December 31, 1997,
and have issued our report  thereon  dated  March 27,  1998;  such  consolidated
financial  statements and report are included elsewhere in this Annual Report on
Form 10-K.  Our audits also  included the  financial  statement  schedule of the
Company   listed  in  Item  14.  This  financial   statement   schedule  is  the
responsibility of the Company's management.  Our responsibility is to express an
opinion based on our audits. In our opinion,  such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole,  presents fairly in all material  respects the information set forth
therein.



DELOITTE & TOUCHE LLP

Tampa, Florida
March 27, 1998









                                       F-28


<PAGE>


                          BENTLEY PHARMACEUTICALS, INC.

                                   Schedule II

                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>


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

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

For the year ended December 31, 1996      406,000        119,000          (28,000)                      497,000
                                                          88,000           27,000
For the year ended December 31, 1995      291,000                                                       406,000



Goodwill:

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

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


For the year ended December 31, 1995      148,000         38,000                                       186,000


Reserve for inventory obsolescence:

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

For the year ended December 31, 1996      819,000        136,000                         128,000(e)    827,000

For the year ended December 31, 1995      248,000        571,000                                       819,000

</TABLE>
--------------

(a)   Effect of exchange rate fluctuation

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

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

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

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



                                      F-29